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312-876-7318 fax


By: Robert E. McKenzie, Esq.

Code Sec. 62

Wages -- Reimbursed Employee Expenses; Accountable Plans -- Business Connection. Temporary

employment corp.'s per diem travel expense payments to non-local employees were wages subject to
withholding: payments weren't made under Reg § 1.62-2 accountable plan where per diem scheme based on
hours worked rather than reasonably expected travel expenses failed business connection test; and didn't
qualify as per diem allowance entitled to deemed substantiation treatment or Reg § 1.62-2(f)'s safe harbor
treatment. Also, payments, which admittedly weren't separately noted on paychecks in accord with Reg §
31.3401(b), qualified as wages under Code Sec. 3121, Code Sec. 3306, and Code Sec. 3401 where per diem
rate differed for each employee and payments substituted as compensation for services; and taxpayer's
alternative claim that it was mere conduit, not employer, was rejected. (Worldwide Labor Support of
Mississippi Inc. v. U.S., DC MS, 87 AFTR 2d 2001-2401 )

Reimbursed Employee Business Expenses -- Non-accountable Plans

Legal fees allegedly reimbursed under securities trader's settlement with former employer were treated as paid
under non-accountable plan and deductible only as miscellaneous itemized deductions, subject to AMTI
'add-back': although fees were clearly made in connection with business for Code Sec. 62 purposes, Reg §
1.62-2(e)(3)'s substantiation requirement wasn't met where taxpayer didn't corroborate statement that he
negotiated settlement in part on basis of his legal fees with time sheet or lawyer's bill; and employer testified
that unallocated settlement wasn't intended to be for any particular claim. (Andrew S. Brenner, et ux. v.
Commissioner, TC Memo 2001-127, TC Memo 2001-127 )

Accountable Plans -- per Diem Expense Arrangements

District court improperly decided on summary judgment that trucking corp. didn't sufficiently show genuine
factual dispute over reasonableness of its decision that expense reimbursements to on-the-road drivers were
paid under accountable per diem allowance. Taxpayer's reliance on standard industry practice for estimating
reimbursements was sufficient for reasonable juror to decide plan satisfied Code Sec. 62's business connection
test where test didn't require proof of drivers' actual lodging expenses and taxpayer's plan was based on
mileage driven, with adjustments for appropriate factors; and whether plan was reasonably calculated not to
exceed anticipated expenses and whether it met "return of excess" requirement were also fact questions for
jury. (Trucks Inc. v. U.S., CA 11, 86 AFTR 2d 2000-7180 )

Employee Vs. Independent Contractor -- Voice Actor

Voice actor was employee, not independent contractor, so couldn't deduct business expenses on Schedule C:
although he had right to choose his own jobs, hiring cos. provided scripts and instructed taxpayer to read them
pursuant to cos.' specifications; taxpayer didn't produce contracts establishing his control over his services;
received Forms W-2 showing his eligibility for participation in pension plans; didn't pay self-employment tax;
and fact that he worked for multiple employers was irrelevant. (Anthony S. D'Acquisto v. Commissioner, TC
Memo 2000-239, 2000 RIA TC Memo ¶2000-239 )

Exempt Wages -- Accountable Plan -- Independent Contractors Vs. Employees

District court properly granted govt. summary judgment in courier service's employment tax refund suit where
taxpayer didn't show that part of wages paid drivers who provided their own vehicles was tax exempt as auto
lease payments or vehicle expenses paid under accountable plan. Taxpayer didn't comply with Code Sec.
62(c) 's requirements: drivers didn't substantiate expenses or return excess payments; and common law
substantial compliance doctrine and discretionary Reg § 1.274-5T(c)(2)(v) didn't apply to substantiation
requirements. Also, drivers weren't independent contractors: lease was valid only during regular employment
hours and was integral to courier duties; taxpayer controlled nonnegotiable, serial lease terms; lease was
illusory where payments were unrelated to leased vehicle's value; and fact that drivers may have been paid
only part of higher hourly rate while on vacation was irrelevant. (Trans-Box Systems, Inc. v. U.S., CA 9, 86
AFTR 2d 2000-5015 )

Limitations on Wagering Losses -- Trade or Business of Gambling

Taxpayer who deducted lottery winnings in determining his adjusted gross income and claimed standard
deduction was denied gambling loss deduction: gambling losses were deductible only as itemized deduction
since taxpayer wasn't in trade or business of gambling. Also, claim that denial discriminated against
low-income taxpayers who lacked sufficient deductions to itemize was rejected. (Roger John Torpie Jr. v.
Commissioner, TC Memo 2000-168, 2000 RIA TC Memo ¶2000-168 )

