Q:  A Turkish corporation providing domain name registration for web sites has a subsidiary in Delaware. If the corporation operates entirely from Turkey, will it be liable for U.S. taxes? If the Delaware subsidiary engages in business, then its income will be subject to U.S. taxes. In addition, under IRC Sec. 482, IRS has the right to allocate income and expenses between related foreign and U.S. corporations to "accurately reflect income. " Thus, you cannot generate income through your U.S. corporation and then avoid U. S. taxes by claiming the income was earned by the Turkish corporation or claiming excess deductions for the U.S. corporation.

A:  The answer involves an analysis of the particular facts and circumstances, but in general, if you maintain your business operations and personnel outside the U.S. and do not have a fixed place of business in the U.S. (as interpreted by the courts and IRS), then you do not owe U.S. taxes on your "foreign source" income.

Q:  I have fallen behind in my payroll taxes. I am in a "Catch 22" because if I pay the taxes, I will have to let the employees go, and without employees of course there is no business. Is there anything we can do to resolve this with the IRS?

A:  It is not clear whether the business is operating as a "C" corporation (a separate taxpaying entity) or as a sole proprietorship. In either event, you are personally responsible for paying the payroll taxes (you hold the funds in trust for the government) and you cannot discharge this debt in bankruptcy. If you are operating as a "C" corporation, then you are personally responsible for the trust-fund portion of the taxes approximately, 60% of the total; otherwise, you are personally responsible for the full amount. In short, you need to pay your payroll taxes or risk personal financial ruin. You may be able to negotiate with IRS to stay current with your payroll taxes and work off the past due amounts, but if you cannot keep your payroll taxes current, IRS will shut you down.-

Q:  I live in a rent-stabilized apartment. If the landlord pays me a substantial amount of money to move, what are the tax consequences?

A:  You could attempt to characterize the payment as a refund of rent - that way, it would not be income to you. However, this transaction sounds like a cancellation of a lease, in which case you will pay capital gains taxes on the payment, provided you comply with the requirements of IRC Sec. 1241; otherwise, the payment will constitute ordinary income to you. Unfortunately, you do not "own" a residence so you will not qualify for the residency exclusion.

Q:  I am helping an elderly relative with estate planning. He has never been married, has no children, & wishes to leave his entire estate to one person. The estate consists of a house, stocks, bonds, annuities, & bank accounts. We'd like to know the tax consequences for his estate if he uses a will vs. transferring his assets on death to the beneficiary. Can TOD ("transfer on death") designation be used for a house?

A:  Read my website section on estate planning or purchase Nolo Press's book on estate planning (www.nolo.com). You cannot transfer a home through a transfer on death designation; however, the home could be placed in joint tenancy, although there could be ownership drawbacks to this approach. A revocable living trust will help avoid probate without interfering with the current ownership of assets. There is no federal estate tax difference between using a will and TOD accounts - currently, your relative (and everyone else for that matter) has a $1 million estate-tax exemption.

All contents copyright © 1995-2002 Robert L. Sommers, attorney-at-law. All rights reserved. This internet site provides information of a general nature for educational purposes only and is not intended to be legal or tax advice. This information has not been updated to reflect subsequent changes in the law, if any. Your particular facts and circumstances, and changes in the law, must be considered when applying U.S. tax law. You should always consult with a competent tax professional licensed in your state with respect to your particular situation. The Tax Prophet® is a registered trademark of Robert L. Sommers.