Tax memorandum and dividend - Essay Example

? of TAX FILE MEMORANDUM Tracey Employee at a pharmaceutical company Mark Captain of a Ferry Boat Relevant facts Tracey makes long trips to see the pharmaceutical customers. This is because her territory is rather large. She makes 16 to 17 hour trips for every trip and takes naps at suitable locations where she stops. While Mark captains a ferry boat that takes up to 15 to 17 hours journeys with 6 to 7 hour overlay. During the over lay Mark takes a four hour nap at the cot restored in the pilot house. The applicable law in these two cases is the overnight rule which is found in section 162(a) (2) of the internal revenue Code of 1954. Specific issues Is Tracy allowed to deduct the cost of meals purchased during the trip? And is Mark allowed to deduct the cost of meals purchased during the trip? The overnight rule only applies if the nature of the taxpayer’s employment is such that it requires him to sleep or rest when away from home. His expenditures which include incidental expenses such as tips are deductible travelling expenses this under section 162(a) (2) of the 1954 Code. It however does not include the brief period of time whereby an employee may be released from duty for the purpose of eating rather than sleeping. In normal circumstances meals are normally nondeductible under section 262 of the Internal Revenue Code of 1954. For meals to be deductible as travelling expenses the petitioner has to prove that the meals were eaten while they were travelling away from home in carrying out their employment duties or trade as well as to show they slept substantially away from home. Conclusion Tracy was therefore not eligible for a deduction under the overnight rule, as per the Frederick. J. Barry, pro se. She was only eligible for tax deduction on entertainment expenses during the trips that she made. While Mark was eligible for tax deduction as the layover was mandatory after a 15 to 17 hour shift so as to get the passengers safely back to shore. He was however not going to eligible during the peak season. Support In Marks case, a Ferry captain qualified as being “away from home” in Code Sec. 162 (a) (2) purposes during off-season tours that were completed within 24 hours and included 6 to 7 hours layovers. This is because of the demanding nature of taxpayer’s job since the captain needed to be alert during the long work hours to ensure passengers and crew safety. This was evidence enough that is was reasonable to obtain sleep and rest to be able meet job exigencies and demands. A 6 to 7 hour layover is more than sufficient duration to reflect increased expenses incurrence. This was not applicable though during peak season tours because rest periods during those hours were not part of the layover released time. The Ferryboat captain deduction for M&IE incurred during off-season tours that were 15 to 17 hours long were subject to Code Sec. 274 (n)(1) deduction limitation. Expenses, which taxpayer computed and substantiated pursuant to operative revenue procedures and federal rate, were treated as food and beverage expenses within meaning of Code Sec. 274(n) (1). In Tracy’s case Frederick J. Barry, pro se. Barry argued that the meals paid for during the 17 hour to 18 hour trips he made to see his clients was deductible under section 162(a), independently of section 163(a) (2). Barry made this trips and stopped at a suitable place to rest in the car before he went back home. He kept a blanket and a pillow in his car for this purpose. The petitioner did not substantially show that his meals where under the ordinary and necessary provision section 162 (a). The case was found to be indistinguishable from Correl. The petitioner was therefore not away from home when section 162(a) (2) was considered during his one day trips during 1966. The petitioner kept detailed records of amounts spent on meals during his one day trips in 1966, this amounted to $, 348.47. From that amount $1, 535. 26, was deductible as entertainment expenses but the rest $ 1, 813.21 was disallowed on the grounds that the amount was spent for personal meals. See Sam J. Herrin, et ux. v. Commissioner, 28 T.C. 1303(1957); and Allan L. Hanson, et ux. v. Commissioner, 35 T.C. 413 (1960). See Bulova Watch Co. v. United States, 365 U.S. 753 (1961); Central Commercial Co. v. Commissioner, 337 F.2d 387 (C.A. 7, 1964), affirming 40 T.C. 901 (1963); Hudson City Savings Bank, 53 T.C. 70, 75 (1969). Cf. United States v. Correll, supra. 2. Cindy and Ralph Edmond Owners of Tidy Co. Relevant Facts Cindy and Ralph Edmond took money out of the business and stashed it at home. This stashed money amounted to $200000. The company itself was not reporting any profits and was on a deficit in the in the two years since they started siphoning money from the business. Edmonds basis in Tidy Co. amounts to $300000. They also made receipt payments weekly both to personal and corporate accounts. Under the Internal Revenue Code any person found who willfully attempts in any manner to evade or defeat any tax imposed by this title or payment thereof shall, liable to penalties provided by the law and found guilty of a felony. Upon conviction they will be fined $100,000 ($ 500, 000 in case of a corporation) or imprisoned for not more than five years or both, together with costs of prosecution. Specific Issues The issue is whether Cindy and Ralph Edmond are guilty of tax evasion from their solely owned corporation despite the fact that the corporation had no earnings in the years in question. Conclusion Cindy and Ralph Edmond are not guilty of tax evasion convictions arising from the diversion of their solely owned corporate funds. As per UNITED STATES OF AMERICA, APPELLEE V. James D’ AGOSTINO, and Anne Marie D’AGOSTINO, the government could not prove that the diversions were unlawful