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TAX MATTERS
Is a remittance a deposit or a payment?  
By Charles J. Reichert, CPA
November 2013

A district court held that an estate’s remittance to the IRS was a tax payment rather than a deposit. It denied the estate’s refund request because it occurred after the three-year recovery period had expired.

Generally, a taxpayer must request a refund of a tax overpayment within three years from the date the return was filed or two years from the date the tax was paid, whichever occurs later. Sec. 6603 permits a taxpayer to make a deposit (not considered a tax payment) with the IRS to suspend interest on a potential underpayment of tax. A taxpayer can request the return of all or part of a deposit at any time before the deposit has been used by the IRS as payment of a tax. To be considered a deposit, a remittance must be accompanied by the taxpayer’s written statement conforming to the requirements of Rev. Proc. 2005-18. In Moran, 63 F.3d 663 (7th Cir. 1995), when deciding whether a remittance was a deposit or a tax payment, the Seventh Circuit applied a facts-and-circumstances test by examining three factors: when the tax liability was determined, what the taxpayers intended, and how the IRS treated the remittance upon its receipt.

Marshall Syring, a resident of Superior, Wis., died on Oct. 14, 2005. The estate’s accountant estimated a $650,000 estate tax liability, which he believed could be paid over 10 years. On July 14, 2006, the estate, based on its accountant’s advice, remitted $170,000 to the IRS and requested an extension of its filing deadline to Jan. 14, 2007; however, no written statement conforming to Rev. Proc. 2005-18 was included with the remittance. The estate tax return, which reported no tax liability, was filed on Feb. 19, 2010. After an audit, the IRS determined an estate tax liability of $25,526, which the estate did not contest; however, it requested a refund of $144,474, the remainder of its remittance. The IRS denied the refund, arguing the remittance was a tax payment, not a deposit, and the estate’s request for the refund of the tax payment was not timely. The estate filed suit in the U.S. District Court for the Western District of Wisconsin.

The court held the remittance was a tax payment, using the three-factor test of Moran. The court found that under the first factor, the facts indicated the payment was a deposit, since there was no formal tax assessment or a defined tax liability at the date of remittance. However, the court found the other two factors—taxpayer intent and the IRS’s treatment of the remittance—indicated it was a tax payment. The estate would have had prima facie evidence that it intended to make a deposit if it had included a written statement outlined in Rev. Proc. 2005-18 with the remittance; however, the estate failed to do so.

The court looked at other factors to determine the estate’s intent and concluded that three circumstances indicated that the estate intended to make a partial estate tax payment: (1) the careful estimate of the estate tax liability and the amount of the remittance by the estate’s accountant; (2) the manner in which the accountant completed Form 4768, Application for Extension of Time to File a Return and/or Pay U.S. Estate (and Generation-Skipping Transfer) Taxes; and (3) the prompt action by the estate following the accountant’s instructions.

Concerning the third Moran factor, the court found that the IRS treated the remittance as a payment since (1) Rev. Proc. 2005-18 states any remittance not accompanied by a written statement will be treated as a tax payment; (2) the IRS recorded the remittance as a “payment received”; and (3) it credited the payment to the estate’s account rather than a separate deposit account. In its conclusion, the court stated, “This result may seem unfair—after all the government is allowed to keep a payment that it concedes was not due—but tax laws are ‘not normally characterized by case-specific exemptions reflecting individualized equities’ ” (quoting Brockamp, 519 U.S. 347, 352 (1997)).

  Syring, No. 12-cv-232-wmc (W.D. Wis. 8/15/13)

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


TAX MATTERS
Final rules issued on individual health care mandate  
By Sally P. Schreiber, J.D.
November 2013

The IRS released final regulations on the Sec. 5000A shared-responsibility payment—the penalty or tax imposed on individual taxpayers who do not obtain minimum essential health care coverage beginning in 2014 (known as the “individual mandate”).

The final rules adopt the proposed regulations issued in January with a few clarifications (REG-148500-12). They also cross-reference rules issued July 1 by the Department of Health and Human Services governing eligibility for and granting certain exemptions from the shared-responsibility payment, which include circumstances in which insurance exchanges will grant hardship exemptions from the requirement to obtain minimum essential health care coverage (78 Fed. Reg. 39494 (July 1, 2013)).

Under Sec. 5000A, starting next year, a taxpayer will be liable for the shared-responsibility payment if the taxpayer or any nonexempt individual whom the taxpayer may claim as a dependent for a tax year does not have minimum essential coverage in a month included in that tax year. Married taxpayers filing a joint return are jointly liable for the payment.

