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TAX MATTERS
IRS issues employment tax refund procedures for same-sex spouses  
By Sally P. Schreiber, J.D.
December 2013

In Notice 2013-61, the IRS announced the procedures employers should follow for filing refund claims for overpaid Federal Insurance Contributions Act (FICA) and income taxes paid on employer-provided benefits for same-sex spouses that, because of the Supreme Court’s Windsor decision, are now tax free. The notice provides two streamlined administrative procedures for making adjustments or claiming refunds.

Windsor, No. 12-307 (U.S. 6/26/13), overturned the portion of the Defense of Marriage Act that had prohibited federal recognition of same-sex marriages. In August, the IRS issued Rev. Rul. 2013-17, explaining how it would treat same-sex married couples for tax purposes after Windsor (see “Tax Matters: All Legal Same-Sex Marriages Recognized for Tax Purposes,” Nov. 2013, page 56).

Notice 2013-61 contains streamlined procedures for employers who wish to file refund claims for payroll taxes paid on previously taxed health insurance and fringe benefits provided to same-sex spouses. If an employer withheld employment taxes for same-sex spouse benefits paid to or on behalf of an employee in the third quarter of 2013 and repaid or reimbursed the employee for these amounts before filing Form 941, Employer’s Quarterly Federal Tax Return, for the third quarter of 2013 (normally due Oct. 31), the employer should not have reported these wages and withholding on that form. If the employer did not repay or reimburse the employee for the overcollected amount before it filed the third quarter 2013 Form 941, the employer must have reported the overcollected amount on that return and can use one of two special administrative procedures to make an adjustment or claim a refund.

First refund or adjustment method. Under the first alternative method, the employer must repay or reimburse employees for the amount of the overcollected FICA and income tax withholding for the same-sex spouse benefits for the first three quarters of 2013 on or before Dec. 31, 2013, and then, on its fourth quarter 2013 Form 941, it may reduce the fourth-quarter wages, tips, and other compensation on line 2; taxable Social Security wages on line 5a (subject to the wage base limitation for the year); and taxable Medicare wages and tips on line 5c, all by the amount of the same-sex spouse benefits treated as wages for the first three quarters of 2013.

The income tax withheld from wages, tips, and other compensation reported on line 3 of Form 941 should be reduced by the amount of income tax withholding that has been repaid or reimbursed to employees by the end of the calendar year. If the value of any same-sex spouse benefits was included in taxable wages subject to additional Medicare tax withholding on line 5d, this amount should also be reduced. Employers that qualify will not have to file separate Forms 941-X, Adjusted Employer’s Quarterly Federal Tax Return or Claim for Refund, to correct each of the first three quarters of 2013.

Second refund or adjustment method. Employers that have not reimbursed or repaid employees by Dec. 31 can file Form 941-X. If the employer has satisfied the usual requirements for filing Form 941-X, including repaying or reimbursing the overcollected employee FICA tax to employees (or, for refund claims, securing consents from employees), and obtaining the required written statements from employees, the employer can write “WINDSOR” in dark, bold letters across the top margin of page 1 of Form 941-X.

An employer may not claim a refund or credit for an overpayment of income tax withholding if the tax was deducted and withheld from the employee. This second procedure for 2013 cannot be used for income tax withheld from employees, because the employer can use this method only if it did not repay or reimburse employees for the amount of withheld taxes for same-sex spouse benefits provided in 2013 on or before Dec. 31, 2013. In these cases, employees will receive credit for the income tax withheld when they file their Form 1040, U.S. Individual Income Tax Return.

Notice 2013-61 also provides procedures employers should follow for overpaid FICA taxes for years before 2013 that are still open under the statute of limitation. Form 941-X must be filed, and the normal requirements that apply to correcting overpayments in earlier years must be followed, including the filing of Forms W-2c, Corrected Wage and Tax Statement, repaying or reimbursing employees, and obtaining the required written statements (and consents) from employees.

