Tax Notes


Tn The IRS proposed regulations that explain the tax consequences to partnerships of contributions of contracts accounted for under the long-term contract method. In addition the proposal described the impact of transfers of interest in—and distributions from—partnerships holding such contracts ( www.irs.gov/taxpros/article/0,,id=112047,00.html ). The proposed regulations, which also list the special rules applying to these partnership transactions, would be effective for contributions, transfers and distributions occurring on or after May 15, 2002. Comments are due November 4.

The Treasury Department and the IRS issued comprehensive tax rules governing split-dollar life insurance arrangements entered into or materially modified after September 17 ( www.treas.gov/press/releases/js726.htm ). Treasury Assistant Secretary for Tax Pam Olson said: “Under these rules, companies cannot use (such arrangements) to provide tax-free compensation to their employees. By ensuring that (they) are appropriately taxed, the regulations curb a backdoor form of executive compensation and promote greater transparency.” Corporations often have used such arrangements, which consist of an agreement between two parties to share the premiums and/or benefits of a life insurance policy.

Reimbursements from an employee’s flexible spending account (FSA) for the cost of medicines and drugs he or she bought without a physician’s prescription are excludable from income under IRC section 105, the IRS said in revenue ruling 2003-102 in September ( www.irs.gov/pub/irs-drop/rr-03-102.pdf ). But amounts an employee pays for dietary supplements that are merely beneficial to the general health of that employee or his or her spouse or dependents are neither reimbursable nor excludable from income under section 105(b).

In its first private letter ruling on a medical reimbursement program, the IRS responded to a taxpayer’s request for guidance on a reimbursement plan for certain of its employees’ expenses not covered under the company health insurance program ( www.irs.gov/pub/irs-wd/0329014.pdf ). Because the plan met the requirements of revenue ruling 2002-41 and notice 2002-45, the IRS offered no explicit new guidance. But, in contrast to its requirements for flexible spending accounts, the IRS did not object to the taxpayer’s practice of making available to employees at a given point in the benefit year only a pro rata portion of the amount obtainable from the reimbursement program for the entire year.

For single-click access to further coverage of the tax stories listed here, visit the Journal of Accountancy Web site at www.aicpa.org/pubs/jofa/joahome.htm .

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