Masonry Magazine June 1973 Page. 13
TAXES
By MIRIAM McD. MILLER
RETIREMENT BENEFITS TAX BILL
A Retirement Benefits Tax Bill, H.R. 7157, has been prepared by the Treasury Department and introduced in Congress. The bill's intended purpose is to strengthen and improve the private retirement system by establishing, among other things, minimum standards for participation in and for vesting of benefits under pension and profit sharing retirement plans.
According to the provisions of this bill, a plan will not qualify if it requires that as a condition to participation, an employee have more than three years of service, have attained the age of 30 years, or have not attained an age which is greater than the normal retirement age under the plan reduced by five years.
Under the existing law, a plan covering an owner-employee must include all employees with three or more years of service. Under the proposed law such a plan covering a self-employed person, who is an owner-employee, in the case of employees who are 35 years of age or older, could not require more than one year of service in order to be covered by the plan. In the case of younger employees, the limit could not be more than two years of service for employees 30-34 years of age. For employees under 30 years of age, the three year minimum service rule could apply.
The bill proposes new vesting rights provisions. A "rule of 50" would apply to the vesting of benefits. This rule simply means that a plan participant would acquire a 50% vested interest in benefits derived from his employer's contributions when the sum of his age and his years of plan coverage equals or exceeds 50 years.
A "rule of 35" would apply to plans which cover self-employed persons who are owner-employees. Accordingly, a participant's interest in a plan would become vested when the sum of his age and his years of service equals or exceeds 35 years.
With an annual ceiling of $1,500, employee contributions of up to 20% of an employee's earned income will be deductible from income tax each year. This deduction would be allowed whether the contributions are to an employer-financed private retirement plan or to his own personal retirement plan. There are certain restrictions concerning this deduction. For instance, in the case of an employee not subject to Social Security or railroad retirement taxes, the deduction would be further reduced by the amount of FICI taxes that would have been imposed on the employee's earned income had he been subject to them.
Under the present law, self-employed individuals may deduct contributions to a qualified plan in the amount of 10% of earned income (with an annual maximum deduction of $2,500). This limit will be increased to 15% of earned income, with an annual maximum deduction of $7,500. These same limits would also apply to shareholder-employees of tax-option corporations.
The bill also proposes that an excise tax be imposed on prohibited transactions. This tax would most likely affect employers and plan trustees. The new bill is fairly complicated and the foregoing merely is intended to give some highlights and is by no means comprehensive.
COMING LITIGATION
Under the Freedom of Information Act, the IRS has announced a list of some 21 issues it plans to litigate in 1973 and which will not ordinarily be conceded or compromised. One of those issues listed was whether employment agency fees paid for seeking employment are deductible either as ordinary and necessary business expenses under section 162 or as expenses for the production or collection of income under section 212. Another issue listed was whether a purported liquidation is in fact a reorganization or is so lacking in substance that it should be disregarded as a liquidation.
Another issue expected to be litigated this year is whether the Commissioner's determination under section 401 (a)(3) (B), Pension and Profit-Sharing Plans, relating to a discriminatory classification should be on the basis of the classification in and of itself or on the basis of the classification in relation to all the facts and circumstances in the case involved.
Also, what standard is to be applied in determining whether a classification is discriminatory? Another is whether a pension, profit-sharing, or stock bonus plan, which meets all the requirements of the statutes and regulations when adopted but fails to meet such requirements in its operation, loses its qualification under Section 401. (IRS List of Prime Issues, 1/1/73.)
CHARITABLE FENCING
A taxpayer made numerous donations of cash and real property to charitable organizations. One year the taxpayer contributed the cost of a fence to a church. When he made out his tax return for that year, he deducted the value of the fence ($932) as a charitable contribution. However, the taxpayer had in fact paid only $732 for the fencing. When it was learned that the destination of the fence was to be a church, the fence company very generously gave the taxpayer a $200 discount.
When before the Tax Court, the taxpayer argued that when a painting or antique is given to a charity the tax deduction for it is based on the value of the contributed property, not on cost. His donation should be treated likewise, he thought.
The Court disagreed with the taxpayer and would allow him to deduct only the $732. The Court's reasoning was that where a taxpayer purchased property at a discount upon the condition that he donate such property to a specific charity, a restriction was placed on the marketability of the goods in his hands, and because of this restriction, the fair market value of the fence was the actual purchase price. (Silberman v. Commissioner, T.C. Memo 1973-48.)