Final Regs Issued on $1 million pay limit

Final Regs Issued on $1 million pay limit The Internal Revenue Service has issued final regulations on I.R.C. §162(m) in Treas. Reg. §1.162-27. These regulations make clear what was permitted under temporary regulations (with certain modifications) and now yields more certainty in the area of planning executive pay by public companies. Background. I.R.C. §162 allows a deduction for trade or business expenses. I.R.C. §162(m) limits the deduction that a public corporation may take for payment of compensation to the principal officer and three highest paid employees to $1 million. However, pay that is performance based is exempt if certain criteria are met. I.R.C. §162(m)(4)(C) and Treas. Reg. §1.162-27(e)(2)) We now have permanent regulations further defining the terms and issues. A discussion of the rules is beyond the scope of a blog. Suffice it to say that anyone seeking to be paid more than $1 million ought to have competent legal advice and any company seeking to pay more than $1,000,000 ought to have competent legal advice.

Even Minority Shareholders Can Be Hit With Transferee Liability for Unpaid Taxes When the Corporation Does Not Pay the Taxes

Even Minority Shareholders Can Be Hit With Transferee Liability for Unpaid Taxes When the Corporation Does Not Pay the Taxes The Tax Court in Kardash v. Comm., T.C. Memo 2015-51 (2015) has just held that minority shareholders who are also high-level employees were liable for unpaid taxes as transferees, with respect to some of the monies the taxpayers received from the corporation. I.R.C. Sec. 6901(a) authorizes the IRS to pursue a transferee of property to assess and collect tax owed by the transferor. State law determines the liability, while Sec. 6901 authorizes the enforcement of that liability. In Kardash, taxpayer and another minority owner held less than 10%, and the company’s president, and its board chairman, owned the balance. Kardash was an engineer and was involved in the company's financial affairs. The company paid no income tax despite though it owed more than $120 million, and its majority shareholders siphoned substantially all of the cash out of the company. Kardash received his usual salary, which was not at issue but also "advances" and “dividends,” which were at issue. Pursuant to Sec. 6901, the IRS asserted approximately $5 million that Kardash received from the company in “advances.” In ruling for the Government, the Tax Court, citing several other decisions looked to Florida law to determine whether IRS has an obligation to pursue all reasonable collection efforts against a transferor before proceeding against a transferee. It determined that Florida law does not require a creditor to pursue all reasonable collection efforts against the transferor so the taxpayers could still be held liable. The Kardash Court also noted that the IRS could pursue Kardash without first exhausting collection efforts against the majority shareholders. Under Florida state law and the law of many states, transfers that are not in exchange for reasonable value while a debtor corporation was insolvent at the time of the transfer or became insolvent as a result of the transfer results in transferee liability. Kardash argued that the advances were actually payments of compensation and thus were reasonably equivalent value, i.e., the value of their work. The IRS urged that the advances were loans that the taxpayers never paid back, and, therefore the corporation did not receive reasonable equivalent value. The Court ruled the advances were payments of compensation but that the dividends were not compensation and thus the corporation did not receive equivalent value for the dividends. Therefore, the taxpayers were liable as transferees under Code Sec. 6901(a). Moral of the story is that anyone receiving funds from an entity that does not pay its taxes can be subject to transferee liability and the recipient of the funds should be sure to document the goods or services provided to the company for which payment is received or risk transferee liability.

Bartender beats IRS in Tax Court

Tax Court rules for Bartender on his Tip reporting method over IRS's reconstruction method The United States Tax Court held that the actual tip income from a bartender's own records was a better reflection of his income than the Internal Revenue Service’s version based upon reconstructing his tip income. By way of background, I.R.C. Sec. 6001 and Treas. Reg. Sec. 31.6053-4 require those who earn tips to keep accurate and contemporaneous records of their income. The IRS has the authority to recompute tip income as it determines if the tip earner fails to produce adequate records. In Sabolic v. Comm., TC Memo 2015-32 (T.C.M. 2015), a bartender had a set routine of how he recorded his tips at the end of each shift but IRS claimed that the bartender had underreported his tip income and because his tip logs were recorded in whole numbers; he did not keep track of how much he paid to the bar backs; and the logs did not include all days. IRS reconstructed the bartender's tip income by determining a “charge tip rate” for each tax year. But, the Court sided with the bartender fully reported his tip income. In the Court’s analysis, it did state that the IRS does have great latitude in adopting a suitable method for reconstructing tip income and its method of recomputing income carries with it a presumption of correctness and therefore, the burden of proof was on the bartender. But the Court sided with the taxpayer on all three challenges: round numbers, payments to bar backs and missing days. In sum, the Court concluded that the bartenders actual records were more accurate than the IRS’s reconstructed method and therefore ruled for the bartender. Many bartenders receive tips that are higher than the Internal Revenue Service method and therefore this case is not helpful. But for those who are not earning tips as high as the IRS method, any tip earner should keep accurate records and fight the IRS if necessary.

Another Estate Tax Repeal Bill Is Proposed

Another Estate Tax Repeal Bill Is Proposed

Many Republicans have been urging a repeal of the Federal Estate Tax for years.  During the time that we have a democratic president, the chances of such a bill becoming law are remote.  In fact, President Obama has set forth his proposal to actually increase the tax by lowering the threshold for an estate to be taxable.  The latest bill was sponsored by Rep. Kevin Brady (R-Tx).  He introduced H.R. 1105, 114th Cong., 1st Sess. (March 6, 2015), which would repeal the federal estate and GST taxes. The bill already has 32 co-sponsors, and has been referred to the House Committee on Ways and Means.

The upshot of this is that it is unlikely that any changes will occur during this administration but if a Republican takes the white house and the Republicans continue to control both Houses, the possibility of absolute repeal may very well become a reality.