Masonry Magazine June 1972 Page. 18
Taxes
(continued from page 17)
the constant rise in the cost of medical care, use of such plans may well forge ahead as more of an inducement to employees than increased compensation.
In one of the most recent cases in this area, the medical reimbursement plan was limited to officer-stockholders of the corporation. The plan covered only its officers (four out of a total of ten or eleven regular employees.) Three of the officers were brothers who, at the end of the taxable year, owned all of the stock. The fourth was the father of these brothers who was a shareholder at the beginning but not at the end of the year.
Two major guidelines on these plans came from this case the health of the prospective participants should be good at the time that the plan is adopted. And, secondly, it would be undesirable to have the salaries of officer-stockholders in proportion to their interests in the corporation. The idea behind that latter provision is that if this is so it can be argued that "officers" is a functionally meaningless classification and that is does not provide a rational "employment" basis for singling out the officer-stockholders group for coverage under a plan.
The Court noted that these officers were the only executive and managerial employees. Therefore, they composed a separate group within the corporation and their medical reimbursement plan was qualified. Epstein v. Commissioner, T.C. Memo 1972-53.
BUSINESS SOCIALS
Taxpayers have long sought to deduct at least part of the cost of some social event because of the fact that many business associates are invited as well as many of their employees. However, the courts have been consistently hard hearted in denying such claimed business expenses.
One of the most recent cases in this area concerned a taxpayer who sought to deduct that portion of his son's Bar Mitzvah party's expenses that was allowable to the taxpayer's partnership-employees and to the business associates whom he invited to the party. The taxpayer showed that the partners consistently invited key employees to family gatherings and celebrations in lieu of partnership-sponsored parties, picnics, and outings. In this case, the taxpayer was able to identify the employees and business associates and to establish their business connection.
Absolutely not deductible, was the ruling of the Tax Court. Most courts have used the same test in disallowing claimed deductions for expenses incurred the taxpayer must prove 1) that the expenditure was made primarily for business purposes, rather than for social or personal reasons and 2) that the business in which the taxpayer is engaged benefited or was intended to be benefited by the expenditure.
The Court pointed out that there is no doubt that many social functions lead to at least some business good will. But this does not dispel the fact that the social event was primarily given for business reasons. Taxpayers must be able to prove that the expenditures were directly related to the active conduct of their business and that the primary purpose of the party was to benefit this business.
FULLY INSURED
First the Tax Court and now the U.S. Court of Appeals of the District of Columbia has held that there is no basis in the tax laws or the constitution to allow a taxpayer to stop paying his self-employment tax after he had obtained a "fully insured status." The taxpayer claimed that he no longer had to pay the self-employment tax because he had acquired more than 40 quarters of coverage to qualify for maximum Social Security benefits. Unfortunately, the liability for the tax continues even after full coverage. Steiner v. Commissioner (CA DC 1972.)
GOVERNMENT PAYMENTS
A corporation, which derived its income from general construction projects, contracted with the Department of Labor to hire and train underemployed, low-income persons. The contract provided that over a two-year period the corporation must hire a specified number of low-income persons for full-time employment in its construction business for a minimum period. During the employment period the corporation must implement a structured training program to provide remedial and supportive services for such employees. To implement the training program, the corporation must purchase real estate and construct a building to be used as a training facility. The corporation also agreed to pay such employees a specified minimum wage, to provide a stock purchase plan, and to arrange for the orderly promotion of employees hired under the contract.
On its part, the Government agreed to pay the corporation a sum of money in installments according to a specified payment schedule spelled out in the contract. These payments made to such contractors are not exempt from Federal income tax.
This matter came before the IRS for its opinion regarding when the payments had to be included in the gross income of the corporation.
The Tax Regulations provide that gross income derived from building, installation, or construction contracts covering a period in excess of one year (from the date of execution of the contract to the date on which the contract is finally completed and accepted) may be reported for the taxable year in which the contract is finally completed and accepted.
This corporation sought to treat these Government payments in accordance with the above Regulation. The IRS was asked to rule on whether this could be done.
The opinion of the IRS was that since this contract is not in essence a building, installation, or construction contract, it is not a long-term contract that is subject to the Regulations. Therefore, the corporation was told it must include each payment in its gross income in the year that it is received. Rev. Rul. 72-207.