Masonry Magazine July 1974 Page. 29
Research and Experimental Expenditures
Section 174 of the Code provides that research and experimental expenditures should not be allowed during the period before a taxpayer is actually engaged in business.
Section 174 of the Code
Section 174 of the Code provides that a taxpayer may treat research or experimental expenditures which are paid or incurred by him "in connection with" his trade or business as deductible expenses.
Taxpayer Investment in Partnership
The taxpayer involved had invested in a partnership that was formed to develop a special-purpose incinerator. On the basis of Section 174(a)(1) he deducted his pro rata share of the partnership's operating loss for 1966. Though there were no sales in 1966, expectations were high and the inventor-partner was giving about a third of his time to the project. In other words, there was indication of a business to come. In 1970, the inventor-partner obtained a patent on the incinerator and it was then marketed.
Supreme Court Holding
The Supreme Court held that it was error to disallow the deduction. The expenses involved were "in connection with" the taxpayer's trade or business. Disallowance by the Commissioner, the Court said, was contrary to the broad legislative objective of the Congress when it enacted Section 174 to provide an economic incentive, especially for small and growing businesses, to engage in research for new products and new inventions. (Snow v. Commissioner, U.S. Su. Ct. 1974.)
Discriminant Function System
The Discriminant Function System (DIF) is a computer program used by the IRS to select returns for audit. The DIF is out to pick up returns that appear to be error-prone. Such returns are high in mathematical errors, unallowable deductions, and obvious mistakes. After the DIF indicates that a return is error-prone, it is checked by employees of IRS to see if human judgment and computer processing agree that there is need for an audit. If they agree, the taxpayer will be the next to know.
Sick Pay Exclusion
By virtue of Section 105(a) of the Code, amounts received by an employee through accident or health insurance for personal injuries or sickness are includible in gross income to the extent that such amounts are either attributable to contributions by the employer which were not includible in the gross income of his employee or were paid for by the employer.
Exception to the Rule
However, the law does provide for an exception to the above rule. Thus gross income does not include amounts referred to in Section 105(a), if such amounts constitute wages or payments in lieu of wages received by an employee pursuant to the provisions of a wage continuation plan for a period during which the employee is absent from work on account of personal injuries or sickness.
IRS Ruling on Sick-Pay Exclusion
A recent ruling of the IRS concerned this so-called sick-pay exclusion provision of the tax laws. An employee was hospitalized on a Thursday because he had been injured in a traffic accident on the way home from work. He reported back to work the following Tuesday. His employer had a sick-pay plan for all of his employees. This plan was a group insurance plan, which provided that an employee who is absent from work because of accidental injuries receives 50% of his normal daily wages for each calendar day, including non-working days, for the duration of his disability resulting from an injury. (Continued on page 32)
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masonry • July, 1974
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