Masonry Magazine April 1969 Page. 11
# TAXES
By MIRIAM McD. MILLER
TAX AUDITS
The IRS states that its 1969 policy is to complete audits of individual returns within 26 months, and corporation returns within 27 months of the due date for filing.
There will be more automation this year as computers will be used to identify and select returns for audit. A new "discriminant function" technique is being used to select certain individual income tax returns for audit. This technique (DIF) will provide uniform screening of individual returns by programming proven mathematical formulas into computers and weighing certain significant characteristics of each tax return. This system supposedly permits the ranking of returns by greatest potential tax error.
The IRS added that the fact that it is now using computers to identify and select tax returns for examination under its nationwide automatic data processing (ADP) system, does not mean the human element has been removed from tax audits. "Computers cannot be expected to replace human qualities vital to impartial, thorough, and fair audit examinations." IRS News Release IR-967.
SOCIAL SECURITY NUMBERS
The IRS has advised that due to the increased use of ADP all taxpayers should put their identification number (Social Security Number) on all checks, money, orders, etc. when paying taxes. It sometimes happens that a return and a payment become separated. However, a payment so identified can be quickly collated with the proper return and thus there would be less chance for delay, misdirection of payments and annoyance to the taxpayer.
ACCUMULATED EARNINGS TAX
A heavy masonry contractor failed to convince the court that his corporation had an accumulated surplus that was justified by reasonable business needs.
As you know, the Internal Revenue Code imposes a tax on accumulated earnings of every corporation formed or availed of for the purpose of avoiding the income tax on their shareholders by accumulating earnings instead of paying them out as dividends.
The corporation involved was owned equally by the taxpayer and his wife. Prior to forming the corporation, the taxpayer had operated through a partnership. As his business grew he decided to incorporate so that, in addition to other reasons, he might get limited liability. Subsequently, the contractor decided to accumulate $1 million in surplus in the corporation in order to give it bonding capacity for $5 million worth of work in any one year, which the taxpayer estimated the corporation could handle. In his testimony, the taxpayer said that one of his reasons for this policy was that in the course of his experience he acquired a dislike for the way bonding companies operated and he made particular reference to the way they checked subcontractors.
However, try as he might he could not convince the court that the formation of the corporation and its dividend policy (or surplus accumulation) had nothing to do with income tax considerations. Thus, in approving of the imposition by the IRS of an accumulated earnings tax on this contractor, the court was following the hard line of the recent Supreme Court case, U.S. v. Donruss Co. That case held that the test for the imposition of the accumulated earnings tax is that if even one of the purposes for a company's accumulation policy is the avoidance of shareholders' tax, then the accumulated earnings tax should be applied. Lichter v. Charles (D.C. Ohio 1969).
HARD COMMUTING
The 10th Circuit refused to make an exception to the general rule that expenses for commuting to and from a place of business or job site are a "personal, living, or family expense" and nondeductible. In the case before it, the taxpayer was a contracts administrator and worked at a chemical plant that manufactured and tested solid fuel rocket engines. Because of the dangers involved, the plant was located some distance from any community. The taxpayer was not permitted to live on the plant site and the nearest place that he could find to live was a town about 27 miles from the plant. The taxpayer argued that his transportation expenses to and from work were a business expense and should be treated as any other travel expense would be.
While the sparse settlement of the entire area and the somewhat hazardous nature of the product of the plant gave the travel of this taxpayer an overall appearance of a somewhat different form from that of the ordinary suburban commuter, nevertheless, the court felt that the two were basically the same. The court could see little distinction between this taxpayer's need to commute a far distance and those of others who work in an area that is completely industrialized and has no available housing, or in completely commercial-business areas, or slum areas in downtown sections of a city, and in an infinite variety of other situations where some travel to work is necessary. U.S. v. Tauferner (10th cir. 1969).
FOUND MONEY
A couple bought an old piano for $15 at an auction so that their young daughter could use it for piano lessons. Some seven years later, while cleaning the piano, the couple discovered some old currency. When the old currency was exchanged for new at a bank the couple realized that they had found $4,467 in the piano.
However, when the court was requested to rule on the tax treatment of this money, the couple was less fortunate. The court ruled that this money must be included in the gross income of the couple in the year found. "The finder of treasure trove is in receipt of taxable income.. for the taxable year in which it is reduced to undisputed possession." Cesarini v. U.S. (D.C. Ohio 1969).
CONSTRUCTION CONTRACTS
A corporate taxpayer, engaged in the business of building roads, bridges, power plants, etc. undertook two multi-year contracts from the government. Although the corporation used the accrual method of accounting, it reported its income and expenses from long-term contracts on the completed contract method. Two years after undertaking the government contracts, the corporation reported (and the government confirmed) the contracts were completed.