The regulations cover:

  • Maintenance of minimum essential coverage and liability for the shared-responsibility payment. Regs. Sec. 1.5000A-1 defines minimum essential coverage and liability for the shared-responsibility payment, including for dependents.
  • Minimum essential coverage. Regs. Sec. 1.5000A-2 defines the different types of health plans that qualify as minimum essential coverage.
  • Exempt individuals. Regs. Sec. 1.5000A-3 defines who is exempt from the payment.
  • Computation of the shared-responsibility payment. Regs. Sec. 1.5000A-4 contains rules for computing the amount of the payment.
  • Administration and procedure. Regs. Sec. 1.5000A-5 states when the payment is due, that liens or levies to collect the payment are prohibited, that the taxpayer is not subject to criminal penalties for nonpayment, and that the IRS has authority to offset overpayments of tax to collect the payment.


Minimum essential coverage is coverage under a government-sponsored program (Medicare, Medicaid, Tricare, the Children’s Health Insurance Program, etc.); an eligible employer-sponsored plan (defined in Regs. Sec. 1.5000A-2(c)); a plan in the individual market (generally, insurance through a health care exchange); a health plan grandfathered under the health care acts (the Patient Protection and Affordable Care Act (PPACA), P.L. 111-148, and the Health Care and Education Reconciliation Act, P.L. 111-152); or other health benefits coverage that has been recognized as minimum essential coverage by the secretary of Health and Human Services (Regs. Sec. 1.5000A-2).

Exempt individuals include:

  • Members of a religious sect whose members oppose government insurance benefits (Regs. Sec. 1.5000A-3(a));
  • Members of health care sharing ministries, which are groups that share a common set of ethical or religious beliefs and share medical expenses among themselves (Regs. Sec. 1.5000A-3(b));
  • Exempt noncitizens, meaning noncitizens, nonresident aliens, and people who are unlawfully present in the United States (Regs. Sec. 1.5000A-3(c));
  • People in jail (Regs. Sec. 1.5000A-3(d));
  • An individual who lacks affordable coverage (meaning the individual’s required contribution for minimum essential coverage exceeds 8% of the individual’s household income) (Regs. Sec. 1.5000A-3(e));
  • Individuals whose household income is below the filing threshold in Sec. 6012(a)(1) (Regs. Sec. 1.5000A-3(f));
  • Members of Indian tribes (Regs. Sec. 1.5000A-3(g));
  • Individuals who obtain a hardship exemption certificate certifying that they have suffered a hardship that prevents them from obtaining coverage (Regs. Sec. 1.5000A-3(h)); and
  • Individuals who were without coverage for less than three consecutive months (Regs. Sec. 1.5000A-3(j)).


The final regulations were changed from the proposed rules to clarify that medical coverage offered to employees by an organization acting on an employer’s behalf qualifies as an employer-sponsored plan. The final rules also added the Nonappropriated Fund Health Benefits Program offered by the Defense Department to the definition of government-sponsored plans that qualify for minimum essential coverage, and Treasury is considering whether other government programs might qualify. And the final regulations clarify that a self-insured health plan is an eligible employer-sponsored plan, regardless of whether it could be offered in a large or small group market in a state.

Generally, a plan in the individual market includes health plans offered through an exchange in a state. Section 1304(d) of the PPACA and the final regulations provide that the term “state” means each of the 50 states or the District of Columbia. However, the PPACA permits territories of the United States to create exchanges. Accordingly, the final regulations provide that a qualified health plan offered through an exchange in a U.S. territory meets the definition of a plan in the individual market within a state.

The regulations apply to months beginning after Dec. 31, 2013, when the Sec. 5000A penalty first applies.

In 2012, the U.S. Supreme Court upheld the individual mandate as a permissible exercise of Congress’s taxing powers under the Constitution (National Federation of Independent Business v. Sebelius, Sup. Ct. Dkt. No. 11-393 (U.S. 6/28/12)).

  T.D. 9632

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


TAX MATTERS
Government farm payments subject to SE tax  
By Kim T. Mollberg, CPA, CGMA, CMA, MBT
November 2013

The Tax Court held a taxpayer’s net income from payments received under the U.S. Department of Agriculture’s Conservation Reserve Program (CRP) was self-employment income under Sec. 1402(a).

