I Didnt Do It—My Boss Did!
Employers are required to withhold FICA and income taxes from
employee wages. The so-called responsible parties must remit the
withholdings to the government and are subject to a 100% penalty on
any unpaid tax if they fail to do so. In a recent Court of Federal
Claims case, the court held that merely holding a corporate office
does not necessarily make someone responsible. The court looked beyond
the vice-presidents and general managers titles and found the
president and principal shareholder had the ultimate authority to
approve all disbursements and to ensure that payments were directed to
the IRS and not to other creditors. Despite his title, the
vice-president was not responsible because he did not have the
authority to direct or prevent payments ( United States v.
DeAlto [Fed. Cl. 5-13-98; 98-1 USTC 50,433]).
The Wrong Form
A taxpayer owned a 10% interest in a partnership. The partnership
filed an amended tax return, claiming a tax credit for a qualified
rehabilitation expense. To get his share of the refund, the taxpayer
filed an amended return on form 1040X. The IRS refused to pay, saying
the taxpayer used the wrong form. He should have submitted an
administrative adjustment request (AAR). The court agreed with the
government and held that a form 1040X filed by a partner is not a
valid AAR request. The taxpayer argued that he—and other partners—had
received refunds in the past by filing form 1040X. The court responded
that the IRS is not bound to give one taxpayer the same treatment
accorded to another, similarly situated taxpayer ( Rothstein
v. United States [Fed. Cl. 5-15-98; 98-1 USTC 50,435]).
How Much Did You Say You Had?
Treasury regulations section 1.446-1 (c)(2)(i) requires taxpayers
who maintain inventories to use the accrual basis of accounting.
However, in a recent case, the Tax Court found precedence for using
the cash method of accounting if a switch to the accrual method
resulted in only an insignificant increase in inventories. The court
said nothing in the regulations prevents a taxpayer holding inventory
from using the cash method ( Golden Gate Litho v.
Commissioner [TC Memo 1998-184]).
Less Homework for Small Business!
The de minimis threshold for filing monthly employment tax
returns has been doubled to $1000 from $500. Approximately 500,000
small businesses are expected to benefit from this change. The new
deposit threshold applies to quarterly returns for periods beginning
July 1, 1998, and for annual returns for periods beginning January 1,
1999 (IRS Informational Release 98-43).
I Dont Recognize That Income
According to Treasury regulations section 1.451-1(a), income does
not have to be recognized until the amount of the income and the
taxpayers right to receive such income can be determined with
reasonable accuracy under the "all-events" test. In a recent
technical advice memorandum, a film processor did not have to
recognize income until customers actually purchased the finished
prints. Even though the film processor almost always sold his prints,
he had a policy that customers did not have to purchase finished
prints unless they were completely satisfied. The IRS ruled that the
all-events test was based on the customers legal rights, not on the
probability those rights would be exercised. Therefore, the film
processor did not have to recognize income when processing was
finished, only when the prints were sold (TAM 9823003).
How Do You Use A Loan?
Is it possible to borrow money from your creditor to repay an
existing loan with that same creditor and then take a deduction for
the interest? Yes, but, according to a recent Second Circuit Court
opinion, it is now much harder to do so. The Second Circuit, in
agreement with the Tax Court, formulated a test to determine whether a
new loan is used to satisfy interest obligations. No deduction is
allowed if it appears that the purpose of a new loan is to postpone,
rather than eliminate, the debtors interest. ( Davison v.
Commissioner , 81 AFTR 2d 98-564, CA-2, 3/18/98).
Amortizing Loan Costs
Banks incur many costs when making loans, including costs necessary
to process property reports, credit reports and appraisals. A bank
deducted these costs annually as ordinary and necessary business
expenses. The IRS argued that each loan was a separate and distinct
asset; therefore, each loan created a stream of future interest income
to the bank. Thus, to properly match income with related expenses, the
bank should have capitalized its loan origination costs and amortized
them over the life of the loan. The court, in applying the U.S.
Supreme Courts Indopco decision, agreed with the IRS and held
that deductions were the exception to the capitalization rule of IRC
section 263(a) ( PNC Bancorp v. Commissioner [110 TC
no. 27, 1998]).
That Gift Is a Benefit
American Airlines gave each of its employees two blank $50 American
Express charge forms bearing the airlines account number. These were
gifts to employees for their hard work and long hours during a
competitors strike. The vouchers were worth over $4 million dollars,
and 97% of them were redeemed. American Airlines did not treat the
vouchers as wages because they gave them in lieu of a company-wide
thank-you dinner. The court held that the vouchers were taxable as
cash-equivalent fringe benefits even though the dinner could have been
excluded as a de minimus fringe benefit ( American
Airlines, Inc. v. Commissioner , Ct.Fed.Cl., 81 AFTR
—Michael Lynch, CPA, Esq., associate professor of tax
accounting at Bryant College, Smithfield, Rhode Island.