Journal of Accountancy

Individual:

Tax Briefs

INDIVIDUAL

Moving Expense Reimbursements

Starting with tax year 1998, the Internal Revenue Service has eliminated Form 4782, Employee Moving Expense Information , which had been used to exclude employer reimbursements from an employees gross income. According to announcement 97-77, although the form has been dropped, employers may continue to provide such information in any format deemed helpful to their employees in understanding the amounts appearing on their W-2 forms.

Middle Class Profits From Tax Bill

The IRS also has simplified reporting the qualified moving expenses on the W-2. Starting in 1998, the W-2 instructions will explain that

The expenses an employer pays to a third party, such as a moving company, on behalf of an employee will not be reported at all on the W-2.
The expense reimbursements an employer pays directly to an employee will be reported in box 13 of the W-2.
Nonqualified moving expense reimbursements, whether paid to the employee or a third party, will continue to be included in wages (form W-2, box 1) and subject to income, Social Security and Medicare taxes.

Observation: As a result of the simplification, employees will report on Form 3903, Moving Expenses , only the qualified expenses they paid directly. Employees must then reduce these expenses by the amounts that were reimbursed by their employers and reported in the W-2, box 13.

—Michael Lynch, CPA, Esq., associate professor of accounting at Bryant College, Smithfield, Rhode Island .

BUSINESS/INDUSTRY

Deducting Severance Payments

In two technical advice memoranda (TAMs), the Internal Revenue Service ruled that an acquiring company can deduct (on a current basis) post-

acquisition severance payments made to the acquired companys employees.

In TAM 9721002, a buyer, which had purchased a targets stock in a transaction it had elected to treat as an asset acquisition, terminated employees whose severance rights had been established in preacquisition plans. The IRS concluded the liability for severance payments had arisen after the acquisition because the buyer had been free to decide after the acquisition whether to terminate the employees. Thus, the severance payments were not a preacquisition liability assumed by the buyer and did not have to be treated as part of the purchase price or the basis. The IRS also concluded the severance payments did not have to be capitalized because they were coincidental and originated in the termination of the target companys employees.

In TAM 9731001, the acquiring company had agreed as part of a stock acquisition to make severance payments in excess of those required under the acquired companys premerger plan. The IRS determined the negotiated increase in the severance payments was coincidental to the acquisition and motivated by the taxpayers desire to integrate the merged business operations. The payments were deductible because they related to postacquisition employment activity.

Observation: In revenue ruling 94-77 (1994-2 CB 19), the IRS reassured taxpayers that the tax treatment of severance payments remained deductible, for the most part, on a current basis, a position that was not changed by the decision in Indopco Inc. v. Commissioner (503 U.S. 79, 1992). However, 94-77 did not address the federal tax treatment of severance payments made as part of the acquisition of property, including a deemed acquisition of assets.

These TAMs are important because they clarify that severance payments made after an acquisition are deductible even when the acquisition was the catalyst for the payments or the payments were coincidental to the acquisition.

—Tracy Hollingsworth, Esq., staff director of tax councils at Manufacturers Alliance, Arlington, Virginia.

Line Items

In Dana Corp. v. United States (38 Ct. Fed. Cls., 1997), a manufacturing company paid a hefty annual retainer fee to a law firm specializing in corporate takeovers. Several years later, when the company acquired another entity and sought to deduct the retainer fee, the IRS disallowed the deduction and sought to capitalize it as part of the acquisition cost of the new entity. Citing the U.S. Supreme Court in United States v. Gilmore (372 U.S. 39, 1963), the court of federal claims allowed the deduction using the origin of the claim doctrine.

In Dye v. United States (80 AFTR 2nd 6006, 1997), a woman sued her stockbroker and incurred substantial legal fees. She sought to offset these fees against her capital gains, but the IRS ruled the fees were ordinary deductions. The Tenth Circuit Court agreed with the taxpayer and ordered a district court to allocate the fees between ordinary and capital expenses.

In Bagley v. Commissioner (80 AFTR 2nd 5739, 1997), a taxpayer reached a $1.5 million settlement with his former employer. The settlement was for damages for personal injuries, not punitive damages. According to Internal Revenue Code section 104(a)(2), such compensatory damages are tax-free. Therefore, the taxpayer excluded the settlement from his gross income. However, the Eighth Circuit Court found that $500,000 was taxable as a payment of possible punitive damages the taxpayer might have recovered if a settlement had not been reached and the case had gone to trial.

Administration introduces

Tax Matters

Tax News

Administration Introduces Its Own IRS Restructuring Bill

Congressman Charles B. Rangel (D-N.Y.) introduced, on behalf of the Clinton administration, a bill to improve the oversight and management of the Internal Revenue Service. The bill, the Internal Revenue Service Improvement Act of 1997 (HR 2428), is intended to implement some of the recommendations of the National Commission on Restructuring the IRS; however, it differs significantly from the commissions recommendations regarding IRS management and governance.