  Notice 2013-61

By Sally P. Schreiber, J.D., a JofA senior editor.


TAX MATTERS
Long-awaited repair regulations are issued  
By Alistair M. Nevius, J.D., and Sally P. Schreiber, J.D.
December 2013

The IRS issued long-awaited final regulations (T.D. 9636) regarding the treatment of expenditures incurred in acquiring, producing, or improving tangible assets, including rules on determining whether costs related to tangible property are deductible repairs or capital improvements.

The IRS noted that it had received many comments on the regulations, most of which it addressed in issuing the rules. (The AICPA submitted a comment letter recommending various changes, available at tinyurl.com/oxnm3gx.)

The regulations affect all taxpayers that acquire, produce, or improve tangible property. The final regulations, which apply to tax years beginning on or after Jan. 1, 2014, do not finalize or remove the temporary regulations governing dispositions of property under Sec. 168. Instead, to address significant changes in this area, revised proposed regulations were issued at the same time as the final regulations.

The final regulations adopt the temporary regulations issued in 2011 (T.D. 9564), with the following changes:

  • In response to comments that the $100 threshold for property that is exempt from capitalization was too low, the final rules raise it to $200 and retain the rule that the amount can be increased in IRS guidance. The rules also incorporate the definition of standby emergency spare parts contained in Rev. Rul. 81-185 and make these spare parts eligible for the optional election to capitalize certain materials and supplies.
  • The final rules retain the rule in the temporary regulations permitting taxpayers to elect to capitalize certain materials and supplies but, in response to comments, limit the rule to rotable, temporary, or standby emergency spare parts. Rotable parts are those acquired for installation on a unit of property that can be removed from the property and generally are repaired or restored and can be reinstalled on the same or another unit of property or stored for later installation (Regs. Sec. 1.162-3(c)(2)).
  • The rules clarify that taxpayers may revoke the election discussed above by filing a ruling request, which the IRS will grant if the taxpayer establishes that it acted reasonably and in good faith and that revocation will not prejudice the government.
  • The final rules change the requirement that taxpayers using the optional method for pools of rotable spare parts use it for all pools of rotable spare parts used in that trade or business to permit taxpayers to not use the optional method for those pools of rotable spare parts for which it does not use the optional method in its books and records for the trade or business.
  • Also in response to many taxpayer comments, the final rules clarify the de minimis rules, including permitting the safe harbor to be elected each year, providing rules for taxpayers without applicable financial statements to use the method, and simplifying the complicated method for calculating the ceiling for applying the de minimis amount provided in the temporary regulations.
  • The preamble clarifies that earlier revenue procedures treating certain property as materials and supplies are not affected by the final rules.
  • Again in response to comments, the final rules allow taxpayers that are members of consolidated groups for financial statement purposes but not for federal income tax purposes to use the applicable financial statements and accounting procedures of their group to qualify for the de minimis safe harbor.
  • The final rules change the treatment of additional costs of acquiring property subject to the safe harbor to include additional invoice costs, such as delivery fees.
  • Again in response to comments, the final rules simplify the de minimis safe harbor by requiring all materials and supplies to be included if taxpayers elect to use the safe-harbor method.
  • Another change is a clarification of the interaction of the de minimis rule with the rule under Sec. 263A that certain property be capitalized.
  • The final rules clarify the meaning of certain terms that are used in determining contingency fees for inherently facilitative costs in acquiring property that are required to be capitalized.
  • In response to comments, the final rules provide that taxpayers may deduct the removal cost when they remove a unit of property.
  • A significant change for small taxpayers is that taxpayers with gross receipts of $10 million or less can elect to deduct, for buildings that initially cost $1 million or less, the lesser of $10,000 or 2% of the adjusted basis of the property for repairs, etc., each year.