Code Sec. 1401

Self-employment Tax -- Business Held in Sham Trust

Self-employment tax on jewelry business/sole proprietorship earnings was upheld against taxpayer/proprietor
who transferred business to sham trust: taxpayer didn't explain how trust's nominal ownership altered fact that
earnings of business which he continued to operate were self-employment income to him. (Kevin D. Castro,
et ux., et al. v. Commissioner, TC Memo 2001-115, 2001 RIA TC Memo ¶2001-115)

Self-employment Earnings -- Taxability -- Profit Intent

Taxpayer's earnings from sports memorabilia sales activity weren't subject to self-employment tax: activity
didn't rise to level of trade or business where taxpayer devoted most of his time to bulk sales for which he
held no profit objective; and made only sporadic sales from private collection that was amassed without plans
for future sale or consideration of cost. (Raymond F. Kling, et ux. v. Commissioner, TC Memo 2001-78, 2001
RIA TC Memo ¶2001-78 )

Self-employment Taxes -- "Contributions" -- Voluntary Payment

Nonfiling taxpayer was liable for self-employment tax for all years except 1 on unreported self-employment
income: Self-Employment Contributions Act of 1954's term "contributions" didn't render payment voluntary
where tax was imposed to fund Social Security and hospital ins. benefits. (Robert Conrad Eanes II v.
Commissioner, TC Memo 2000-252, 2000 RIA TC Memo ¶2000-252 )

Code Sec. 1402

Self-employment Tax -- Computation -- Community Income

Husband had to take all his self-employment income into account when computing his self-employment tax:
California's community property law didn't apply in self-employment tax context under Code Sec. 1402(a)
(5)(A)'s plain language where wife didn't exercise any management or control over husband's business; and
fact that community property law was taken into account for income tax determination purposes was
irrelevant. (Mortimer Z. Landsberg v. Commissioner, TC Memo 2001-105, 2001 RIA TC Memo ¶2001-105 )

Self-employment Taxes -- Farm Rental Income

8th Cir. reversed and remanded decision that cash rental income farmers and wives received from their farms
was taxable under Code Sec. 1402(a)(1): Tax Court didn't consider whether rents were in fact "derived
under" arrangements requiring material participation in agricultural production; arrangements' mere existence
wasn't dispositive; and taxpayers' rents' consistent reflections of market rates strongly suggested rental
agreements were independent of material participation arrangements. But, IRS was entitled to opportunity to
show nexus between rents and arrangements; and taxpayers' other arguments regarding statute's limited
applicability, contradictory Form 4835 instructions, and wives' material participation were rejected.
(McNamara v. Comm., CA 8, 87 AFTR 2d 2001-310 )

Code Sec. 3101

Sham Transactions -- Wage Prepayment Scheme; Loan Agreement -- Tax Avoidance

Government was granted summary judgment in solely owned professional corp.'s refund action for FICA and
FUTA taxes on wages paid to owner in 1 tax year under prepayment scheme which IRS reallocated to 2d
year: prepayment scheme, together with loan agreement under which owner loaned funds to taxpayer at time
of wage prepayment, which were repaid at varying times over later years, was sham transaction designed to
reduce taxpayer's employment tax liability. Other than loan agreement, no documentary evidence proved that
wage prepayment or loan occurred; and unrefuted characterization of loan as disguised wage payments
supported conclusion that prepayment scheme neutralized, and necessitated loan back to taxpayer. (Jeffery
B. Fleck Co. v. U.S., DC OH, 86 AFTR 2d 2000-5749 )

Code Sec. 3121

Irs Method -- Aggregate Estimate of Employee Tip Income

District court properly determined that IRS had no authority for assessing restaurant's employer-only FICA
tax liability on basis of aggregate estimate of employees' allegedly unreported tips: Code Sec. 446, which
didn't expressly allow estimate in lieu of actual calculation, didn't apply to FICA taxes; ambiguous Code Sec.
3121(q)'s provision for alternative employee/employer assessment didn't govern what method was allowable;
and contrary case law wasn't followed. Also, estimates that ignored statutory wage bases and processing fees
incorporated in credit card tips effectively overstated taxpayer's liability; and allowing IRS to use aggregate
estimates without 1st securing regulatory authority for doing so contravened rulemaking process and public
policy behind such process. (Fior D'Italia, Inc. v. U.S., CA 9, 87 AFTR 2d 2001-1118 )

