More Time for Electronic Filers
Businesses that are required to make their federal tax deposits electronically have an extra six months to prepare. IRS Commissioner Charles O. Rossotti told members of the House Ways and Means Oversight Subcommittee that because existing business users had made such substantial progress with the electronic federal tax payment system (EFTPS) it was not necessary to impose penalties on July 1, as previously planned.
The announcement applies to businesses required to use the EFTPS beginning July 1, 1997, or January 1, 1998. Before Rossottis announcement, those businesses were subject to a 10% penalty if they continued to use the old paper coupon system. Businesses now have until January 1, 1999, before the IRS starts imposing penalties.
The EFTPS, which is available to all taxpayers, allows businesses to make deposits by telephone or personal computer. Approximately 1.5 million businesses already are enrolled in the EFTPS.Settlement Program a Hit
The IRS extended indefinitely a popular method of resolving worker classification cases. Implemented in March 1996 for a two-year trial period, the Classification Settlement Program (CSP) was highly regarded by taxpayers who used it to resolve such cases early in the examination process.
Under the CSP, IRS examiners can offer a settlement to businesses that have incorrectly classified workers. The language of the settlement is based on a standard closing agreement developed by the IRS. Generally, a business that files form 1099 information returns but fails to meet all other requirements for relief under IRC section 530 can reclassify workers prospectively and pay a specified tax assessment that does not exceed one years liability. The amount of the assessment depends on the extent to which the business satisfies section 530 requirements.
CSP is a voluntary program, and businesses that decline the settlement offer retain the right to appeal.
For more information on CSP, contact Greg Christensen of the IRS Office of Employment Tax Administration and Compliance at 202-622-3650.
The Value of an IRS General Counsel Memorandum
CPAs researching tax issues frequently find the IRC and related regulations ambiguous. If they are unable to find court cases that address the issue at hand, they may need to turn to private letter rulings or to IRS general counsel memoranda (GCMs), which are background documents the IRS uses to support a ruling. However, is it safe to rely on these as precedent?
The First Circuit Court of Appeals was asked to decide whether a pension fund created through collective bargaining was tax-exempt as a labor organization under IRC section 501(c)(5). For the years at issue, the code and regulationsas interpreted by published revenue rulingswere ambiguous. The taxpayer cited a GCM as precedent for the exemption. The court was asked to address the usability of the cited memo.
Result: For the IRS. The pension fund was not tax-exempt. In reaching its decision, the court ignored the GCM cited by the taxpayer and searched the legislative history to determine the funds tax-exempt status. Citing Treasury regulations section 1.6661-3(b)(2), the court said it was ignoring the memo because it is not precedent. The regulation says private letter rulings and GCMs are not authoritative.
With this case, the First Circuit joined several other courts in holding that GCMs are informal determinations and therefore not precedent. In its opinion, the court cited the two prior cases that addressed the tax-exemption issue. It rejected the Second Circuit Court of Appeals use of the cited GCM in Morganbesser and based its rejection on the decision in Stitching , which refused to follow Morganbesser because that case had failed to apply the correct standard and had relied on a dubious GCM.
It is important to note two issues the First Circuit decision failed to address.
- IRC section 6661, the authority for regulations section 1.6661-3, was repealed and replaced by section 6662. Treasury regulations issued under section 6662 provide that both private letter rulings and GCMs are substantial authority, reversing the position under the old regulations cited by the court.
- In spite of their supposed lack of precedential value, in Rowan Cos. , 452 US 247 (1981), the U.S. Supreme Court considered private letter rulings to determine how the IRS interpreted the code.
The Supreme Courts use of private letter rulings can be interpreted to require similar use of GCMs by other courts. Comparing GCMs with private letter rulings, though, reveals some interesting differences.
- A private letter ruling is the IRS response to a specific fact
- A GCM, on the other hand, generally is guidanceextensively cross-referenced and updated to reflect current IRS policyfor IRS district offices to use in formulating positions. Because they constitute working law, GCMs are useful to CPAs as a research tool to interpret the code consistently. They also appear to provide a better foundation than letter rulings for well-reasoned decisions.
The First Circuits refusal to even consider the memo cited by the taxpayer can be interpreted as lowering a GCMs value below that of a letter ruling. Therefore, CPAs need to be careful about relying on GCMs until their status is clarified.
John F. Tupper, et al. v. U.S. , 134 F.3d 444-98
USTC P 50,148.
Prepared by Edward Schnee, CPA, PhD, Joe Lane Professor of Accounting and director, MTA program, Culverhouse School of Accountancy, University of Alabama, Tuscaloosa.
The Tax Court ruled for the first time that cash distributions from IRAs and Keogh retirement plans must be rolled over as cash (not property) to another IRA within 60 days or the rollover will be taxed. If the cash is used to purchase stock or other assets that are then deposited in an IRA, even within the 60-day period, the entire amount of the cash distributions is taxable.
