Tax Briefs


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 .


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.

Where to find January’s flipbook issue

Starting this month, all Association magazines — the Journal of Accountancy, The Tax Adviser, and FM magazine (coming in February) — are completely digital. Read more about the change and get tips on how to access the new flipbook digital issues.


Get your clients ready for tax season

Upon its enactment in March, the American Rescue Plan Act (ARPA) introduced many new tax changes, some of which retroactively affected 2020 returns. Making the right moves now can help you mitigate any surprises heading into 2022.