Statutory Stock Options May Trigger Payroll Tax Withholding but Not Before 2003

Notice 2001-14, 2001-6 IRB

A new IRS notice provides both bad news and goods news for employees holding statutory options --
incentive stock options (ISOs) or options granted under an employee stock purchase plan (ESPP), and
companies offering them. The bad news is that IRS has concluded that Rev Rul 71-52, 1971-1 CB 278, which
held that prior law's qualified stock options weren't subject to FICA, FUTA, or income tax withholding, is
obsolete and doesn't apply to statutory options. The good news, however, is that statutory options won't
trigger FICA, FUTA, or income tax withholding before 2003.

More background. Subject to exceptions, all remuneration for employment is subject to FICA ( Code Sec.
3121(a)) and FUTA. ( Code Sec. 3306(b)) No statutory or regulatory provision excludes the value of stock
transferred pursuant to the exercise of a statutory option from wages for FICA or FUTA purposes.

Rev Rul 71-52 held that a taxpayer did not make a payment of wages for FICA, FUTA and income tax
withholding purposes at the time of the exercise of a qualified stock option under former Code Sec. 422, and
that income realized by employees and former employees from a disqualifying disposition of stock acquired
by the exercise of a qualified stock option was not wages for these purposes. IRS now notes that at the time
Rev Rul 71-52 was issued, the then single social security wage base (as contrasted with today's separate
OASDI base and unlimited HI base) was very low and most employees had wages over the base so that the
ruling had little effect on their FICA taxes or social security benefits.

In Notice 87-49, 1987-2 CB 355, IRS said it was reconsidering Rev Rul 71-52 but that pending release of the
results of the reconsideration, Rev Rul 71-52 could be relied on with respect to disqualifying dispositions of
ISO stock.

Results of reconsideration. IRS has now concluded that the holding and principles of Rev Rul 71-52 do not
apply to the exercise of ISOs or options granted under an ESPP, or to the disposition of stock acquired
pursuant to these statutory options, and has therefore determined that Rev Rul 71-52 is obsolete. Accordingly,
the provisions of Notice 87-49 no longer apply. While not providing specific rules at this time, IRS said that it
expects to issue guidance that would treat exercises of statutory options as wages for FICA and FUTA
purposes. It may, however, treat dispositions of stock acquired pursuant to exercises of these options as not
subject to income tax withholding.

Interim relief. For any statutory option exercised before Jan. 1, 2003, IRS will not assess FICA or FUTA tax
upon the exercise of the option and will not treat the disposition of stock acquired by an employee pursuant to
the exercise of the option as subject to income tax withholding. This guidance applies to an exercise of a
statutory option and the disposition of stock acquired by an individual on exercise of a statutory option, if the
exercise occurs on or after publication of Notice 2001-14 and before Jan. 1, 2003. However, employers may,
at their option, choose to apply the guidance for any exercise of statutory options, or dispositions of stock
acquired by individuals pursuant to any exercise of statutory options, that occurred before publication of
Notice 2001-14. Thus, for exercises of statutory options covered by this guidance, IRS won't require payment
of FICA or FUTA tax, won't assert penalties or interest, and will honor otherwise allowable adjustments and
claims for refund of any FICA or FUTA tax paid. Furthermore, for dispositions of stock acquired pursuant to
the exercise of statutory options covered by this guidance, IRS won't require income tax withholding and
won't assert penalties or interest.

Observation: In a '99 FSA, IRS had concluded that the exercise of an option under an ESPP triggers FICA
wages equal to the amount by which the fair market value of the stock at that time exceeds the option price.
Companies that adhered to the FSA are now in a position to claim refunds of any FICA tax (both the OASDI
portion and the HI portion) paid by employees and the companies on the wages from the option exercise.
Companies that treated exercises of ISOs as generating FICA wages also are in a position to claim refunds.

observation: As a result of nondiscrimination requirements that apply to ESPPs, they typically cover a broad
spectrum of employees including many with wages below the OASDI wage base. Thus, in the case of ESPPs,
refunds may be substantial because exercises of options under these plans could have resulted in additional
OASDI taxes being owed by many employees. One down side of seeking refunds with respect to ESPPs is
that some employees ultimately may receive lower social security benefits as a result. This is much less likely
to be the case with ISOs because they aren't subject to nondiscrimination requirements and often cover
employees who are already over the OASDI base. Refunds of HI taxes could be sought for both ESPPs and
ISOs without adverse affect on any employee.