In Albert Lemishow v. Commissioner (110 TC no. 11, 1998), the taxpayer had $492,950 in his Keogh and IRA accounts. He withdrew $480,400 (to cover the 20% withholding tax) to pay the $377,900 purchase price of a stock deal he had signed. Within 60 days he opened a new IRA with a brokerage house and deposited his newly acquired shares into that account. The taxpayer did not report the cash distributions on his tax return. However, the IRS considered the withdrawals taxable and included the full $480,400 in the taxpayers gross income.
At issue is whether the cash distributions have to be rolled over as cash to a qualifying IRA for the rollover to be tax-free. Generally, IRA and Keogh distributions are included in gross income in the year received. However, IRC sections 408(d)(3) and 402(c)(1) allow tax-free rollovers if the money distributed from the accounts is transferred to a new qualified account. According to the Tax Court, the legislative history uses the term this same money . The court interpreted the laws strictly, concluding the distributions were taxable because they were used to purchase stock and then deposited into an IRA.
Observation: The above result can be avoided by transferring money from IRA and Keogh accounts via trustee-to-trustee transfers and then having the new IRA purchase the stock. Not only are such transfers tax-free but they also avoid the 20% withholding requirement, the 60-day restriction and the one-year waiting period between IRA rollovers.
Failed rollovers can result in a 10% tax on distributions prior to age 5912 and a 6% annual excise tax on excess contributions.
Finally, distributions from a nondeductible IRA contribution or a non-deductible employee contribution to a qualified plan are not included as income when received.
Michael Lynch, CPA, Esq., associate professor of tax accounting at Bryant College, Smithfield, Rhode Island.Some Relief for Worker Classification Disputes
The Taxpayer Relief Act of 1997 expanded the jurisdiction of the Tax Court to include employment tax issues. The act gives two new forums for challenging the IRS to taxpayers that fail to meet the provisions of section 530 of the Revenue Act of 1978 and whose workers have been reclassified as employees.
In addition to filing suit in either a federal district court or the U.S. Claims Court, a taxpayer can challenge the IRS in Tax Court or the Small Cases Division of the Tax Court in cases involving amounts under $10,000.
Traditionally, taxpayers were required to pay the assessed taxes, penalty and interest before they sued the IRS in the district claims court. But now, taxpayers who choose to use the Tax Court can file suit against the IRS without first paying the assessed amount.
Observation. Filing a suit in Tax Court will not stop the accumulation of interest on the assessed deficiency. The taxpayer can avoid the running of interest only by depositing with the court a cash bond sufficient to cover the assessment. If the IRS prevails and no deposit has been made, the taxpayer must pay the assessed deficiency plus interest to date, which may prove costly.
Tina Steward Quinn, CPA, PhD, assistant professor of accountancy , and Keith Smith, CPA, PhD, associate professor of accountancy, Arkansas State University .
Refunds for Harbor Maintenance Taxes
On March 31, 1998, the U.S. Supreme Court unanimously struck down the harbor maintenance tax (HMT) as an unconstitutional tax on exports ( U.S. v. United States Shoe Corp. ). Exporters, importers and domestic shippers pay the HMT based on the value of commercial cargo they ship through U.S. ports. The U.S. Customs Service collects the HMT at the time exports are loaded and imports and other shipments are unloaded. The tax traditionally has been used to fund harbor maintenance and development.
U.S. Shoe sought refunds of HMT paid during a three-month period in 1994, arguing that HMT violates the Export Clause of the U.S. Constitution, which prohibits Congress from imposing any duty on exports. The U.S. government declared that the HMT is a permissible user fee, not an export duty.
Justice Ginsberg ruled that the HMT bears the indicia of a tax because Congress called it a tax and because it is part of the Internal Revenue Code. More important, the HMT is levied directly on exported goods, with reference to their value, and bears no relationship to port services rendered to a shipper.
Observation. U.S. Shoe Corp. challenged the HMT only as it applies to exports. Thus, the Supreme Courts ruling does not immediately affect taxes paid on imported and domestically shipped cargo. Nor does it address how much interest the government will have to pay or the years for which refunds will have to be made. The Court of International Trade ordered the government to refund HMT amounts paid by U.S. Shoe and enjoined it from collecting further HMT on exports.
Many companiesmore than 4,000have filed claims to protect their ability to obtain refunds of HMT. Companies that have not already filed such claims should consider doing so.
Congress may redraft the HMT in the form of a user fee that correlates with the exporters use of port services and facilities because Justice Ginsbergs opinion indicates that a bona fide user fee will survive a challenge to the Export Clause.
Tracy Hollingsworth, Esq., staff director of tax councils at Manufacturers Alliance, Arlington, Virginia.