Income and Gift Tax Planning

Transcription

1 Buchheit Law, PLC Lindsey Buchheit, Attorney st Street Sergeant Bluff, Iowa (Office Phone) (Fax) Lindsey@Buchheitlaw.net Income and Gift Tax Planning The information contained herein is educational in nature. You should not rely on this material in lieu of a full review of the applicable statute, regulations and other authorities affecting any tax issue or transaction. The following information is not legal advice or a substitute for legal counsel. TOPICS COVERED A. Self-Employment Tax B. Reporting Farm Income C. Reporting Tax on Deferred and Installment Payments Received D. Taking Advantage of Farm Deductions E. Farm Equipment Depreciation F. Family-Owned Business Deduction G. Use of Conservation Easements H. Corporate Stock as a Major Estate Asset

2 A. Self-Employment Tax 1. Self-Employment Tax on Farm Rental Income In general, rentals from real estate (for both cash rent and crop share) are excluded from the definition of self-employment income (Sec. 1402(a)(1)). However, there is an exception if the following criteria are satisfied: (i) The rental income comes from an agreement between the owner and lessee which requires the lessee to produce agricultural commodities on the land; (ii) the agreement requires the owner to significantly participate in the management or production of agricultural commodities; and (iii) the owner actually materially participates. (Reg (a)-4(b)(1)); Mizell v. Comm. (Tax Court Memo , ). Illustration where self-employment tax on farm rental income applies (e.g. taxpayer loses ) Mizell case: first reported decision to determine whether real estate is exempt from self-employment income for a landlord leasing to his own active farming entity. The taxpayer, Mizell, had been a farm proprietor. In 1986, Mizell formed a farm partnership with his three sons, with each partner holding a 25% ownership interest. The taxpayer, Lee Mizell, was a 25% partner in an active farming partnership with his three sons. He also was a lessor, leasing about 730 acres of Arkansas farmland to the farm partnership. The lease called for Mizell to receive a 1/4 share of the crop; the partnership was responsible for all expenses. Mizell reported his 25% share of partnership income as SE earnings. However, the crop share rent on the land lease was treated as rental income that was exempt from SE tax. IRS Ruling: Both the IRS and the taxpayer agreed that he materially participated in the agricultural production of his farming operation. Mizel argued that the crop share lease did not involve material participation and that the crop share rental income should be exempt from SE tax. The IRS disagreed and assessed SE tax on the crop share lease income. The IRS took the position that the crop share rental and the farming partnership constituted an arrangement that needed to be considered in the aggregate

3 in measuring self-employed earned income. The Tax Court focused on the word "arrangement" in both the statute and the regulations, noting that this implied a broader view than simply the single contract or lease for the use of the land between the landlord and tenant. By measuring material participation with consideration to both the crop share lease and Mizell's obligations as a partner in the partnership, the court found that the rental income must be included in Mizell's net earnings for self-employment purposes. The Tax Court s decision illustrates a definite risk for the common situation where a materially participating owner leases farmland to an operating entity. Illustration where taxpayer wins McNamara v. Commissioner of Internal Revenue, NOS , and (2000, Eighth Circuit) The McNamara case involved a husband and wife who owned 460 acres that they leased to their farming C-Corp. under a cash rent written lease, with payments averaging about $50,000 per year. Michael McNamara was employed full time by the corporation, and Nancy McNamara was employed doing part-time bookkeeping and farm errand duties (annual compensation to her was approximately $2,500 per year). Again, the judge held that the rental arrangement and the employment roles must be treated as one, and imposed SE tax on the rental income. Appeal Eighth Circuit reverses. The court held: The mere existence of an arrangement requiring and resulting in material participation in agricultural production does not automatically transform rents received by the landowner into self-employment income. It is only where the payment of those rents comprise part of such an arrangement that such rents can be said to derive from the arrangement. Under McNamara s interpretation, the IRS needs to prove a connection between the rental and employment arrangements.

