Masonry Magazine January 1969 Page.27
TAXES
By MIRIAM McD. MILLER
TWO BUSINESSES
Two taxpayers were equal partners in the operation of a lumber business and a clothing store. The IRS was asked whether only one return of a Form Form 941 (Employers' Quarterly Federal Tax Return) and one Form 941 (Employers' Annual Unemployment Tax Return) should be filed showing the wages paid to the employees of both the lumber company and the clothing company, or whether each company should be treated as a separate employer and required to file separate returns.
The IRS pointed out that the fact that the partnership carried on different businesses did not result in separate partnerships. The Ruling was that separate returns covering each business need not be filed. The wages of all the employees of both businesses should be included in one return of a Form 940 and one return of a Form 941. Rev. Rul. 69-522.
AVOID DOUBLE TAX
Corporate profits, as you know, are subject to a double tax-one at the corporate level and again at the shareholder level when the dividends are received. In an effort to reduce this double taxation many corporations pay part of the corporate earnings to its employee-shareholders as compensation. This compensation paid then becomes a deductible business expense for the corporation.
Numerous court cases have resulted from the Commissioner's challenging the reasonableness of compensation paid-especially in closely held corporations. Excess compensation is usually considered to be a dividend. Nevertheless, so long as the compensation remains reasonable, this is a valid and effective method of lessening the impact of the double tax.
Some of the factors that the courts have considered in determining reasonableness of compensation include the employee's qualifications; the nature, extent and scope of the employee's work, the size and complexity of the business; a comparison of salaries paid with the gross income and net income; the prevailing general economic conditions; comparison of salaries with distributions to stockholders; comparative policy of the corporation as to all employees; the amount of compensation paid an employee in previous years; and a continuation of the salary during loss years.
Certain acts of a corporation may alert the Commissioner to investigate such as an increase in salary without an increase in duties. A failure to increase dividends in a period of rising income may cause the Commissioner to investigate to determine if increases in salaries during that period was the means used to distribute corporate profits. However, one solid test is would the corporation have given an outsider such an increase in salary.
Finally the basic test always used by the IRS in allowing a deduction for compensation paid is was the salary reasonable.
RECORD-KEEPING
The Tax Court recently clarified the Commissioner's Regulations regarding substantiation of expenditures of $25 or more for travel and entertainment expenses. By virtue of Code Section 274(d) the Secretary of Treasury has designated the sum of "up to $25" of expenses for which it shall not be necessary to have a receipt or other documentary evidence. However, the Tax Court says, while documentary evidence may be absent, these expenses still have to be substantiated or approved by other evidence. In the case before it, the taxpayer argued that a flat $25 per day deduction should be allowed for trips away from home whether or not the taxpayer knows the amount of his actual expenses. Not so, said the Court. The law permits deductions only for expenses incurred. While the amount of proof may be eased on amounts up to $25, expenses still have to be proved-tied in with business and evidenced by acceptable means. And, as this case illustrates, if these expenses are not substantiated, they may be denied in their entirety. Hennessy v. Commissioner, T.C. Memo, 1969-209.
It may be of interest to review the substantiation of expenses that is required by the law. In addition to a diary or account book, a taxpayer must have documentary evidence for any expendiutres of $25 or more. In general, documentary evidence will be considered sufficient if it shows the amount, date, place, and essential character of the expenditures. A receipt from a restaurant that indicates the name, location of the restaurant, date, amount of expenditure, and separate charges for items other than meals and beverages (such as a tip) would be sufficient to support a deduction for a business meal. Of course, if the meal is for less than $25-it would only be necessary to substantiate the expense by adequate records such as a diary, account book, or other such recording.
When recording an expense, if not obvious, it may be wise to include a written statement of the business purpose of the expenses.
In this matter of record keeping, a novel case was presented to the Ninth Circuit. The petitioner had filed suit demanding reimbursement for his time spent in keeping the records required of all taxpayers. But, the court threw the case out as being "patently without merit." Kasey v. Commissioner (9th cir. 1969).
SELF-INSURED
Some tax rulings can certainly give rise to the notion that the IRS has a mechanized brain. A taxpayer's business involved the use of structures erected and maintained by the (Continued on page 42)
About the Author.
Following graduation from Tulane University Law School in 1955, Miriam McD. Miller entered private practice in New Orleans. Later, she joined the General Counsel's Office of the Federal Communications Commission in New York City for one year. For the next six years, she worked for the Department of Labor, primarily with the Davis-Bacon, Wage and Hour laws. Mrs. Miller and her husband, an attorney for the National Labor Relations Board, have two children and reside in Arlington, Virginia.
Editor's Note:
The cases and interpretations in this column are not intended as legal advice. Individuals should contact their own attorney or tax consultant on specific problems.