Some finalized changes to tip income compliance agreements

Ann 2001-1, 2001-2 IRB; Notice 2001-1, 2001-2 IRB

IRS has finalized proposed changes to its voluntary tip income compliance agreements and the requirements
and procedures for employers to obtain approval for employer-designed "EmTRAC" programs, which were
proposed in Notice 2000-21.

Background. Under a Tip Rate Determination Agreement (TRDA), IRS and employers work together to
determine the amount of tips that employees generally receive and should report. Under a Tip Reporting
Alternative Commitment (TRAC), employers agree to educate employees and establish tip reporting
procedures. In return for taking part in a TRDA or TRAC, IRS agrees not to initiate tip examinations of the
employer while the agreement is in effect. The agreements are designed to help employers and employees
understand and meet their tip income reporting responsibilities.

Previously, only the gaming, food and beverage, cosmetology and barber industries were able to make these
agreements with IRS. In May 2000, however, IRS proposed to simplify and shorten the TRDA and TRAC for
the food and beverage industry and the TRAC for the cosmetology and barber industry. It also developed a
TRDA and a TRAC for some other industries where tipping is customary, including taxicab and limousine
businesses, airport skycap companies, and car wash operations.

The proposed agreements were as follows:

...TRAC Agreement for Use Where Tipped Employees Receive Both Cash and Charged Tips (Other Than in
the Food and Beverage Industry and the Cosmetology and Barber Industry) (Ann 2000-19)

...TRDA for Use By Any Employer with Tipped Employees (Other Than in the Food and Beverage Industry
and the Gaming Industry) (Ann 2000-20)

...Revised TRAC Agreement for Use in the Cosmetology and Barber Industry (Ann 2000-21)

...Revised TRAC Agreement for Use in the Food and Beverage Industry (Ann 2000-22)

...Revised TRDA for Use By Employers in the Food and Beverage Industry (Ann 2000-23)

Final versions of these agreements are now available on the IRS website at
/msu-info.html. Although the substance of the revised agreements has not changed, language has been added
to clarify that any earlier TRAC agreement or TRDA relating to an establishment covered by a new
agreement will automatically terminate on the day before the new agreement is effective for that
establishment. IRS also said that it will soon address additional issues related to TRDA/TRAC Agreements in
the IRS manual; the new information will be available at
/part04.html. (Ann 2001-1)

Employer-designed TRACs. In addition to TRDA and TRAC, IRS is now permitting employers in the food
and beverage industry to design their own program through the Employer's Tip Reporting Alternative
Commitment (EmTRAC). In Notice 2000-21, 2000-19 IRB 967, IRS set forth proposed requirements and
procedures for obtaining approval of employer-designed TRAC programs (called EmTRACs). IRS has now
finalized these, as follows:

The EmTRAC program is available only to employers in the food and beverage industry that have employees
who receive both cash and charged tips. If an employer has more than one establishment, it can choose which
to include in its EmTRAC program.

The EmTRAC program contains many of the provisions in the TRAC agreement. The employer must
establish an educational program that trains employees that they are required to report all their cash and
charged tips to their employer. Education must be furnished for newly hired employees and quarterly for
existing employees. The employer must establish tip reporting procedures, under which a written or electronic
statement is prepared and processed on a regular basis (no less frequently than monthly), reflecting all tips for
services attributable to each employee. The EmTRAC program gives an employer considerable latitude in
designing its educational program and tip reporting procedures, which the employer may combine.

An employer entering into an EmTRAC program must agree to comply with the requirements for filing all
required federal tax returns and paying and depositing all federal taxes; to maintain the records of gross
receipts subject to tipping and receipts showing charged tips for at least 4 years after the April 15 following
the calendar year to which they relate; and to make the following quarterly totals available, by establishment,
at IRS's request for statistical samplings of its establishments: (a) gross receipts subject to tipping, (b) receipts
showing charged tips, (c) total charged tips, and (d) total tips reported.