4 Practice tips: Consider clarifying language in the lease that the landlord/lessor is not providing services or participation under the rental arrangement. If the lessor is providing services, include a separate written employment agreement which describes the duties and establishes reasonable compensation for those services. Keep land rentals at fair value / consistent with the market (McNamara Court: Rents that are consistent with market rates very strongly suggest that the rental arrangement stands on its own as an independent transaction and cannot be said to be part of an arrangement for participation in agricultural production. ). High rents and low compensation are a red flag for the IRS, giving it the chance to argue the rents are disguised compensation. See Gerald E. Johnson v. Comm. (TC Memo , )). 2. Self-Employment Tax on Farming Activity of Trusts Net earnings from self-employment tax is the gross income derived by an individual from any trade or business carried on by such individual, less deductions allowed by this subtitle which are attributable to such trade or business, plus his distributive share (whether or not distributed) of income or loss... from any trade or business carried on by a partnership of which he is a member. Sec. 1402(a). The regulations require an individual (either personally or through agents/employees) to carry on a trade/business. [I]ncome derived from a trade or business carried on by an estate or trust is not included in determining the net earnings from self-employment of the individual beneficiaries of such estate or trust. (Reg (a)-2(b)). Income from a business within a trust (defined in Reg (a)) is excluded when determining earnings from self-employment of individual beneficiaries. When a trade/business is carried on by a trust (and not an individual), the income from the trust is not included in determining the self-employment earnings of each beneficiary unless there is a reason for disregarding the trust under the Code (for example, where the grantor/maker of the trust is

5 also the beneficiary of the trust). Grantor trusts are treated as owned directly by the grantors (Sec ), so there is no trust tax and no self-employment tax savings. Business trusts are not deemed trusts under the Internal Revenue Code if the trust is not designed to protect or conserve property for beneficiaries. Reg (b). The I.R.C. interprets these trusts as created merely to carry on a profit-making business that otherwise would have been carried on through a corporate structure. EXAMPLE CASE 1 - Technical Advice Memoranda ( ): Farmer dies. Farm assets put in a testamentary trust. Surviving wife is sole trustee and beneficiary of QTIP Trust and Credit Bypass Trust. Wife participates in the operations and management of the farming activity. Wife reports income and distributions from the trusts on her Form 1040 Schedule E, but self-employment tax is not paid on this income. IRS held that the QTIP Trust and the Credit Bypass Trust (irrevocable trusts at the death of the husband), was a trust with a separate existence. The pass-through income from these trusts was not deemed earnings from self-employment to the beneficiary. The IRS refused to ignore these as separate business trusts. EXAMPLE CASE 2 Technical Advice Memoranda ( ): Irrevocable, testamentary trust came into effect at husband s death. Surviving wife and son were trustees and beneficiaries of trust. The trust paid a fee to the son for managing the farm operations, and paid a fee to the wife for maintaining farm records. The son and wife reported these fees as self-employment income, but did not report the income as beneficiaries of the trust as subject to self-employment tax. The IRS treated the trust as a separate entity, and as such, the earnings were not subject to self-employment tax. The IRS held the trust was as a trust that would be separately respected under the Internal Revenue Code, and accordingly the earnings were not subject to self-employment tax.

6 Practice tip: The aforementioned cases suggest beneficiaries of a trust can avoid selfemployment income when actively operating the farm if (i) the trust is created to preserve the property for a third party or in a non-business trust (e.g. a testamentary trust that is not only an attempt to move business operations into a trust entity and (ii) the trustees are reasonably compensated for their services in a manner that is subject to either FICA or selfemployment tax. B. Reporting Farm Income 1. Background Farming individuals, trusts, and partnerships report farm income on Schedule 1040F (a.k.a. Schedule F). Schedule C is used to report business profit and loss related to farming, but which does not qualify for Schedule F (e.g. landlords whose only income is from renting farmland). Part one of Schedule F requires farm taxpayers to set forth their farm income. The taxpayer must answer a series of questions, including but not limited to, how much livestock was bought for resale, crops which were raised and sold, and cooperative distributions and payments from various farm programs. Part two of Schedule F concerns how much gross income was earned and how that money was distributed for farming expenses. To calculate farming income, see Chapter 3 of the Internal Revenue Service Publication 225, Farmer s Tax Guide (2013)). Chapter 4 of Publication 225 provides guidance on defining and computing farm business expenses. Once the gross income and distributions are calculated, the total farming expenses are then deducted to show the net profit or loss of the activity. Amortization might also be used to spread the cost of certain expenses over a period of years for tax purposes. Internal Revenue Service Publication 535, Business Expenses (2012), provides detailed assistance in identifying and utilizing available deductions. Note the change in the tax law for 2013, which set the standard mileage rate for the cost of operating a vehicle for business purposes at 56.5 cents per mile. 2. Practice Tips and Suggestions a. Keep good records of income, crops, livestock and other assets and expenses. b. Use a certified public accountant (CPA) or enrolled agent (EA). They re worth the money! c. For an in-depth review of this topic, read Reporting Farm Income, written by Neil E. Harl, Esq., Charles F. Curtiss Distinguished Professor in Agriculture and Emeritus Professor of Economics at Iowa State University, and Roger A. McEowen, Esq., Associate Professor of Agricultural

