Masonry Magazine July 1970 Page. 16
TAXES
By MIRIAM McD. MILLER
NO NEW TAXES IN 1970
Secretary of the Treasury Kennedy has said that the Nixon Administration will ask for no further new taxes in 1970. However, the proposed tax on lead in gasoline will not be withdrawn.
PARTNERSHIP EMPLOYEE
Under the terms of a partnership agreement one of the partners was required to pay, out of his own personal funds, the compensation of one of the employees of the partnership who performed a part of the duties delegated to that partner.
The IRS has ruled that in such a situation the partner may deduct the compensation he pays to the employee as an ordinary and necessary business expense. Rev. Rul. 70-253.
ASSESSMENTS
As you are probably aware both the real estate and personal property taxes paid by a homeowner are fully deductible. However, taxpayers are often confused on the deductibility of assessments levied against homeowners. Whether an assessment is deductible depends on the purpose of the assessment. In general, if the assessment is for maintaining or repairing an existing benefit, a current deduction is in order. Deductions have been allowed where an assessment was for repairing and resurfacing streets. If the assessment is made to meet interest charges on maintenance assessments then it too would be deductible. On the other hand, an assessment for street-widening was not permitted to be deducted. Nor would an assessment be deductible if it is for a new water works or sewer system. One small comfort with regard to the nondeductible assessment is that it may be added to the cost of the property benefited to determine the gain or loss on a later sale of the property.
Since many assessment bills do not indicate the purpose of the assessment, and, also because the burden is on the taxpayer to show the purpose of the assessment to the IRS, the taxing authority should be contacted and the necessary information obtained from them.
NEW WITHHOLDING TABLES IN 1970
After July 1, 1970, new withholding tables must be used. The surcharge, reduced to 5% for the first six months of 1970, became a thing of the past July 1, 1970. New withholding tables must be used to reflect not only the elimination of the surcharge but also to take care of the increase in the personal holding exemption from $600 to $650. New tables will again be required after January 1. 1971 to reflect lower tax rates for single persons and heads of households and an increase in the standard deduction.
RETIREE-CONSULTANT
According to the tax laws, if the distribution made to a stockholder in the process of redeeming his stock terminates his interest in the corporation then the distribution is not taxed as a dividend but rather as a capital gain. Recently, the IRS issued a ruling that curtailed this rule. Needless to say, a stockholder would prefer to pay capital gains rates rather than the ordinary income rates to which dividends are subject.
Quite often in a family owned corporation, the father will retire and attempt to terminate his interest in the corporation through the redemption of his stock by the corporation. Then, the corporation will hire him back as a consultant and advisor in exchange for a stated yearly compensation.
The Regulations provide that an individual, whose children have stock in the corporation, will not be eligible to report the amount of money he received for his redeemed stock as a capital gain unless immediately after the distribution to him he has no interest in the corporation and he files an agreement with the Commissioner stating that he will notify the Commissioner in the event that he acquires such an interest within the next ten years.
The IRS Ruling holds that a father's "interest" in his family corporation is not terminated if his stock is redeemed and he enters into a contract with the corporation to perform consultant and advisory services. Thus, the distribution in redemption of the stock would be taxable to such a taxpayer as a dividend and subject to ordinary income tax rates. Rev. Rul. 70-104.
SOCIAL SECURITY BILL
The House has passed H.R. 17550, that would provide for automatic increases in benefits based upon cost-of-living increases and would allow automatic adjustment in the taxable wage base (now $7,800) to finance any such benefit increases.
PENSION PLAN
A company established a noncontributory pension plan and restricted it to salaried employees only. The company then amended the pension plan to exclude from participation all salaried employees earning below the maximum compensation base for social security purposes. The IRS was asked if this amendment caused the plan to be discriminatory and therefore non-qualified.
The IRS advised that it is necessary that the total benefits resulting to each employee under the plan and under the Social Security Act, as to employees covered by the plan, and under the Social Security Act alone, as to employees not covered by the plan, establish an integrated and correlated retirement system. Prohibited discrimination was not brought about merely because salaried employees earning below the maximum compensation base for social security purposes are excluded from plan participation. Therefore, the instant plan did not fail to qualify. Rev. Rul. 70-258.
BONUS-OBLIGATORY
A recent case before the Tax Court centered around the (Continued on page 36)