Pick a Better Test
In a decision that reversed a Tax Court ruling, the Seventh Circuit Court of Appeals held that the salary a closely held corporation paid to its majority owner and CEO was reasonable. The owner and CEO was the company’s chief sales and marketing person, head of research and development and principal investor. In 1993 and 1994, the company paid him $1.3 million and $1 million, respectively. The Tax Court used a multifactor test and determined that a reasonable salary to the owner and CEO would have been $900,000 for 1993 and $700,000 for 1994.
The circuit court rejected the Tax Court’s seven-part test. It said the vague nature of the test allowed for arbitrary decisions. In its ruling, the circuit court applied the “independent investor” test. Under that test, a CEO’s salary is presumed reasonable if the company’s investors receive a higher rate of return than they had reason to expect ( Commissioner v. Exacto Spring Corp., 7th Cir. 11-16-99).
Returned to Sender
The IRS is attempting to locate more than 100,000 taxpayers whose 1998 refund checks, totaling $72 million, couldn’t be delivered because of incorrect names and addresses. Taxpayers still waiting for their 1998 refund should call the IRS’s toll-free assistance number at 800-829-1040 (IR-1999-91).
Agents Are Not Invited
An informant calls the IRS Criminal Division and offers to disclose tax and nontax criminal violations by a taxpayer. A meeting is set up with the informant and a U.S. district attorney to discuss the possible criminal nontax violations. Can an IRS special agent be present at the meeting?
“Absent a compelling reason,” IRS special agents shouldn’t be present at such meetings. Their presence might imply there was an unauthorized disclosure of return information, and IRC section 6103 prohibits such disclosures (ILM 199945002).
Online or Offline: To the IRS It’s the Same
Increasingly stockbrokers are trading on the Internet. Does the Internet Tax Freedom Act (PL 105-277) eliminate or change brokers’ reporting obligations merely because the sales are executed online?
In Service Center Advice (SCA 199945043), the IRS concluded that reporting requirements for Internet traders were the same as for non-Internet traders. Both must file form 1099 and complete an information return following each transaction.
Who’s the Boss?
A police officer worked at several off-duty jobs. His police department coordinated the jobs, but the off-duty employers paid him. His off-duty employers also had the authority to hire and fire him.
The officer claimed he wasn’t subject to self-employment taxes because he was an employee of the police department even while working his off-duty jobs. He argued that he was always subject to the police department’s control.
The Tax Court disagreed and ruled the officer was an independent contractor. It held that his off-duty income constituted self-employment income ( Commissioner v. Tracey Lee Milian, TC Memo, 1999–366).
IRS Helps in Search for Missing Children
The IRS teamed with the National Center for Missing and Exploited Children (NCMEC) to expand the distribution of photos of lost, abducted and runaway children. The service will print the pictures of missing children on 1999 tax instruction booklets and other IRS publications. Information about the children and NCMEC’s 24-hour, toll-free hot line number will be printed with the photos (IR–1999–85).
Paper or Plastic?
The IRS has given taxpayers more opportunities to pay with plastic. This year individual taxpayers can use their credit cards to pay the balance due on their 1999 returns, pay a projected balance due when requesting an automatic extension of time to file a 1999 return and make estimated tax payments for 2000. In addition, they will no longer be required to file forms 4868 and 1040-ES.
The pay-by-phone system will allow taxpayers to use American Express, Discover or MasterCard. This phone option, which started January 14, will be available for estimated tax payments on March 1, 2000.
Also, all individuals who file electronically—including those using TeleFile, the file-by-phone system—can choose to have the balance due debited directly from their bank accounts (IR–1999–87).
—Michael Lynch, CPA, Esq., professor of tax accounting at Bryant College, Smithfield, Rhode Island.