The IRS also issued proposed regulations on dispositions of property depreciable under the modified accelerated cost recovery system. The IRS had announced in Notice 2012-73 that it intended to revise the disposition rules that appeared in the temporary regulations. The proposed regulations contain those revisions, but taxpayers can continue to apply the rules in Temp. Regs. Secs. 1.168(i)-1T and 1.168(i)-8T for tax years beginning on or after Jan. 1, 2012, and before Jan. 1, 2014.

While the proposed regulations contain many of the same property disposition rules as the 2011 temporary regulations, they make changes to the rules on determining the asset disposed of and the qualifying disposition of an asset in a general asset account. They also contain new rules for partial asset dispositions.

  T.D. 9636; REG-110732-13

By Alistair M. Nevius, J.D., the JofA’s editor-in-chief, tax, and Sally P. Schreiber, J.D., a JofA senior editor.


TAX MATTERS
FICA and FUTA caps refer to common law employment relationships  
By Charles J. Reichert, CPA
December 2013

The Court of Appeals for the Federal Circuit upheld a lower court decision that the wage caps for the Federal Insurance Contributions Act (FICA) and Federal Unemployment Tax Act (FUTA) must be calculated by reference to common law employment relationships rather than statutory employment relationships. Thus, a payroll service company with statutory employees who worked for multiple common law employers had to apply the FICA and FUTA wage caps to the wages paid to each statutory employee by each common law employer. The court also upheld the lower court’s decision barring the taxpayer’s attempt to reclassify some of its employees as independent contractors.

Statutory employers, such as payroll service companies, are required to remit employer FICA and FUTA taxes and employee FICA taxes even though they are not common law employers. Although FICA and FUTA taxes are capped at different wage levels, both are imposed on every employer and are based on remuneration with respect to employment paid to an individual by an employer. Employment is any service provided by an employee, as defined by common law rules. In 1999, the IRS took the position in Technical Advice Memorandum 199918056 that payroll service companies should not aggregate the wages from multiple common law employers when computing the FICA and FUTA tax wage caps.

Cencast Services LP is a payroll service company for motion picture and television production companies. The production companies hire and supervise the workers; however, Cencast pays the workers, files payroll tax returns, and remits payroll taxes to the IRS for them. From 1991 to 1996, Cencast treated each employed production worker as its employee, and as a result, Cencast aggregated the annual wages paid to an employee and then applied the FICA and FUTA wage caps to each worker’s total wages from all production companies rather than to the wages earned at each company. In 2001, the IRS assessed FUTA tax and FICA tax deficiencies of approximately $43.7 million and $15.6 million, respectively, for tax years 1991–1996, on the basis that each production company was the employer for purposes of computing the wage caps. Cencast later litigated the issue, but the Court of Federal Claims agreed with the IRS. When the parties later engaged in settlement discussions, Cencast argued, for the first time, that some of the employees should be classified as independent contractors. After another round of litigation, the Claims Court barred as untimely Cencast’s independent contractor argument. Cencast appealed both decisions.

The appellate court agreed with the IRS on both issues. Cencast argued the FICA and FUTA tax liabilities are imposed only on the entity that pays the wages. The court agreed that the statutory employer is an employer required to remit the taxes; however, it held the computation of the FICA and FUTA taxes is based on wages from employment, and it is the common law employer that provides that employment. Since the FICA and FUTA wage caps are defined as a portion of the remuneration for employment, the wages earned from the common law employer are the measure of the FICA and FUTA wage caps, according to the court. The court added that applying the wage caps as Cencast desired would make no sense, since common law employers could reduce their FUTA and FICA taxes by using companies such as Cencast, a result Congress could not have intended.

The appellate court also held Cencast’s attempt to argue that some of the employees should be classified as independent contractors was untimely because Cencast could have raised the issue at multiple points over many years and failed to do so.

  Cencast Services LP, No. 2012-5142 (Fed Cir. 9/10/13), aff’g 94 Fed. Cl. 425 (2010)

By Charles J. Reichert, CPA, instructor of accounting, University of Minnesota–Duluth.


