Masonry Magazine February 1974 Page. 26
TAXES
By MIRIAM McD. MILLER
WITHHOLDING FROM WAGES
Congress passed a law in order to discourage banks from loaning employers money to pay employees "net wages" but not enough to pay the withholding tax due on the wages. To hold a bank liable two essential conditions must be present. First, the bank must supply funds for the specific purpose of paying wages. Second, the bank must have actual notice or knowledge that the employer will not be able to make timely payment of the withholding tax to the Government. The liability of the bank is limited to an amount equal to 25% of the funds supplied for the purpose of paying wages.
In a recent situation involving a loan from a bank to an employer, the bank was found liable by the Court. Even though one of the bank's employees had concealed information from the bank about the financial condition of the borrower, the bank remained liable as principal and the knowledge of its agent was imputed to it. The Court reasoned that since its agent knew the bank knew that the borrower would not be able to make timely payments of the withholding tax to the Government. U.S. v. Park Cities Bank and Trust Co. (5th cir. 1973.)
CONSTRUCTIVE DIVIDEND
In a recent case the taxpayer involved was the sole shareholder of a corporation that was set up to engage in various business endeavors. The taxpayer used the corporation's funds to pay travel, entertainment, hotel and automobile expenses incurred while seeking business opportunities for the corporation.
For a time this taxpayer resided in a home built by the corporation and being offered for sale to the general public. The house served as the corporate offices as well as the taxpayer's home. The corporation made the mortgage payments on the house and carried it as an inventory item on its income tax returns. The taxpayer also used corporate funds to pay travel, entertainment, hotel and automobile expenses that he had experienced while he was seeking business opportunities for the corporation.
The corporation claimed a deduction for the taxpayer's travel, entertainment, hotel and automobile expenses. It also deducted telephone, utility, sales promotion and real estate expenses. However, the Commissioner thought differently and determined that the expenses were instead constructive dividends to the taxpayer. So the taxpayer brought the case to the Tax Court for a decision.
The Tax Court held that the travel, entertainment, hotel and automobile expenses were business expenses and not constructive dividends to the taxpayer. However, on the other expense items, the Court held that they were constructive dividends mostly because the taxpayer had failed to allocate between his personal and business use of the telephone and other items. (Workman v. Commissioner, T.C. Memo 1973-241.)
(Continued on page 28)
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masonry
February, 1974