Masonry Magazine January 1974 Page. 28
Taxes
(Continued from page 27)
The Court alleged that there existed an oral agreement between the builder and the plumbers, whereby the builder assumed the responsibility for the FICA and withholding taxes. The Court first stated that there was no evidence that such an oral agreement existed between the builder and the plumbers. However, the Court noted that even if such an agreement existed it would not relieve the taxpayers of their tax liability, although it could impose liability on the builder as well as the plumbers. The plumbers had the duty to pay the taxes and they could not rely upon another to assume their liability.
The Court also rejected the taxpayers' argument that they did not willfully fail to pay the taxes. Rather, the taxpayers argued that the only payments they made were salaries and it was necessary to do this in order to remain in business. The Court ruled that the payment of salaries is a payment to other creditors. And the intentional payment of creditors to remain in business nevertheless constitutes a willfull payment under the law. The taxpayers were found to have knowingly and willfully failed to pay required FICA and withholding taxes. Marker v. U.S. (D.C. Pa. 1973.)
MEDICAL REIMBURSEMENT PLANS
One aspect of employment taxation that should be universally known by all whom it might affect is that concerning the taxation of a medical reimbursement plan. Where an employer pays the medical expenses of his employee under a medical reimbursement plan, the employer is allowed to deduct the full amount paid. And what makes it even nicer, the employee can exclude the amount reimbursed from his gross income. Such a plan is very attractive to the employee who happens to be the majority stockholder of the employer-corporation.
In order to be assured that the deduction and exclusion of the medical reimbursement will be available, there must be a plan. A written plan, of course, would be the best. But, in any event there must be a plan, and it must antedate the employment relationship. In other words, a corporation should not be formed principally so that the one or two major stockholders can take advantage of medical reimbursements.
Another aspect of this deduction that has evolved from the cases on this topic is that the plan must be for the benefit of employees and not for the benefit of the stockholders. For instance, while a plan may only cover stockholder-employees, the coverage criteria should be expressed in terms of employment only and not in their corporate capacity.
One final word of caution-a plan was not approved by a court when one stockholder was paid sick leave pay for over six years. The facts indicated that there were other employees who received sick pay during those six years. However, the Court simply could not believe that the corporation would pay anyone sick pay for six years unless it was because he was a major stockholder. Levine v. U.S., 50 T.C. 422 (1968). There are guidelines to be followed and certain plans will certainly be challenged by the Commissioner. But, nevertheless, this is an appealing aspect of employment taxation.
EMPLOYEE'S INCOME
A taxpayer, who was being paid $1,000 a month, and his employer came to an agreement whereby the amount being paid to the taxpayer was to be accumulated in a special account by the employer but in the name of the taxpayer. Subsequently the employer unconditionally transferred the accumulated balance from the special account into a trust and then provided for all subsequent payments to also be paid into the trust. At the end of the trust term, the trustee was to pay the entire entrusted funds to the taxpayer or, if he were not alive, to certain named members of his family.
When the taxpayer filed his income tax return for the years involved, he did not include as income those amounts recorded on the employer's account or those paid to the trust institution. This omission eventually led the taxpayer before the Tax Court. Unfortunately for this taxpayer, the Court held that the taxpayer realized taxable income when the amounts were placed in trust for the benefit of the taxpayer and his family.
The Court explained that it had reached this conclusion because of the following facts: first, the trust was established at the taxpayer's request; second, the taxpayer's employer irrevocably paid out the amounts involved for services that had already been rendered by the taxpayer; and, lastly, because the taxpayer could terminate the trust prematurely and thereby receive the trust funds. (Jacuzzi v. Commissioner, 61 TC-No. 28.)