Masonry Magazine June 1969 Page. 17
TAXES
By MIRIAM McD. MILLER
EMPLOYEE PLANS
The IRS statistics show that the number of H.R. 10 plans (self-employed individuals) and employee benefit plans that qualified during the first quarter of 1969 have doubled the number that qualified in the first quarter of 1968. So, perhaps the abundance of IRS Rulings on these plans is due in part to the increasing volume of plans in operation.
The IRS was recently asked whether a pension plan could qualify where the owner-employee participating under the plan was older than any of the common-law employees. It advised that it could.
The Code provides that contributions or benefits provided under a plan intended to qualify must not discriminate in favor of employees who are officers, shareholders, or highly compensated. A self-employed individual is considered to be a highly compensated employee and thus is a member of the group in whose favor discrimination is prohibited.
The IRS advised that it is not necessary that both contributions and benefits be nondiscrimniatory under a qualified plan. It is sufficient that there is no discrimination in favor of the owner-employee with respect to benefits only.
Thus, should the number of years that annual contributions are made on behalf of the owner-employee not be sufficient to provide the full benefits upon retirement for the owner-employee, his benefits will be reduced to that which can be provided with the contributions theretofore made on his account. Rev. Rul. 69-253.
Where a sole proprietor received the cash surrender value of a contract issued under a qualified pension plan the IRS ruled that it was a premature distribution, subject to certain penalties.
The sole proprietor, who had no common-law employees, established a qualified pension plan covering himself as an owner-employee. Subsequently, he established another qualified pension plan with a bank acting as custodian of the assets under the terms of the plan. The sole proprietor then delivered the annuity contract purchased under the first plan to the issuer thereof and received its cash surrender value. He then paid the cash received to the bank under the second plan.
The Regulations provide that an amount is prematurely distributed or made available if it is paid to or on behalf of such a participant before he attains age 59½ or becomes disabled. Here this did happen notwithstanding the fact that the participant later paid that amount to the custodian under another qualified plan.
This Ruling would not result if the case were one where the annuity contract had been transferred by a trustee to the bank. Nor would it have resulted if the instant owner-employee had been under a legal obligation to pay the bank the amount received upon surrender of the annuity contract.
Thus, the thing to be remembered from this Ruling is- that in changing the method of funding an H.R. 10 plan, never let the funds come into the hands of the owner-employee. Rev. Rul. 69-254.
The IRS has updated and restated its position with regard to an agreement by several employer corporations to maintain a consolidated and joint pension plan and trust.
So long as all the requirements of the Code are otherwise met, such a trust will qualify. The employers need not be members of an affiliated group of corporations. Of course, the requirements necessary for a plan to qualify are applicable to each employer separately. Rev. Rul. 69-250.
Another Ruling updated and restated by the IRS concerned the question of whether a plan is discriminary if it contains the following provisions. The pension plan provided that there shall be an increase in a participant's retirement benefit to reflect an increase in compensation. However, the benefits will be increased only when the cumulative increase in the amount of compensation is large enough to call for an increase in benefits of not less than $120 per year and that no increase will be made in any participant's benefits after he has reached age 60.
As the plan's limitations on such increases in benefits apply alike to all participants, the IRS holds that such a plan is not discriminatory. Rev. Rul. 69-251.
1968 COLLECTIONS
As a result of its modern automation, the IRS has already published its report of federal tax collections for 1968.
| | 1968 | 1967 |
| :------------ | :------------------ | :------------------ |
| Grand Total | $168,636,202,000 | $151,827,687,000 |
| Corporate income tax | 34,045,183,000 | 34,218,407,000 |
| Individual income tax & employment taxes | 116,339,550,000 | 100,005,310,000 |
| Estate, gift & excise taxes | 18,251,469,000 | 17,603,970,000 |
BUSINESS LIFE INSURANCE
Business life insurance proceeds paid in a lump sum at death are just as tax-free as the proceeds from personal life insurance. Because of this, the business use of insurance on the lives of a corporation's employees is very popular.
However, a business that is considering life insurance on any of its employees should be aware of the following. First, the company has to have an insurable interest in the life of the person insured. Does the success of the business depend in large part on the continued life of the employee, officer, or shareholder, to be insured?
Another feature to be noted is that at the moment of receipt by the corporation, the death proceeds lose their character as life insurance proceeds and become corporate assets. Thus, should a corporation distribute all or part of the proceeds to the beneficiaries of the employee, it would not be a tax-free distribution but taxable income to the recipient.
POINTS
The IRS seems to be altering its position with regard to the deductibility of points. In a recent ruling, the IRS indicated that deductibility depends on what you are paying for when you pay points.
In the case presented, a taxpayer obtained from a lender a conventional mortgage loan secured by a deed of trust on
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