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NewsNotes Lesli S. Laffie, J.D., LL.M. FICA on TIPS • Short Sales • Tax Shelters
Court Decisions Resolving a conflict among the circuits, in Fior D'Italia, Inc., S.Ct., 6/17/02, the Supreme Court reversed the Ninth Circuit and held that the IRS properly calculated a restaurant's FICA tax liability by basing the assessment on an aggregate estimate of all employee tips. The Court overturned the Ninth Circuit's determination that the IRS should have computed total tip income by first estimating each individual employee's tip income separately, then adding individual estimates together to create a total. According to the Court, the FICA statute did not bar usage of an aggregate estimation method, and neither Sec. 446 (which authorizes the IRS to use estimation methods for determining income tax liability) nor Sec. 6205 (which authorizes the issuance of regulations governing employers' adjustment of FICA tax liability), limited the IRS's authority to use the aggregate estimation method. Despite the facts that the aggregate estimate might have included certain tips that should have been disregarded in computing FICA tax and that cash customers might have left smaller tips than customers who charged their meals (and on whose credit card slips the IRS estimates were made), the employer failed to show that the aggregate estimate was so unreasonable as to violate the law. Moreover, the employer, which stipulated that it would not challenge the IRS assessment as inaccurate, did not convince the Court that individualized employee assessments would inevitably lead to a more reasonable liability assessment than an aggregate estimate. The fact that the employer might have been placed in an awkward position by the requirement that it pay taxes only on tips reported by its employees (even when it knew that those reports were inaccurate) did not make aggregate estimation unlawful. It was not unfair or illegal to assess a tax deficiency on the employees' unreported tips, because no penalties would attach (nor interest accrue) unless the IRS actually demanded the money and the restaurant subsequently refused to pay timely. Finally, the employer's general claim that the aggregate estimation method lends itself to abusive agency action was rejected, absent a showing that the IRS acted illegally. For background on this case, see Tax Clinic, "Challenge to Tax Assessment Based on Aggregate Tip Re-porting," p. 519, this issue.
From the IRS The IRS has provided two fact patterns in Rev. Rul. 2002-44, addressing when gain or loss is realized on a short sale of stock. Each situation involves a taxpayer who entered into a short sale and directed a broker to purchase the stock sold short and close out the short sale. In the first set of facts, the short sale is not consummated until the stock is delivered to close it, according to Regs. Sec. 1.1233-1(a)(1). Although the taxpayer is treated as having acquired the stock on the trade date, the stock will not be delivered to close the short sale until a specified date; hence, the taxpayer does not realize loss on the short sale until then. In the second situation, a taxpayer constructively sold the short sale on December 31 of a specified year and realizes gain in that year as if he had sold, assigned or otherwise terminated the short sale at its fair market value on December 31 of that year.
Regulations The IRS has issued final, temporary and proposed regulations (TD 9000; NPRM REG-103735-00, NPRM REG-110311-98) modifying the rules on (1) certain taxpayers' filing of a statement with their Federal income tax returns under Sec. 6011(a), (2) registration of confidential corporate tax shelters under Sec. 6111(d) and (3) the Sec. 6112 list maintenance requirement. The temporary regulations, which were effective June 18, 2002, affect taxpayers participating in certain reportable transactions, persons responsible for registering confidential corporate tax shelters and those responsible for maintaining lists of investors in potentially abusive tax shelters. Existing Temp. Regs. Sec. 1.6011-4T requires certain corporate taxpayers to disclose their participation in listed and other reportable transactions that meet the "projected tax effect test," by attaching a written statement to their returns. To obtain information on potentially abusive transactions entered into by noncorporate taxpayers, the disclosure requirement has been extended to individuals, trusts, partnerships and S corporations that participate (directly or indirectly) in listed transactions. The IRS has clarified the regulations on indirect participation in a reportable transaction. A taxpayer indirectly participated in such a transaction if he knew (or had reason to know) that the tax benefits claimed from the transaction were derived from a reportable transaction. Existing Temp. Regs. Secs. 1.6011-4T and 301.6111-2T refer to "substantially similar" transactions. The IRS has noted that some taxpayers and promoters have applied this standard overly narrowly to avoid disclosure. Modifications to the regulations clarify that "substantially similar" includes any transaction expected to obtain the same or similar types of tax benefits and that is either factually similar or based on the same or a similar tax strategy. Further, the term must be broadly construed in favor of disclosure. Under existing Temp. Regs. Sec. 1.6011-4T, a reportable transaction is one that meets the projected-tax-effect test and is either a listed transaction or a transaction that has at least two of five specified characteristics. The projected-tax-effect test for listed transactions is met if the taxpayer reasonably estimates that the transaction will reduce its tax liability by more than $1 million in a single tax year or by more than $2 million for any combination of tax years in which the transaction is expected to reduce the taxpayer's liability. The IRS has determined that the projected-tax-effect test results in inadequate disclosure and, thus, will no longer apply it to listed transactions. Any individual, trust, partnership, S corporation or other corporation participating in a listed transaction must report it under the temporary regulations. Generally, the disclosure statement for a reportable transaction must be attached to the taxpayer's return for each tax year for which the taxpayer's tax liability is affected by its participation in the transaction. In the case of a partnership or S corporation, the disclosure statement must be attached to the return for each tax year ending with or within the tax year of any partner or shareholder whose income tax liability is affected (or is reasonably expected to be affected) by the partnership's or S corporation's participation in the transaction. Additionally, at the same time that the disclosure statement is first attached to the taxpayer's return, the taxpayer must file a copy of the statement with the Office of Tax Shelter Analysis (OTSA). If a transaction becomes a reportable transaction on or after the date the taxpayer has filed the return for the first tax year for which the transaction affected a taxpayer's, partner's or shareholder's tax liability, the disclosure statement must be filed as an attachment to the return next filed after the date the transaction becomes a reportable transaction; a copy of the disclosure statement must also be filed with the OTSA. Notwithstanding the new regulations' effective date, under existing Temp. Regs. Sec. 1.6011-4T, corporations must disclose transactions that later became reportable on the next filed return, even if the transactions did not affect the entities' tax liability for that year. The text of the temporary regulations also serves as the text for two notices of proposed rulemaking. Interested parties have until Sept. 16, 2002, to submit comments and requests for a public hearing to:
Comments may also be submitted electronically, by selecting "The Newsroom" option on the IRS Website at www.irs.gov , clicking on "IRS Guidance," then selecting "Tax Regulations." |