7 Law at Iowa State University. The book describes the tax accounting periods and methods available to farmers and ranchers in determining their federal tax liability. C. Reporting Tax on Deferred and Installment Payments Received 1. Installment Sales a. Depreciation recapture. Depreciation recapture must be reported as ordinary income in the year of sale, regardless of the amount of cash collected, if property is sold in an installment sale, (Sec. 453(i)). Only gain in excess of the recapture income is taken into account under the installment method. b. Installment sale dispositions. A transfer, sale or gift of an installment obligation is a disposition that results in gain or loss equal to the difference between the basis in the obligation and its fair market value at the time of gift. A cancellation of an installment obligation also results in gain recognition (Sec. 453B(a)). c. Installment sale of inventory by cash method farmers. Farmers may use the installment method of reporting when disposing of property used or produced in the farming business (Sec. 453(l)(2)(A)). 2. Deferred Payments a. Crop Revenue Coverage If a revenue-based policy pays the farmer merely due to poor grain prices, not deferral is allowed. Insurance proceeds for weather-related damage, however, permit an elective tax deferral. (Sec. 451(d)). Cash method farmers may defer crop insurance proceeds (due to weather-related damage) to the year after the crop damage. The farmer must demonstrate that under normal business practice most of the crop proceeds would have been reported in the following year (Rev. Rul ). b. Deferral of gain on weather-related sales Sec. 451(e) allows a deferral for one year from early sales of livestock which were sold because of weather-related conditions (e.g. drought; flood; etc.) IF: (i) the taxpayer s principal business if farming; (ii) the taxpayer uses cash method accounting; (iii) normally, the sale would not have occurred in the current year except for the weatherrelated condition; (iv) the weather-related condition occurred in an area designated as eligible by the U.S. government; and (v) deferral is only allowed for the livestock exceeding of the number that normally would have been sold but for the weather-related condition.

8 D. Taking Advantage of Farm Deductions Following is a description of only some of the farm deductions available. Please note several other deduction opportunities are available. 1. Soil and Water Conservation Expenditures Sec. 175(c)(1): Deductible soil and water conservation expenses include: (i) the treatment or movement of earth (e.g. leveling, conditioning, grading, terracing, etc.); (ii) the construction, control, and protection of diversion channels, drainage and irrigation ditches, earthen dams, water courses, outlets and ponds; (iii) the eradication of brush; and (iv) the planting of windbreaks. The soil and water deduction cannot exceed twenty-five percent (25%) of gross farming income. (Sec. 175(b)). Further, to be deductible, soil and water conservation expenses must consistent with a plan approved by the Natural Resources Conservation Service (NRCS) of the Department of Agriculture or other applicable state or local agency. 2. Section 168 Depreciation The useful life (a.k.a. class life) of an asset is determined by Section 168(e)(3) of the United States Tax Code. Sec. 168(i)(4) and Reg (i)-1T: Assets subject to Section 168 depreciation may be classified as one or more general asset accounts, if the assets have the same: (i) asset class; (ii) depreciation method; (iii) recovery period/depreciable life; (iv) depreciation convention; and (v) serviced in the same tax year. Depreciable Farm Property Recovery Periods (in Years under the General Depreciation System (GDS) and Alternative Depreciation System (ADS)) as reported by the Farmer s Tax Guide, Publication 225, Chapter 7 see following page.

