Posted: January 17th, 2023

Taxation of Business Entities

 

Parameters:
 You are an advocate in your role here. If you find statutory evidence that does not support your clients most tax advantageous position, then try to find case law to mitigate the affect.
 You must provide a properly formatted bibliography that annotates the sources you used to draw your conclusions. A URL is not an adequate substitute for a properly formatted reference.
 In your write up, do not quote directly, but rather paraphrase – this includes framing the issue, reasoning from your sources, etc. If your paper is more than 30% from other sources, I will consider it plagiarized.
 Use primary sources ONLY. The Federal Standard Reporter’s narrative is not a primary source.
 Please be sure to write clearly and concisely as appropriate writing skills will be part of the final grade.
 Use point 12 font using standard margins. Limit yourself to a maximum of 5 pages, 1 and ½ spaced

Given the fact pattern below, answer the following questions:
1. Was the lease a capital lease (conditional purchase in tax terms) or a true operating lease for tax purposes As noted above, justify your answer.

2. Did Dr. Simba receive a constructive dividend Whether a constructive dividend exists turns on whether the distribution was primarily for the benefit of Lion Imaging and thus Dr. Simba as its sole shareholder or for Lion Heart, since it derived as least some benefit from the improvements as they actually owned the building.
FACT PATTERN
Dr. Simba is a cardiologist who conducts his medical practice through Lion Heart. In 2003, Lion Heart leased a cardiac CT scanner from Narla Medical Solutions USA, Inc. (Narla), for a 60-month term. The estimated useful life of a CT scanner is generally assumed to be approximately 5 years. Dr. Simba signed the lease on behalf of Lion Heart, and the lease was secured by a $500,000 life insurance policy on Dr. Simba naming Narla as the beneficiary. The lease provided that Lion Heart could not assign or dispose of its rights or obligations under the lease or enter into any sublease without Narla’s written consent. The lease also included an option to purchase
the CT scanner at less than fair market value at the end of the lease thus making the lease a capital lease for financial reporting purposes.

In 2004, Lion Heart paid $4,000 to WRB Custom Constructions for construction work to
accommodate the CT scanner. The construction work included erecting new lead walls to assist with the functionality of the scanner and housing the scanner on the bottom floor of Lion Heart’s new two-story office. Also in 2004, Dr. Simba formed Lion Imaging, a limited liability company, to manage the CT scanner. Dr. Simba was the sole owner of Lion Imaging and one of its three managing members.

Lion Heart’s Reported Income and Claimed Deductions:

As sole owner and manager of Lion Heart and Lion Imaging, respectively, Dr. Simba maintained separate books for both entities. For the years at issue Lion Heart reported income generated by the CT scanner for patients’ use of its heart scanning services, while Lion Imaging claimed depreciation deductions for the CT scanner. Lion Heart also claimed deductions related to the CT scanner including: (1) salaries and wages of three employees involved in the operation of the CT scanner; (2) repairs and maintenance of the CT scanner and the office shared by Lion Imaging
and Lion Heart; (3) monthly rental of the shared office; (4) depreciation of office furniture in the shared office; (5) rental payments on the CT scanner lease; and (6) expenses for operating the CT scanner. In addition, Lion Heart was the sole tenant of the office space in which the CT scanner operated, and made the downpayment and paid the construction costs related to the CT scanner. Simultaneously, Lion Imaging was claiming depreciation on the CT scanner as if it owned the scanner.

For the years at issue the Simbas and Lion Heart had the same accountant prepare their tax returns.

 

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