Taxpayer Was a Statutory Employee, Expenses Deductible on Schedule C

One of the issues in the case of Fiedziuszko v. Commissioner, TC Memo 2018-75, was whether the taxpayer, who received a Form W-2 for his work for 2012, was a “statutory employee.”

The statutory employee definition is found at IRC §3121(d)(3).  The first requirement to be a statutory employee is that the individual not be a common-law employee of the service recipient.  Next, the taxpayer must perform services for pay in one of the following four categories:

  • As an agent-driver or commission-driver engaged in distributing meat products, vegetable products, fruit products, bakery products, beverages (other than milk), or laundry or dry-cleaning services, for his principal;

  • As a full-time life insurance salesman;

  • As a home worker performing work, according to specifications furnished by the person for whom the services are performed, on materials or goods furnished by such person which are required to be returned to such person or a person designated by him; or

  • As a traveling or city salesman, other than as an agent-driver or commission-driver, engaged upon a full-time basis in the solicitation on behalf of, and the transmission to, his principal (except for side-line sales activities on behalf of some other person) of orders from wholesalers, retailers, contractors, or operators of hotels, restaurants, or other similar establishments for merchandise for resale or supplies for use in their business operations.

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No Option to Agree to Pay FICA/Medicare for Closed Years to Be Granted to Employers that Failed to Properly Included Nonqualified Deferred Compensation in Year of Vesting

In AM 2017-011 the IRS National Office was asked whether the IRS should enter into closing agreements with certain entities that discovered they had not included nonqualified deferred compensation as wages subject to FICA/Medicare tax when there was no substantial risk of forfeiture of the rights to the amount.

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Failure of Employers to Follow Terms of Supplemental Unemployment Benefit Plan Caused Payments to Be Subject to FICA

Sometimes taxpayers may adopt a plan on paper that would create tax savings, but then turn a blind eye with regard to actual compliance with the plan.  That was the issue in the email advice discussed below

Despite the fact that a SUB Trust plan summary description indicated that benefits it would pay would be limited to those who qualified for state unemployment benefits, the failure of the employers submitting lists of employees to be paid under the plan to confirm the employees had received stated unemployment meant the payments were not treated as FICA-exempt supplementation unemployment benefits (Chief Counsel Email 201639015).

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Payments to S Corporation Shareholder Were Loan Repayments, Not Disguised Wages

Normally when we discuss a case of an S corporation shareholder who performed services for the entity, reported no salary but received cash we end up with a finding by the Court that the payments represented disguised salary.  But that is because, normally, the shareholder has been trying to argue the payments represented a distribution from the S corporation.

In the case of Scott Singer Installations, Inc. v. Commissioner, TC Memo 2016-161 the taxpayer did not argue that the payments represented distributions and, in fact, the taxpayer agreed that, as a corporate officer, he would be an employee of the corporation.  But the taxpayer argued in this case that the payments amounted to repayments of loans he had made to the corporation—and the Tax Court agreed with the taxpayer

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Counseling Taxpayer that Suboptimal Tax Laws are Still Valid Tax Laws, Court Upholds Imposition of Payroll Taxes on Deferred Compensation Taxpayer Will Never Receive

The Court of Federal Claims concluded something all of us learned early on—“suboptimal tax laws are still valid tax laws” in upholding the taxation of deferred compensation in 2004 for a taxpayer that was clear even when included in the employee’s income would never be paid in the case of Balestra v. United States, 113 AFTR 2d ¶2014-887.

The taxpayer in this case was a pilot for an airline who retired in 2004.  The airline in question entered bankruptcy in 2002.  In 2004 Mr. Balestra retired from the airline.

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IRS Publishes Revised Payroll Tax Exam Procedures

In SBSE-04-0915-0058 on “Procedures for Required Filing Checks and Scope of Employment Tax Examinations” the IRS outlined revised procedures to be followed by agents conducting payroll tax examinations.

The four-page memo contains changes that will be made to the Internal Revenue Manual IRM 4.23.3.7.4.  Agents are instructed to follow the memorandum in the interim until those changes are placed in the manual.

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IRS to Disallow All Pending Claims for Payroll Tax Refunds on Severance Pay, Implementing Supreme Court Decision in Quality Stores

The U.S. Supreme Court resolved a split among lower courts regarding whether severance payments under a severance plan are subject to FICA, overruling the holding of the Sixth Circuit Court of Appeals in the case of United States v. Quality Stores, 113 AFTR 2d 2014-1326 reversing CA6, 110 AFTR 2d 2012-5827.  The IRS, nearly eleven months later, officially announced [Announcement 2015-8] that based on that decision the agency was going to deny all pending claims for refund.

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