9 Asset GDS ADS Agricultural structures (single purpose) Automobiles 5 5 Calculators and copiers 5 6 Cattle (dairy or breeding) 5 7 Communication equipment (not including communication equipment listed in 7 10 other classes) Computer & peripheral equipment 5 5 Drainage facilities Farm buildings (not including single purpose ag. or horticultural structures) Farm machinery & equipment 7 10 Fences (agricultural) 7 10 Goats & sheep (breeding) 5 5 Grain bin 7 10 Hogs (breeding) 3 3 Horses (age when placed in service) Breeding & working (12 years or less) Breeding & working (more than 12 years) Racing horses Horticultural structures Logging machinery & equipment (used by logging & sawmill operators for 5 6 cutting timber) Nonresidential real property Office furniture, fixtures, & equipment (not calculators, copiers, or typewriters) 7 10 Paved lots Residential rental property Tractor units (over-the-road) 3 4 Trees or vines bearing fruits or nuts Truck (heavy duty, unloaded weight 13,000 lbs) 5 6 Truck (actual weight less than 13,000 lbs.) 5 5 Water wells 15 20

10 3. Fertilizer Allocations and Elections Sec. 180; IRS Publ. 225, Ch. 5: The purchase and application of fertilizer or other materials used to enrich, neutralize, or condition farmland may be treated as either a direct expense or an amount to be capitalized and deducted over the useful life of the materials. a. To be deductible, expenses must be for the purchase of fertilizer or other materials to enrich farmland (Reg (b)). b. The expenses must otherwise be chargeable to a capital account paid or incurred for the application of the materials to the land (Reg (a)). c. The election to currently expense the amount is effective only for the taxable year for which the deduction is claimed (Reg (a)). 4. Prepaid Farm Expenses A cash method farmer may deduct annual pre-paid expenses so long as the three-part test outlined in Revenue Ruling is satisfied: (i) The expense must be an actual purchase, not a mere deposit to purchase at later date; (ii) The expense must be made for a business purpose, not simply to avoid taxes; and (iii) The expense must not result in a material distortion of income. Rev. Rul , several factors to determine whether the deduction results in a material distortion of income: * The relationship b/w quantity purchased & quantity projected to be used next year * The materiality of the expense in relation to total income of the taxpayer for the year * The taxpayer s customary business practices in buying supplies and the business purpose for paying in advance * The relationship between the expenditures and past purchases * The time of year in which the expenditure was made * The effect of deductions of prepaid expenditures on taxes paid by farmer in prior years 5. Charitable Gifts Cash method farmers may give pre-adjusted gross income charitable commodity inventory to a charitable beneficiary. As a result, the farmer may get an income and self-employment tax savings. The donating farmer s charitable deduction is the lesser of the property s fair market value or adjusted tax basis (Reg A-4(b)(1)). 6. Commodity Wages and Family Employment Wages a. Commodity Wages Wages paid in the form of commodities to agricultural employees are not subject to FICA tax (Sec. 3121(a)(8)(A); Reg (a)(8)-1(b)), federal withholding tax (Sec. 3401(a)(2)), or FUTA tax (Sec. 3306(b)(11)). b. Spousal Employment Wages Income paid in the form of commodities to employee spouses decreases net income and self-employment tax. (IRS Farmers ATG Chapter 9,

11 August 2009). The farming employment may provide tax-free, fully deductible fringe benefits like health insurance. Id. c. Wages For Children Teenage children often provide services for family farm operations. As long as a farmer shows a true employer-employee relationship exists (see Rev. Rul ), reasonable wages or other compensation paid to such children may be deducted % Self-Employed Health Insurance Deduction Sec. 162(l): Self-employed individuals may deduct from gross income all of the cost of providing medical, dental, and qualifying long-term care insurance for themselves and their families. This deduction does not reduce selfemployment income for purposes of self-employment tax (Sec. 162(l)(4)). E. Farm Equipment Depreciation 1. Background Section 179 I.R.C. Section 179 allows a business to deduct, for the current tax year, the full purchase price of financed or leased equipment. The equipment purchased, financed, or leased must be within the limitations of Section 179 (e.g. if in 2012 a farmer spent $2.2 Million, he was only allowed a Section 179 deduction of $300,000). The equipment must also be placed into service in the same tax year in which the deduction is taken. a. Eligible Assets: breeding/dairy livestock; vehicles; equipment; grain bins; single purpose buildings. b Deduction Limitation (for new, used, and off-the-shelf equipment) - $500,000. c. $2 Million is the maximum amount which can be spent on equipment before the Section 179 deduction decreases. d. 50% Bonus Depreciation (e.g. Accelerated 1 st Year Depreciation) (for new equipment only or buildings with a 20-year life span)- taken after the $2 Million limitation in capital equipment purchases. Note: The State of Iowa did not couple with the bonus depreciation provisions allowed for federal tax purposes for 2012 or Section 179 Calculator See Example: A $350,000 equipment purchase yields a $122,500 deduction, for a true cost of $227, IA 4562A, Iowa Depreciation Adjustment Schedule Report your deduction(s) on this form. Available at