TAX MATTERS
IRS bound to honor designation of voluntary payment by one taxpayer of another’s liability  
By Janet A. Meade, CPA, Ph.D.
December 2013

In a reviewed opinion, the Tax Court held that the IRS must follow a corporation’s designation of voluntary payments toward the income tax liabilities of its owners/employees. However, because the payments did not represent taxes withheld at the source, the IRS was allowed to levy on the assets of the owners/employees to collect applicable interest and penalties. Likewise, the corporation remained liable for interest and penalties attributable to its failure to remit taxes on a timely basis.

Sec. 3402 requires employers to withhold taxes from wages paid to employees. Sec. 31(a) provides employees with a credit against their income tax for amounts withheld at the source. Under Regs. Sec. 1.31-1(a), this credit is applied to the calendar year of the withholding without regard to whether or when the employer remits the tax. Tax of an employee is deemed to have been withheld at the source only if the employer (1) contemporaneously withholds tax in the correct amount or (2) corrects a withholding error by making a timely and proper adjustment.

Rev. Proc. 2002-26 allows a taxpayer to designate how voluntary partial payments are applied against liabilities of tax, penalties, and interest. If a taxpayer does not make a designation, the IRS generally applies payments to tax, penalties, and interest, in that order. Likewise, the IRS generally honors designations of voluntary payments between different types of taxes, such as corporate income or employment tax obligations. When a tax is divisible, such as employment taxes that relate to specific employees and calendar quarters, case law has held that a taxpayer may designate and pay a divisible portion of the total tax obligation. Sec. 6331(i)(1) prohibits a levy against a taxpayer with respect to an unpaid divisible tax during pending legal proceedings.

James and Sharon Dixon served as officers and employees of Tryco, a temporary staffing business they founded in 1990. At first, Tryco was a great success, and the Dixons paid themselves generously. In late 1992, however, Tryco stopped filing and remitting employment taxes, and the Dixons stopped filing individual income tax returns. In 1997, the Dixons were criminally prosecuted for failure to file individual income tax returns for 1992 through 1995, and as part of a settlement that resulted in a reduced sentence, they agreed to make restitution to the IRS for its tax loss in the amount of $61,021. In 1999, the Dixons contributed this amount to Tryco, and Tryco then submitted it to the IRS, accompanied by a cover letter indicating that the payment represented Tryco’s withholding taxes to be applied to the withheld income taxes of the Dixons.

In 2000, when accountants prepared the individual income tax returns for the Dixons’ missing years, they determined that the couple owed $30,202 more in taxes than Tryco had previously submitted to the IRS. As before, the Dixons contributed this amount to Tryco, and the corporation in turn submitted it to the IRS with a cover letter indicating that the payment represented the Dixons’ withheld income taxes. On the advice of legal counsel, the Dixons chose not to pay their individual income tax liabilities directly, believing that the indirect payments through Tryco would reduce both the portion of the company’s withholding tax liability attributable to themselves and their own income tax liabilities. They also hoped to avoid interest and penalties on the payments by availing themselves of Sec. 31’s crediting scheme, which treats withholding at the source as paid in the year of the withholding irrespective of the employer’s date of remittance.

The IRS initially credited Tryco’s payments to the Dixons’ 1992−95 income tax liabilities, which discharged their tax obligations but not the applicable interest and penalties. Later, the IRS reversed itself and applied the payments to Tryco’s general unpaid employment tax liabilities, which then exceeded $23 million. The IRS then issued a notice to the Dixons of intent to levy on their assets in satisfaction of their now unpaid 1992−95 income tax liabilities. The Dixons petitioned the Tax Court for review.

The Dixons contended first that they were entitled to a withholding credit under Sec. 31 for the amounts submitted by Tryco on their behalf in 1999 and 2000. Second, they asserted that the IRS was obligated to honor Tryco’s designation of the payments as withheld income taxes and to credit the amounts toward the Dixons’ 1992−95 income tax liabilities.