During 2006 and 2007, Rollin Morehouse, a resident of Minnesota, received “CRP annual rental” payments as consideration for agreeing to set aside from crop growing and implement soil conservation practices on tracts of farmland owned in South Dakota. In filing his Forms 1040, Morehouse reported the payments for both years as rental income on Schedule E, Supplemental Income and Loss, and not as self-employment income on Schedule SE, Self-Employment Tax. The IRS assessed deficiencies for both years, determining that because the CRP payments were not farm rental income, they should have been reported on Schedule F, Profit or Loss From Farming, and on Schedule SE. The taxpayer petitioned the Tax Court, arguing self-employment tax did not apply because he never actually farmed in a customary manner before or during the CRP term and his participation was de minimis. Alternatively, he argued the payments were not self-employment income under the exclusion of Sec. 1402(a)(1) for certain rents from real estate and personal property leased with the real estate.

In ruling for the IRS, the court first determined a trade or business existed because Morehouse’s participation was regular, continuous, profit-motivated, and not de minimis, then determined payments received were subject to self-employment tax because the trade or business activities he performed were clearly related to the income received. Morehouse negotiated and obligated himself to terms of contracts, filed annual certifications, participated in emergency programs, and requested cost-sharing payments. Although he hired a third party to do planting and maintenance, he purchased seed and performed regular inspections. He also expanded his participation in the CRP over time, as he believed it was more profitable than leasing to farmers.

The court followed the Sixth Circuit’s holding in Wuebker, 205 F.3d 897 (6th Cir. 2000) (which had reversed the Tax Court’s holding in that case). In Wuebker, the appellate court held CRP payments were self-employment income and not eligible for the Sec. 1402(a)(1) exclusion. Because the government could access the real estate only for inspections, the rents received were for services performed by the landowner meeting the obligations of the contract rather than for the lessee’s actual use of the real estate. In arriving at its decision, the Sixth Circuit found a link between the trade or business activities performed and income received. The Wuebkers engaged in farming before and during the contract term, performed the conservation practices on land owned and previously farmed, and used their own equipment in fulfilling their contractual obligations.

Similarly, the Tax Court determined that Morehouse was in the “business of participating in the CRP,” that there was a clear connection between the trade or business activities he performed and the income received, and that the income did not qualify for the rental exclusion.

Morehouse was not eligible for the Sec. 1402(a)(1) self-employment tax exclusion for Social Security retirement or disability benefit recipients receiving CRP payments, because the payments were made before the 2008 effective date of the exclusion. The court reasoned that Congress had signaled its intent to not exclude all CRP payments from self-employment tax by enacting that exclusion.

Unless reversed upon appeal, the Morehouse decision means all individual and partnership landowners, regardless of their levels of participation, will more than likely be subject to self-employment tax on CRP income, unless the landowner qualifies for the rental real estate exclusion permitted for taxpayers receiving Social Security retirement or disability benefits.

  Morehouse, 140 T.C. No. 16 (2013)

By Kim T. Mollberg, CPA, CGMA, CMA, MBT, assistant professor, Minnesota State University Moorhead.


TAX MATTERS
Proposed rules issued for small employer health insurance premium credit  
By Sally P. Schreiber, J.D.
November 2013

The IRS issued proposed regulations governing the Sec. 45R credit for small employers that offer health insurance coverage for employees (REG-113792-13). The proposed rules incorporate the provisions of Notices 2010-44 and 2010-82, modified to reflect the statutory changes starting in 2014, notably, a higher credit amount, the fact that employers must obtain the insurance coverage through an exchange, and a two-year limit on taking the credit.

Sec. 45R was added by the Patient Protection and Affordable Care Act, P.L. 111-148. From 2010 to 2013, small businesses—defined as businesses with 25 or fewer employees and average annual wages of less than $50,000—have been eligible for credits of up to 35% of nonelective contributions the businesses make on behalf of their employees for insurance premiums. Tax-exempt organizations have been eligible for a 25% credit against payroll taxes. Beginning in 2014, the maximum credit increases to 50% (and 35% for tax-exempt organizations).

The credit amount is based on a percentage of the lesser of: (1) the amount of nonelective contributions paid by the eligible small employer on behalf of employees under a qualifying arrangement during the tax year, and (2) the amount of nonelective contributions the employer would have paid under the arrangement if each employee were enrolled in a plan that had a premium equal to the average premium for the small group market in the rating area in which the employee enrolls for coverage.

The proposed rules provide that employers that are exempt from tax under Sec. 501(a) but not described in Sec. 501(c) are not eligible for the credit, but a Sec. 521 farmers’ cooperative that is subject to tax under Sec. 1381 is eligible for the credit as a taxable employer (as long as it meets the other eligibility requirements).

The regulations incorporate the rule that the credit does not require the employees to be performing services in a trade or business. An employer who otherwise meets the eligibility requirements can take the credit for employees who are not performing services in a trade or business, such as a household employee. Eligible small employers located outside the United States that have income effectively connected with the conduct of a trade or business in the United States may claim the credit only if the employer pays premiums for health insurance coverage issued in and regulated by one of the 50 states or Washington, D.C.