12 and Beyond Unless Congress acts before the end of 2013, the Section 179 limit is set to revert to the pre-2003 limit of $25,000 in 2014, with a phase-out threshold of $200,000. With the reduction of the I.R.C. 179 to $25,000 and the potential elimination of accelerated first year depreciation, farm business should examine if now is the time to consider such a capital equipment purchase. F. Family-Owned Business Deduction 1. Background Section 2057 was enacted by the Taxpayer Relief Act of 1997 and amended in The statute was designed to provide federal estate tax relief for farms and closely-held small businesses. The maximum deduction amount is $675,000 (26 U.S.C. Section 2057(a)(2)). To qualify for the family owned business deduction (FOBD), several complicated tests must be met, including but not limited to: a. Fifty Percent Liquidity Test 26 U.S.C. 2057(b)(1)(C)) the adjusted value of the qualified family-owned business interests must equal fifty percent (50%) of the decedent s adjusted gross estate. Estate of Farnam v. Com r, No , 2009 U.S. App. LEXIS (8th Cir. Oct. 8, 2009), aff g,130 TC No. 2 (2008). Parents loaned money to their familyowned corporation in exchange for unsecured promissory notes with a twentyyear term. The loans were intended to help the family business expand. At their death, each parent s estate held 50% of the outstanding shares of the corporation s voting common stock and the unsecured promissory notes. Both the Tax Court and U.S. Court of Appeals for the Eighth Circuit denied both estates the FOBD because the promissory notes were not equity, and therefore, the estates failed to satisfy the fifty percent liquidity test. The Courts found an interest in equity under 2057(e)(1)(B) is limited to equity ownership interests, something promissory notes are not. b. Material Participation Test for at least five of the last eight years of the decedent s life, the decedent or a member of the decedent s family must have materially participated in the operation of the business 2057(b)(1)(D)). 2. IRS Letter (2010 decision): Farmer dies. Survived by 2 kids. Decedent s gross estate included residential apt. bldgs. which decedent had operated. Executor hires attorney to prepare federal estate tax return. Attorney was unaware of Section 2057 and failed to make an FOBD. IRS gave Executor an extension of 60 days to

13 file the election since the taxpayer acted in good faith by relying on a tax professional who failed her. Section (a) provides, in part, that requests for relief subject to will be granted when the taxpayer provides the evidence to establish to the satisfaction of the Commissioner that the taxpayer acted reasonably and in good faith, and the grant of relief will not prejudice the interests of the Government. A taxpayer is deemed to have acted reasonably and in good faith if the taxpayer reasonably relied on a qualified tax professional and the tax professional failed to make or advise the taxpayer to make the election. 3. Resource covering this topic in detail: The Family-Owned Business Deduction Section 2057, by Neil E. Harl, Esq., Charles F. Curtiss Distinguished Professor in Agriculture and Professor of Economics, Iowa State University and Roger A. McEowen, Esq., Associate Professor of Agricultural Economics, Kansas State Univ. G. Use of Conservation Easements 1. Background An easement is a partial interest in property. Generally, charitable contributions of partial property interests cannot be deducted, unless the easement is a qualified conservation contribution. I.R.C. 170(c), (f)(3)(b)(iii), (h). A qualified conservation contribution ( QCC ) is a contribution of a qualified real property interest to a qualified organization exclusively for conservation purposes. I.R.C. 170(h) Tax benefits of conservation easements include: (i) income tax deduction from the QCC; (ii) possible decrease in local property tax valuation; and (iii) reduction in the value (and hence, estate tax) of the donor s estate. Farming and non-farming taxpayers may receive a QCC deduction of up to fifty percent (50%) of their adjusted gross income contribution base (Sec. 170(b)(1)(E)(i)). QCC exceeding this limit may be carried forward fifteen years (170(b)(1)(E)(ii)). 2. Easement Valuation Kiva Dunes Conservation LLC, et al. v. Comm r, TC Memo (June 22, 2009). Taxpayer bought 251 acres in Alabama on the Gulf of Mexico for 1.05 Million. Later, taxpayer conveyed his interest in the real property to an LLC he created. The LLC then developed the property into a gated residential resort known as Kiva Dunes, as well as a large golf course. The golf course was thereafter conveyed to another LLC which the taxpayer had also formed, Kiva Dunes LLC. Years later, this LLC placed a perpetual conservation easement on the golf course and donated the easement to a qualified land trust. The real estate subject to the easement could be used as a golf course, park, or agricultural enterprise. The LLC (which was taxed as a partnership) took a $30.6 million charitable