The IRS argued that its policy of honoring designations of voluntary payments is confined to particular tax periods or types of tax. It contended that the policy does not extend to designations of delinquent employment tax by one party toward the income tax liability of another.

Both the majority and dissenting opinions of the court concluded that the funds submitted by Tryco to the IRS in 1999 and 2000 were not withheld at the source and, accordingly, that the Dixons were not entitled to a Sec. 31 credit against their individual income tax liabilities. Regarding the Dixons’ second argument, the majority determined that the IRS was obligated to follow its published administrative position regarding designations of voluntary payments. The IRS was therefore directed to properly credit the $91,223 payments to the Dixons’ account, fully discharging their 1992−95 income tax obligations. The IRS was allowed, however, to levy on the Dixons’ assets to collect applicable interest and penalties. Tryco likewise remained liable for interest and penalties.

  Dixon, 141 T.C. No. 3 (2013); related decision at Dixon, T.C. Memo. 2013-207

By Janet A. Meade, CPA, Ph.D., associate professor, University of Houston.


TAX MATTERS
Health coverage information-reporting guidance issued  
By Alistair M. Nevius, J.D.
December 2013

The IRS issued two related proposed regulation projects on health care coverage reporting requirements under the Patient Protection and Affordable Care Act, P.L. 111-148. One set of proposed regulations gives guidance to providers of minimum essential health coverage that are subject to the information-reporting requirements of Sec. 6055 (REG-132455-11). The other set gives guidance to employers subject to the information-reporting requirements of Sec. 6056 (REG-136630-12).

Sec. 6055 requires providers of minimum essential coverage and providers of coverage through an employer’s group health plan to report information that will allow taxpayers to establish and the IRS to verify that the taxpayers were covered by minimum essential coverage and their months of enrollment during a calendar year.

Sec. 6056 requires applicable large employers (generally employers with 50 or more full-time employees) to report to the IRS information about the coverage that they offer to their full-time employees and requires them to furnish related statements to employees.

Treasury and the IRS asked for comments on the requirements last year and say they have engaged in a dialogue with stakeholders to figure how to simplify Sec. 6055 and Sec. 6056 reporting consistent with effective implementation of the law. The IRS delayed the effective dates for reporting under both Secs. 6055 and 6056 to 2015, although it is encouraging voluntary reporting during 2014 (Notice 2013-45).

Both sets of proposed regulations discuss the possibility of combined reporting under Secs. 6051 (requiring W-2 reporting), 6055, and 6056, but the regulation projects do not institute full combined reporting. They do discuss how to avoid duplicate reporting under the requirements for those sections.

The proposed regulations under Sec. 6055 clarify:

  • Who is subject to the information-reporting requirement;
  • What information is required to be reported;
  • The time and manner of filing;
  • Statements that must be furnished to individuals; and
  • Penalties.


The regulations propose placing returns under Secs. 6055 and 6056 within the definitions of information return and payee statement under Secs. 6721 and 6722.

The proposed regulations under Sec. 6056:

  • Define key terms;
  • Discuss the responsibilities of applicable large employers with respect to full-time employees;
  • Describe the content, manner, and timing of information required to be reported to the IRS and furnished to full-time employees; and
  • Define the person responsible for Sec. 6056 reporting.


The preamble to the proposed Sec. 6056 regulations discusses a variety of potential simplified reporting methods that the IRS is considering. These include allowing employers to report on Form W-2, Wage and Tax Statement, and eliminating the need to determine full-time employees if minimum essential coverage is offered to all potentially full-time employees.

Both sets of regulations are proposed to apply for calendar years beginning after Dec. 31, 2014. Consistent with Notice 2013-45, reporting entities will not be subject to penalties for failure to comply with the Secs. 6055 and 6056 reporting requirements for coverage in 2014.

  REG-132455-11; REG-136630-12

By Alistair M. Nevius, J.D., the JofA’s editor-in-chief, tax.


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