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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 2d 98-585).

—Michael Lynch, CPA, Esq., associate professor of tax accounting at Bryant College, Smithfield, Rhode Island.

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