The commission published its recommendations on June 25 (see "IRS Restructuring Commission Calls for Independent Oversight Board; Treasury Strongly Disagrees," JofA, Aug.97). Legislation (HR 2292 and S 1087) already has been introduced in the House and Senate that implements most of the commissions recommendations, including the creation of an independent oversight board that would manage IRS operations (see "New IRS Restructuring Bill," Oct. JofA, p. 28, 1997). Although the Treasury Department agreed publicly that enhanced oversight of the IRS is desirable, it was critical of the commissions proposal to create an independent board, arguing that approach would remove the IRS from executive branch oversight.

Comparing Tax Burden State by State

The administration proposal calls for, instead of an independent board, a management board consisting of senior officials from the Treasury, the IRS and the Office of Management and Budget. The management board would work directly with the secretary of the IRS on its management and operations and be directly involved in decisions concerning modernization of the IRS and tax administration, including reorganization, budget, technology and personnel issues.

The bill also would make the current advisory board, composed of 14 individuals from outside the federal government, a permanent provision in the tax code. The advisory board would advise the IRS secretary and the management board on IRS management and operations, including ways to enhance the fairness of Internal Revenue Code administration.

The bill also would

Taxpayer Relief Act of 1997

How to Implement EIC

The Internal Revenue Service is requesting comments on how it should implement the earned income credit (EIC) due diligence provisions of the recently enacted Taxpayer Relief Act of 1997. Under the new law, effective for 1997 and future years, return preparers must fulfill certain due diligence requirements for returns claiming the EIC. The $100 penalty for failure to meet these requirements is in addition to other penalties that may be imposed under current law. Send your suggestions to Eileen Sherr, AICPA technical manager, by e-mail at esherr@aicpa.org .

Establish a five-year term for the IRS commissioner.
Streamline the electronic filing system by eliminating many statutory obstacles.
Set multiyear funding for the IRS.
Create a more flexible management environment for hiring and firing personnel.
Require the Treasury secretary and deputy secretary to report to Congress annually on their stewardship of the IRS.
Expand responsibilities and independence of the taxpayer advocate.

"This bill should be the basis of a bipartisan effort to create a more efficient, well-managed and responsive IRS," said Rangel in a statement. Cosponsors of the bill include William J. Coyne (D-Pa.), Steny H. Hoyer (D-Md.), Henry A. Waxman (D-Calif.) and Robert T. Matsui (D-Calif.).

Clinton Signs Antibrowsing Bill

President Clinton signed into law legislation that criminalizes the unauthorized inspection of taxpayer records by the Internal Revenue Service, as well as by state and other federal employees. Before the enactment of the Taxpayer Browsing Protection Act (PL 105-35), unauthorized access to or inspection of taxpayer files had not been a criminal offense.

According to the General Accounting Office, there were 1,515 cases in 1994 and 1995 in which IRS employees made unauthorized inspections of taxpayer records. Congressman Bill Archer (R-Tex.), the bills sponsor in the House, said in a statement to the press that although taxpayer records may be provided to the government, such information "belongs to the taxpayer, not to the government, and the government has an obligation to protect the privacy of the taxpayer."

The act provides for a monetary penalty, imprisonment or both for violators. It permits taxpayers to receive awards for civil damages, and it requires that the taxpayer be notified as soon as possible if any person is indicted for inspecting or disclosing a return or return information.

Deputy Treasury Secretary Lawrence H. Summers said IRS employees had been warned about unauthorized access and trained on IRS privacy policies. Taxpayers who suspect an IRS employee is snooping can call the IRS inspection hotline at 800-366-4484.

Tax Files

All for a Simpler Tax!

The National Federation of Independent Business in Washington, D.C., is beginning a grass-roots campaign to replace the entire income tax system by 2001 with something simpler and fairer. The NFIB is urging Congress to create a bipartisan commission to begin work next year on a replacement system. The new system might include a national sales tax and a simplified tax on income that eliminates most deductions and exclusions.

Separate Ss

In a letter to Acting IRS Commissioner Michael P. Dolan, the chairman of the American Institute of CPAs S corporation taxation committee, Theodore B. Stone urged the IRS and Treasury Department not to treat qualified subsidiary elections or terminations made by subchapter S corporations as step transactions. According to Stone, such elections should be treated as separate events, not as part of any other transaction or series of transactions in determining the tax consequences to the parties. The Small Business Job Protection Act of 1996 granted S corporations greater flexibility in treating wholly owned domestic subsidiaries as qualified subchapter S subsidiaries.

The Benefits of Correct Classification

Workers the IRS ruled were misclassified as independent contractors are entitled to participate in pension and stock purchase plans, according to the Ninth Circuit Court of Appeals in Vizcaino v. Microsoft Corp . The workers had signed agreements waiving their rights to certain benefits because they were independent contractors. The IRS overruled the workers classification, requiring Microsoft to withhold federal income taxes and to pay FICA taxes for them. As a result, the benefits waiver is invalid.

Extending Research Credit

Senator Connie Mack (R-Fla.) introduced a bill (S 1131) that would permanently extend the research tax credit. In a statement, Mack said the 13-month extension in the Taxpayer Relief Act of 1997 was "disappointing" and that a permanent extension was "critical to fast-growing research-intensive companies such as those in the computer, telecommunications and biotechnology industries."