14 contribution deduction for the easement on its 2002 tax return. The IRS audited and, while conceding that the taxpayer was entitled to a charitable contribution, disallowed a large portion of the deduction by valuing the easement at $10 million. The IRS also assessed an accuracy-related penalty. The Tax Court noted that determining the proper value required examination of the current use of the property and its highest and best use. Experts for the IRS and taxpayer agreed the highest and best use of the easement was as a residential subdivision. Because neither expert presented much evidence of comparable easement sales, the Tax Court used the default test of the regulations the before and after approach. The Tax Court focused on three criteria in assessing the value of the donated property before the easement restriction was placed on the property, (i) the number of lots available for sale on the easement area in the hypothetical residential subdivision; (ii) the average sales price of the lots; and (iii) the rate at which the lots would sell. The taxpayer s expert valuation persuaded the Tax Court. However, the Court increased the real property s post-easement value because of improvements to the golf course. After considering those adjustments and an added value enhancement on the taxpayer s property which was not subject to the easement, the Tax Court found the post-easement value of the property was $3.3 Million. Deducting that amount from the property s pre-restriction value resulted in a charitable deduction for the donated easement worth $28.6 Million. 3. Personal Property Donation Sherrel and Leslie Stephen Jones v. Comm r, U.S. Court of Appeals, 10th Circuit; No (Mar. 27, 2009). Leslie Stephen Jones, lead defense counsel for Timothy McVeigh during the Oklahoma City bombing trial, donated discovery material to a national museum. Prior to donating the material, Jones had an expert appraise the material at $294,877. Jones claimed a charitable contribution deduction for the material on his 1997 joint income tax return. The unused amount of the 1997 charitable deduction was carried over to subsequent tax years. In 2004, Jones received an IRS notice for income tax deficiencies of $3,675 for 2000 and $11,110 for The IRS claimed Jones did not own the donated material and, accordingly, couldn t claim a charitable contribution deduction. The IRS also argued that because the material was either ordinary income or short-term capital income, the deduction amount was limited to Jones basis (e.g. zero) in the donated property. The Oklahoma Tax Court ruled in favor of the IRS. The Appellate Court affirmed the Tax Court s ruling that the donated discovery material was excluded from the Code s definition of capital asset.

15 H. Corporate Stock as a Major Estate Asset 1. Background It is a common strategy for family farmers to establish a corporation (or other corporate structure). Generally, the reason for doing so is tri-fold: (i) achieve tax advantages; (ii) protect farming assets from creditors; and (iii) establish a business succession plan to keep the farm in the family for future generations. While the advantages of a corporate structure can be great, the likelihood of seeing those advantages often depends upon whether the taxpayer has consistently worked with a qualified attorney, CPA / EA, and financial planner. - LLC - Estate tax planning: lifetime gifts & transfers at death to get a potential discount. Potentially, a discount can be taken both at the time ownership units are gifted from one member to another and at the death of a member on his remaining ownership units. Gift $14,000 per year / $5M annual exclusion. - Operating Agreement: determine value of company and stock * discount for lack of (i) marketability (ii) transferability (restrictions) (iii) minority interest - S-Corp. 2. Corporate Stock Redemption Corporate stock may be redeemed to retire the stock of senior generation stock-holders. Although a corporate stock seller receives capital gain treatment via both a direct sale to the producer or stock redemption, a stock redemption also benefits the junior generation/successor because of the ability to fund the nondeductible stock acquisition with tax favorable corporate earnings (e.g. low rate of 15%). See Cannon Insights, Caution, while there are several advantages with corporate stock redemptions, there are also potential disadvantages and pitfalls. Consult a qualified CPA/EA. 3. Practice Tip: Buy-sell agreements involving closely held-corporate stock should require the corporation to distribute enough income to cover tax liabilities. This is especially important until the stock value is set and the shares purchased. Lee v. Meloan, No / (Iowa Ct. App., Jun. 30, 2010).

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