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NewsNotes Lesli S. Laffie, J.D., LL.M. S Corp. Officer Was Employee • New Audit Priorities • New Markets Tax Credit • Timely Mailing/Filing Rule
Court Decisions The Tax Court held in Joseph M. Grey Public Accountant, P.C., 119 TC No. 5 (2002), that an accountant who was the president of his wholly owned S corporation was also its employee for employment tax purposes. The S corporation was thus liable for FICA and FUTA taxes under Secs. 3121(d)(1) and 3306(i). Joseph M. Grey Public Accountant, P.C. (PC) was an S corporation accounting, bookkeeping and tax preparation firm. Joseph M. Grey (Grey), the president and sole shareholder, performed services for it. Grey had signatory power over the corporate checking account and withdrew to pay his bills as they arose. PC reported $24,990 of ordinary income on its 1996 Form 1120S and on the Schedule K-1 issued to Grey. PC did not withhold or pay employment taxes. Grey reported the $24,990 as income on his own return. Secs. 3111 and 3301 impose FICA and FUTA taxes on employers for wages paid to employees. For this purpose, an "employee" is defined in part as a corporate officer. There is an exception for an officer who does not perform services (or performs only minor services) and neither receives nor is entitled to receive remuneration. PC argued that Grey was not its employee and that it properly passed its net income to Grey as the corporation’s sole shareholder, under Sec. 1366. It also asserted that a corporate officer is not an employee for employment tax purposes unless he is an employee under the common law. It argued that Grey was not an employee under this test, because PC never exercised control over Grey in the performance of his services. The IRS countered that Grey was an employee, because he was an officer and performed substantial services on the company’s behalf. The Tax Court rejected all of PC’s arguments. As to the S corporation passthrough theory, the court noted Veterinary Surgical Consultants, P.C., 117 TC 141 (2001), in which it refuted a similar argument (see Koppel, Tax Clinic, "IRS Wins Two Cases Reclassifying S Distributions as Wages," TTA, December 2001, p. 819). Without accepting PC’s common-law theory, the Tax Court said that even if it applied, PC failed to prove that it did not exercise control over Grey in the performance of his services. Grey chose to do business in a corporate form. His assertion that the corporation could not exercise control over him in the performance of his services amounted to a request that the corporate form be disregarded. Under Revenue Act of 1978 (RA ’78) Section 530, an individual is not an employee for employment tax purposes if the employer meets three requirements: (1) it must not have treated the individual as an employee for any period; (2) it must have consistently treated the individual as not being an employee on all tax returns for periods after 1978; and (3) it must have had a reasonable basis for not treating the individual as an employee. The Tax Court ruled that PC failed to show that it had any reasonable basis for not treating Grey as an employee. Alternatively, the court held that RA ’78 Section 530 relief is not available for statutory employees. Rather, the court said that such relief is limited to controversies involving the employment tax status of service providers under the common law. Because corporate officers are treated as employees under Sec. 3121(d)(1), without regard to whether they are common-law employees, they are statutory employees for whom RA ’78 Section 530 relief is not available.
From the IRS The IRS is realigning its audit resources to focus on key tax noncompliance areas, a new direction for the agency’s compliance effort. Following months of research and planning, the new approach will target high-risk noncompliance areas. The Service’s effort will generally focus first on promoters, then on participants. The initiative will feature new and enhanced efforts in six priority areas:
Increased resources will be devoted to these projects in fiscal year 2003, which will be a year of transition and training as new audit cases move into the IRS system. The Small Business/Self-Employed Division will handle the new effort in audit areas affecting individuals and businesses. Compliance efforts will continue in other parts of the agency (e.g., the tax-shelter initiative in the Large and Mid-Sized Business Division). This initiative reflects part of a broader, agency-wide plan and places a top priority on pursuing promoters of abusive schemes, shelters and trusts and then identifying participants who evade taxes. To address these problems, the IRS has revamped its compliance programs. The Service will use tools such as summons enforcement, injunctions and criminal investigation of promoters and civil audits of participants. The strategy reflects the new way of doing business at the IRS. The agency will direct more examination resources to address these issues in the six new areas. However, it will maintain a presence in other audit areas to maintain core tax administration responsibilities. Additional examination resources will help meet this requirement.
There is both good and bad news on the new markets tax credit (NMTC). The Sec. 45D credit, established by Section 121 of the Community Renewal Tax Relief Act of 2000, seeks to stimulate investment in low-income community businesses by offering a 39% credit of the amount invested through special intermediaries. A taxpayer obtains NMTCs by making an equity investment in a Federally certified for-profit entity (a "qualified community development entity" (CDE)) that has received a Federal NMTC allocation permitting it to designate NMTCs to its equity investors. (For background, see Lederman, "Will the New Markets Tax Credit Stimulate Low-Income Communities? (Parts I and II)," TTA, June 2002, p. 390 and July 2002, p. 454.) Bad news: According to the Community Development Financial Institutions (CDFI) Fund, which certifies CDE status and allocation of NMTCs to CDEs, 345 NMTC applications were filed in the August 2002 awards round, requesting NMTCs for equity investments of $25.8 billion (slightly over 10 times the $2.5 billion in NMTC-eligible investments that can win NMTCs). The CDFI will have to deny 90% of the NMTC allocation requests. The average NMTC-allocated in-vestment requested was $75 million per application. Good news: Notice 2002-64 states that until further guidance is provided, the availability of the NMTC is not limited by any provision other than Sec. 42, the low-income housing credit. In the future, the IRS may issue guidance that limits the NMTC for investments directly or indirectly subsidized by other Federal tax benefits.
The IRS maintains a list of private delivery services (PDS) for purposes of the Sec. 7502(f) "timely mailing is timely filing" rule. Notice 2002-62 supersedes Notices 97-26 and 2001-62 and adds two new delivery services to the list of designated PDSs. Effective Sept. 5, 2002, the designated PDSs are as follows: 1. Airborne Express (Airborne): Over-night Air Express Service, Next Afternoon Service and Second Day Service. 2. DHL Worldwide Express (DHL): DHL "Same Day" Service and DHL USA Overnight. 3. Federal Express (FedEx): FedEx Priority Overnight, FedEx Standard Overnight, FedEx 2 Day, FedEx International Priority and FedEx International First. 4. United Parcel Service (UPS): UPS Next Day Air, UPS Next Day Air Saver, UPS 2nd Day Air, UPS 2nd Day Air A.M., UPS Worldwide Express Plus and UPS Worldwide Express. FedEx International Priority and FedEx International First are the new additions to the list; both of these provide delivery services to the U.S. from foreign countries. Airborne, DHL, FedEx and UPS are not designated as to any type of delivery service not identified above. |
