Masonry Magazine April 1973 Page. 17
TAXES
By MIRIAM. McD. MILLER
DISCRIMINATORY PLAN
The tax laws provide that in order for a pension trust to qualify, the classification that determines employee eligibility for participation must not be discriminatory in favor of "employees who are officers, shareholders, persons whose principal duties consist of supervising the work of other employees, or highly compensated employees." This group is called the "prohibited group."
In deciding whether a pension plan favored the "prohibited group," the Third Circuit Court of Appeals gave weight to the facts surrounding a company's labor negotiations. In the case before the court, the pension plan had been put into effect by a tax-option corporation which was engaged in the manufacturing of lamp and gift components. The pension plan applied to about 10% of the corporation's regular full-time work force leaving 90% without any pension benefits whatsoever. There seemed to be no doubt that the employees covered were those in the above prohibited group.
The company argued that while the plan does look discriminatory on its face, the company's dealings with the excluded employees were controlled by a collective bargaining agreement and that the union which represented these employees elected to forego any pension plan. It is certainly arguable, the court noted, that a pension trust that covers only the prohibited group cannot be reasonably characterized as discriminatory if employees not covered have freely declined coverage after the employer has offered to include them on a non-discriminatory basis.
Such was not the case here, the court decided. It was true that one of the union demands of the company had been the inauguration of a pension plan. However, in the course of bargaining, this demand was withdrawn while others were pressed and ultimately granted. It seems that the gaining of pension rights was not as high on the priority list of the union demands.
Under these facts, the court ruled that the employees had not freely declined coverage under the pension plan. Therefore, the plan was found to be discriminatory and failed to qualify. Contributions to it were not deductible by the company. Loevsky v. Commissioner (3rd cir. 1973).
1972 RETURNS
By February 16, 1973, almost 22 million returns had been filed with the IRS. Refunds were averaging about $354 -up from last year's $252 average refund. Also, the IRS reported that these taxpayers who filed early this year have not been very interested in the political campaign check-off. It will be interesting to see if this trend continues.
SUPREME COURT
The U.S. Supreme Court has handed down a decision involving an accountant and the tax records of one of his clients. The petitioner in the case was the sole proprietress of a restaurant. For some 14 years she had given bank statements, payroll records, etc. to her accountant in order that he could prepare her income tax return. The accountant was not an employee of the petitioner, but rather was what is termed an independent contractor with an office of his own and numerous clients.
After the IRS began an investigation of the petitioner's tax returns, they decided that it would be necessary to subpoenae the petitioner's returns from her accountant. The petitioner intervened asserting that the ownership of the records warranted a Fifth Amendment privilege to bar their production.
The court pointed out that the Fifth Amendment privilege is a personal privilege and "adheres basically to the person, not to information which may incriminate him." The court noted that, "The summons and order are directed against the accountant. He, not the taxpayer, is the only one compelled to do anything."
Thus, the Supreme Court has ruled that except in very restricted cases a taxpayer cannot claim the Fifth Amendment privilege for records not in his possession. Couch v. U.S. (Su.Ct.1973).
MUST BE A BUSINESS
Where a taxpayer receives no gross receipts from his efforts, it is very hard to convince the IRS and the courts that he is in a business and has incurred deductible business expenses.
One taxpayer seemed have been engaged in a lot of business activity. He had attempted to solicit a business opportunity by running an ad in the Wall Street Journal. Later he tried to interest two companies in mining explorations; he ordered a study of the application of lasers to the mining industry. At another time the taxpayer counseled a construction company into expanding operations into the mental health area and taking advantage of federal funds. Unfortunately the taxpayer received no compensation for his efforts.
The tax court ruled that the taxpayer was not engaged in carrying on a trade or business and therefore was not entitled to business expense deductions. The absence of gross receipts from the activities was one of the main determinative facts that caused the court to reject the disputed expenses. Kilroy v. Commissioner (T.C. Memo 1973-71).
SALARY REDUCTION AGREEMENTS
The IRS is working on an amendment to regulations governing the taxation of certain amounts paid to purchase an annuity contract for an employee. These regulations are directed toward contributions made to a plan that result from an employee's decision that he would prefer such contributions in return for a reduction in his regular salary (or in lieu of an increase in such compensation).