or that tax deficiency existed as required by Code Sec. 7201, Corp. Tidy co. Just like D’ Agostino corporation didn’t have any earnings and profits in the diversion years. Support At trial at the district court, the D’ Agostinos contended they did not owe any tax on the approximately $ 400,000 of diverted corporate funds. The income that Anne Marie diverted they argued was corporate income received by a shareholder that is taxable if it’s a constructive dividend payment, but it’s not taxable if it is a reduction by a shareholder’s loan account or capital account. The government contended that whether the diverted funds constitute personal income or corporate income depends upon the intent of the taxpayer at the time the funds are diverted. If the intent is to evade taxes, the income is personal and taxable. In this case, the government argued that whether diverted funds constitute personal income or corporate income depends upon the intent of the taxpayer at the time the funds are diverted. If the intent is to evade taxes, the income is personal and not taxable. If the intents is to take a reduction under the loan account or capital account, then the funds are not taxable. The district court adopted the government’s theory and gave the following charge to the jury: If you find beyond reasonable doubt that D’Agostino diverted funds of the corporation to themselves personally. Income is personal and taxable. At the appeal, under the “no earnings and profits, no income” rule, diverted corporate funds were treated as a constructive dividend to the shareholder to the extent the corporation had earnings and profits. To the extent that a corporation’s distribution to the shareholder is not made out of earnings and profits, I.R.C section 301 (c) (2) treats the distribution to a shareholder that is applied against and made in reduction of the adjusted basis of the shareholder’s stock, or, if applicable, the distribution is treated as a return of a loan. For these reasons the judgment of conviction and sentence imposed by the district court are reversed and the case is remanded with directions to vacate the judgment of conviction and dismiss the indictments rendered against both defendants. Essay Dividend Distribution in Today’s economy Some of the companies that still paid their dividends even after the financial crisis included large bank holding companies (BHCs) during the economic crisis. This reduced capital in these firms as shown by academics, industry and analysts. They still continued doing so to placate the shareholders in light of dropping share prices. Despite the considerable uncertainty about the full extent of losses facing the banks and the banking industry at large, they continued dishing out dividends. The banking industry was heavily hit by the economic financial crisis. Other means of returning capital to shareholders such as stock repurchases serve almost the same function. Common stock repurchase did not remain in the same level as dividends during the financial crisis they drastically fell. Many analysts also reported that many bank holding companies, securities firms and U.S government enterprises did not reduce on common stock dividends until the financial crisis had passed (Beverly, 2013). Scharfstein and Stein argued in an article in New York Times op-ed piece, that the large dividend payments during the hard times were undercutting the capitalization of the U.S. banking industry during a time of stress. The bank holding companies have redirected more than $25 billion of the $ 125 billion to shareholders in 2009 alone. This led to the Federal Reserve implemented the Comprehensive Capital Analysis and Review (CCAR) to review planned dividend payments and other capital distributions which were made by large bank holding companies in 2011. This was with an aim to make sure that the companies retained sufficient capital so as to remain resilient to withstand economic and financial market conditions. Many investment companies are advising to invest in dividend paying stocks in NASDAQ and the New York Stock Exchange (Beverly, 2013). The current market conditions create excellent conditions to invest in dividend paying stocks. Investors are investing in stocks in the Indexes above and creating portfolio of 3 to 3.5 percent. This in comparison with 10 year treasury yield is more advantageous. Companies that are publicly traded are in some ways better in dividend payments than those that are closely traded. The publicly traded companies have the advantage of having large funds and profits after tax that can be distributed as dividends. Closely traded companies normally don’t have these luxury hence they can’t be able to access large amounts of money for dividend payments (Ostrowski, 2012). Other good funds that can be bought include the exchange traded funds (ETFs) that concentrate on dividend paying stocks. This provides a cost effective way Investing in a company that provides dividends and also gives an opportunity for diversification in small amounts. Even among smaller companies which are defined with less $100 million are increasing their dividends distributions as compared to the 1980’s. The current rate of dividends distributed in the New York Stock Exchange, Nasdaq and the American Stock Exchange is 31 percent which is up from last year which was 28%. Especially large company payouts have increased by 18 percent from 2011 and have also increased by that same percent in 2012. This year the rate has grown to another 9 percent in the period July (Floyd, 2013). References Beverly. H, (2013) Federal Reserve Bank of New York, http://www.newyorkfed.org/index.html Sue Ostrowski, (2012) Smart Business, http://www.sbnonline.com/ Floyd. N., (2013), Dividend Payments are making a modest comeback, The New York Times F http://www.nytimes.com/ Read More