A Fringe Benefit Primer for the Closely Held C Corporation (Part I) — footnotes

¹ Fringe benefits subject to statutory nondiscrimination rules generally provide better or more certain tax results for the benefited employees. These include qualified retirement plans (Sec. 401), cafeteria plans (Sec. 125), self-insured medical reimbursement plans (Sec. 105(h)), voluntary employees’ beneficiary associations (Sec. 501(c)(9)), group legal services plans (Sec. 120), educational assistance plans (Sec. 127), dependent care assistance programs (Sec. 129) and other tax-favored fringe benefits (e.g., qualified employee discounts, recreational facilities and qualified tuition plans).

Most statutory employee benefits that embody these nondiscrimination standards incorporate Sec. 414(b), (c) and (m), which aggregate all employees of commonly controlled and functionally related entities. If most or all employees of a closely held corporation are family or insider group members, benefits that embody strict nondiscrimination standards should be considered. In such a case, including all 1,000-hour-or-more employees becomes much more of a high-end tax shelter than a mere fringe benefit.

² An excellent tool for doing a present-value analysis of these alternate scenarios is available at www.personal.kent.edu/~aagarwal/dca.html.

³ See Sec. 162(a)(1) and Rev. Rul. 67-341, 1967-2 CB 156.

⁴ Mayson Mfg. Co., 178 F2d 115 (6th Cir. 1949).

⁵ See Internal Revenue Manual Section 4.35.2.5.2.2 (3/1/02).

⁶ See, e.g., Henry Shotmeyer, TC Memo 1980-238.

⁷ See, e.g., Elliots, Inc., 716 F2d 1241 (9th Cir. 1983).

⁸ Pediatric Surgical Associates, P.C., TC Memo 2001-81.

⁹ See Roth Properties, Co., TC Memo 1974-23, aff’d, 511 F2d 526 (6th Cir. 1975) ($1,250 paid to officer of corporation disallowed in full when the value of services were found to be de minimis).

¹⁰ Compare American Int’l Coal Co., TC Memo 1982-204 (redemption), with Muskogee Radiological Group, Inc., TC Memo 1978-490 (compensation, not goodwill). See also Ted N. Steffen, 69 TC 1049 (1978); and Synanon Church, TC Memo 1989-270.

¹¹ See C.H. Robinson, Inc., TC Memo 1998-430.

¹² If the loan transaction involves an owner-employee and is not properly documented, and/or the Service can show that there was no intent on the employee’s part to repay the “loan” proceeds, the transaction could be recast as a dividend or compensation; see generally, Bittker and Eustice, Federal Income Taxation of Corporations and Shareholders (Warren, Gorham & Lamont, 7th ed., 2002) at 8.05[6].

¹³ J. Simpson Dean, 35 TC 1083 (1961); see also Haworth H. Parks, 686 F2d 408 (6th Cir. 1982); Herman M. Greenspun, 670 F2d 123 (9th Cir. 1982); Colin F. Beaton, 664 F2d 315 (1st Cir. 1981); Albert Suttle, 625 F2d 1127 (4th Cir. 1980); William G. Martin, 649 F2d 1133 (5th Cir. 1981); and W.L. Hardee, 708 F2d 771 (Fed. Cir. 1983).

¹⁴ Regs. Sec. 1.105-11(g) provides that reimbursements paid under a plan for medical diagnostic procedures for an employee (but not for a dependent) are not deemed to be part of a plan for purposes of the Sec. 105(h) nondiscrimination requirements.

¹⁵ See Rev. Rul. 82-196, 1982-2 CB 53.

¹⁶ See Rev. Rul. 74-542, 1974-2 CB 36.

¹⁷ See Regs. Sec. 1.79-1(f)(3).

¹⁸ See Marcus Wigutow, TC Memo 1983-620.

¹⁹ See Samuel Levine, 50 TC 422 (1968); and Alan B. Larkin, 394 F2d 494 (1st Cir. 1968).

²⁰ Bojene, Inc., TC Memo 1968-147.

²¹ Nathan Epstein, TC Memo 1972-53 and E.B. Smith, TC Memo 1970-243.

²² Arthur R. Seidel, TC Memo 1971-238.

²³ See Wigutow, note 18 supra.

²⁴ See America Foundry, 536 F2d 289 (9th Cir. 1976); and Sturgill Motor Co., TC Memo 1973-281.

²⁵ See Asa Pearson, TC Memo 2000-160.

²⁶ See Sec. 213(d)(1).

²⁷ The employee is precluded from deducting disability insurance premiums that he or she paid personally; see Sec. 213(d)(1)(D).