Under Sec. 45R, sole proprietors, partners in a partnership, shareholders owning more than 2% of the stock in an S corporation, and any owners of more than 5% of other businesses—and their family members—are not taken into account as employees for purposes of the credit. Although Sec. 45R does not specifically refer to spouses, the IRS says that spouses are nevertheless excluded from the definition of employee for those purposes.

In a “qualifying arrangement,” the employer pays a uniform percentage (not less than 50%) of the premium cost for each employee enrolled in health insurance coverage. If an employer is entitled to a state tax credit or a premium subsidy that is paid directly to the employer, this amount is not included in determining whether the employer has satisfied the premium payment requirement. It is taken into account in calculating the credit, however.

For 2014 and later, employers must obtain health insurance through a Small Business Health Options Program (SHOP) exchange, which is an insurance exchange specifically set up for small businesses to obtain coverage. Before 2014, there was no time limit on taking the credit, so employers that qualified could have taken it in 2010 through 2013. Beginning in 2014, a two-year limit begins with the first year (after 2013) the employer files Form 8941, Credit for Small Employer Health Insurance Premiums. However, if an entity’s predecessor entity (as determined under employment tax rules) claimed the credit, that predecessor’s period will count toward the successor entity’s two-year credit period.

The proposed regulations also provide a transitional rule for employers with non-calendar-year insurance plans.

The regulations will be effective the date they are published as final in the Federal Register, but taxpayers may rely on them for tax years beginning after 2013 and before Dec. 31, 2014.

  REG-113792-13

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


TAX MATTERS
All legal same-sex marriages recognized for tax purposes  
By Alistair M. Nevius, J.D.
November 2013

In the wake of the Supreme Court’s Windsor decision (Sup. Ct. Dkt. No. 12-307 (6/26/13)), which invalidated a portion of the Defense of Marriage Act (DOMA), P.L. 104-199, the Treasury Department and IRS announced in late August that “same-sex couples, legally married in jurisdictions that recognize their marriages, will be treated as married for federal tax purposes.” The IRS also issued a revenue ruling (Rev. Rul. 2013-17) and FAQs (tinyurl.com/ptg3u7q) providing guidance on the topic.

The ruling will apply to all federal tax provisions where marriage is a factor, for all federal taxes, including income, estate, and gift taxes. Tax provisions in which marriage is a factor include filing status, personal and dependency exemptions, the standard deduction, employee benefits, contributions to IRAs, the earned income tax credit, and the child tax credit, among others.

According to the IRS, more than 200 provisions in the Code and Treasury regulations include the terms “spouse,” “marriage,” “husband,” “wife,” or “husband and wife.” Under the revenue ruling, the IRS will treat gender-neutral terms, such as “spouse” and “marriage,” as including, respectively, an individual who is married to a person of the same sex if the couple is lawfully married under state law and such a marriage between same-sex individuals. The terms “husband,” “wife,” and “husband and wife” will be interpreted to include same-sex spouses.

The ruling will apply to taxpayers who are in any same-sex marriage legally entered into in one of the 50 states, the District of Columbia, a U.S. territory, or a foreign country. These marriages will be recognized for federal tax purposes, even if the state in which the couple currently resides does not recognize same-sex marriages. The IRS says this is consistent with its long-standing position (Rev. Rul. 58-66) that for federal tax purposes the IRS will recognize marriages based on the law of the state in which they were entered into and will disregard subsequent changes in domicile.

The ruling does not apply to taxpayers who are in registered domestic partnerships, civil unions, or similar formal relationships recognized under state law that do not have the status of legal marriage under state law. However, some states extend full community property treatment to such unions, for which the FAQs also provide guidance.

Under the ruling, legally married same-sex couples generally will file their 2013 federal income tax returns using either married filing jointly or married filing separately status. Such individuals may, but are not required to, file original or amended returns choosing to be treated as married for federal tax purposes for one or more prior tax years still open under the statute of limitation, if they were legally married during that tax year.

Treasury and the IRS also announced that they intended to issue 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. They also said that they intended to issue further guidance on cafeteria plans and on how qualified retirement plans and other tax-favored arrangements should treat same-sex spouses for periods before the effective date of this revenue ruling.

The revenue ruling applies prospectively, effective Sept. 16, 2013, but taxpayers who wish to rely on it for earlier periods (for which the statute of limitation has not expired) may do so.

  Rev. Rul. 2013-17

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


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