Masonry Magazine January 1970 Page. 33
TAXES
By MIRIAM McD. MILLER
FAIR LABOR STANDARDS ACT
The Fair Labor Standards Act provides that any employer who violates the provisions of the Act with regard to minimum wages and maximum hours shall be liable to the affected employees for the amount of their unpaid minimum wages or their unpaid overtime compensation, as the case may be, and in an additional equal amount as liquidated damages.
Recently, advice was requested from the IRS on whether payments by an employer of (1) liquidated damages and (2) reasonable attorney's fees allowed by the courts in conjunction with a matter arising out of the FLS Act were deductible as ordinary and necessary business expenses for Federal income tax purposes.
The IRS explained that the provisions of the FLS Act are not penal in nature. The liquidated damages involved constitute compensation for delay in the payment of sums due under the Act.
Therefore, the IRS ruled that the payments by an employer of (1) liquidated damages and (2) reasonable attorney fees pursuant to the provisions of the FLS Act are deductible as ordinary and necessary business expenses for Federal income tax purposes. Rev. Rul. 69-581.
EXEMPTIONS
The Tax Reform Act of 1969 provides for an increase in the amount allowed as a personal exemption-starting in 1970. It may be of interest to review a few instances where additional exemptions may be claimed by taxpayers.
For instance, where a taxpayer claims a mother or a father as a dependent, for income tax purposes, not only must the taxpayer contribute to more than half of the support of the parent but the parent may not earn more than $600 during the taxable year. However, in the case of a taxpayer's child, who is either under 19 or is a student, the amount of income that he earns is not important-so long as the taxpayer contributes to more than half of the support of the child. In general, a student must have been in school for at least five calendar months in the taxable year.
A husband who is divorced or separated from his wife may be able to claim his child as a dependent even if the child is in the wife's custody and the husband did not contribute more than half of the child's support. If he can show that he contributed at least $600 toward the child's support in 1969 and his ex-wife agrees in writing to his taking the exemption. (This is often stipulated in the divorce decree nowadays.) A taxpayer who finds he cannot qualify for this special exemption rule for 1969 can still act to get such an agreement for 1970.
TAX-OPTION CORPORATIONS
Briefly, a tax option corporation is one that can elect to have its shareholders pay taxes in proportion to their shareholdings on the corporate income and thus avoid a corporate tax. Though the corporation is not taxed on any part of its income during the period that an election is in effect, it remains a corporation for all other purposes.
The Regulations provide that in order to make an election not to be taxed as a corporation, the following requirements must be met:
(1) There may be no more than 10 shareholders, who must be individuals or estates (i.e. not trusts).
(2) It must be a domestic corporation.
(3) No shareholder may be a nonresident or alien.
(4) There must be only one class of stock.
(5) The corporation cannot be a member of an affiliated group eligible to file a consolidated return.
The election must be filed with the district director for the district in which the corporation's principal place of business is located. The IRS provides a form (2553) to be used for this election. Together with the form, a statement of the unanimous consent of all shareholders must be filed.
The election has to be timely filed. According to the Regulations, the election must be filed either (1) during the first month of the taxable year or (2) during the calendar month preceding this first month in the taxable year. Thus, for a corporation operating on a calendar year basis, the election must be filed either in January or in the preceding December.
But as with every Regulation with a time requirement, court cases develop to settle the question of whether there was compliance with the time requirement. Recently, a taxpayer contended that tax deficiences should not be assessed against his corporation because an election to be treated as a tax-option corporation had been timely filed. The District Director denied receiving either the stockholder's consents or the corporation's tax-option election form. However, after hearing the taxpayer, his wife, and his accountant testify that all proper forms had been prepared, signed and timely mailed, the Tax Court found that the election had been mailed. "Mailing gave rise to a strong presumption of delivery which was not rebutted by mere negative evidence of the absence of any record or receipt." Mitchell Offset Plate Service, Inc. v. Commissioner, 53 TC No. 25.
FUTA TAXES-QUARTERLY PAYMENTS
If you are an employer of 4 or more employees and have been paying Federal unemployment taxes, you may want to check with your tax advisor as to your system of reporting and paying this tax. Begining in 1970, an employer subject to the FUTA must make quarterly deposits of these taxes. The quarterly FUTA UTA tax deposits are required on April 30, July 31. November 2, and February 1, 1971 for the tax year of 1970. Previously, this tax was due and payable on or before January 31 of each year. No quarterly return is required, but each deposit must be accompanied by new Form 508, Federal Tax Deposit-Federal Unemployment Taxes.
The new quarterly deposit system is to be phased in over a three-year period. In 1970, only 1 of the tax for a calendar quarter must be deposited. Note: No deposit is required if the employer's tax for a quarter is $100 or less.
COMPENSATION OR EARNINGS?
Regardless of any intent to cheat the government, the IRS will reinterpret the distribution of money according to its own rules. In a recent case, the founder of a corporation that sold fuel oil, coal, and wood and installed and