For its part, IRS agrees not to initiate any tip examinations of the employer or an establishment included in
the EmTRAC for any period for which the EmTRAC program is in effect; except in relation to a tip
examination of one or more employees or former employees. IRS will base any Code Sec. 3121(q) notice and
demand issued to the employer or an establishment included in the EmTRAC and relating to any period
during which the EmTRAC program is in effect solely on amounts reflected on Form 4137, Social Security
and Medicare Tax on Unreported Tip Income, filed by an employee with his or her Form 1040, or Form
885-T, Adjustment of Social Security Tax on Tip Income Not Reported to Employer, prepared at the
conclusion of an employee tip examination. IRS also will not evaluate the employer for compliance with the
provisions of its EmTRAC program for the first two calendar quarters for which the EmTRAC program is

Requesting EmTRAC approval. IRS has developed a pro forma letter that an employer must use to request
approval of its EmTRAC program. A copy of the approval request letter is attached to Notice 2001-1. It can
also be obtained by calling (202) 622-5532 (not a toll-free call). If an employer's program meets the necessary
requirements, IRS will send the employer an approval letter that will specify the effective date of the
employer's EmTRAC program. If IRS determines that the employer's EmTRAC program fails to meet all the
requirements, it will contact the employer and offer assistance in working out a suitable program.

Change in IRS's Position on Rehabilitation and Vocational Trainees -- Safe Harbor Relief

In non-profit corp.'s FICA refund action for payments to disabled "consumers" who govt. deemed employees,
govt.'s motion to dismiss and corp.'s F.R.Civ.P. 54(b) motion to certify as final judgment district court's prior
order dismissing corp.'s claims alleging violation of §530 of '78 Revenue Act were denied. Govt.'s motion
directed at same allegations as prior granted motion was moot; and although court "judicially split" corp.'s
refund claims into §530 claim and claim that its clients weren't employees, claims constituted single claim
where they had common factual background and weren't finally adjudicated. Also interlocutory certification
wasn't merited since court didn't find there was no just reason for delaying appeal, and possibility of multiple
appeals of same issue existed. (Hope Network v. U.S., DC MI, 86 AFTR 2d 2000-5105 )

Salary Reduction Arrangements -- Nonqualified Deferred Compensation Plans

Earnings attributable to accounts in nonqualified deferred compensation plans and credited monthly to
separate accounts of eligible participants at participant's election qualifies for special timing rule of FICA tax
under Code Sec. 3121(v)(2). Also, plan provision that allows participants to make prospective changes to
plan's investment options as often as monthly meets requirement in reg that "actual investment" be chosen
before beginning of investment period. (IRS Letter Ruling 200021012 )

Code Sec. 3401

Worker Classification -- Employee Vs. Independent Contractor

For employment tax purposes, truck drivers for taxpayer/freight hauling business owner were employees, not
independent contractors: although taxpayer didn't closely supervise drivers, he controlled their activities by
requiring them to call daily and by making all repair, load and transport related decisions; and drivers didn't
invest in truck equipment or bear any costs, lacked decision-making authority, had no real risk of loss,
provided services that were integral and essential to taxpayer's regular business vs. special skills, and believed
they were employees. Also, fact that drivers worked for short periods wasn't persuasive where they were free
to terminate and subject to discharge at any time. (Robert P. Day v. Commissioner, TC Memo 2000-375,
2000 RIA TC Memo ¶2000-375 )

Withholding Tax Credits -- Employee Vs. Independent Contractor -- Proof

Magistrate judge granted taxpayer refund, subject to adjustment, for income tax withholdings ex-employer
orally agreed to take from his gross pay but didn't remit to IRS: IRS's refusal to issue taxpayer withholdings
credit was improper where his and 1 IRS expert's credible and consistent testimonies showed taxpayer was
employee, not independent contractor, and that his gross pay was actually reduced by claimed withholding
amount. Also, employer's vague, self-serving testimony that taxpayer wasn't employee contradicted earlier
assertion that taxpayer was issued Form W-2 and didn't explain discrepancies between later issued Form 1099
and taxpayer's net pay; and employee's right to credit was independent of employer's remittance. (Winter v.
U.S., DC TX, 86 AFTR 2d 2000-6846 )

Employee Vs. Independent Contractor -- Attorneys; Corp. Officer

Magistrate judge properly found that 1 of taxpayer-law corp.'s attorneys/officer was employee subject to
FICA and FUTA taxes: under dual capacity doctrine, attorney's services were more than minor where he had
sole authority to make major corp. decisions, including all management, employment, financing and check-
signing decisions. (Van Camp Bennion v. U.S., CA 9, 87 AFTR 2d 2001-2408 )

Employee Vs. Independent Contractor -- Process Server

Process server was employee for messenger service co. from which he received Forms W-2, not independent
contractor: taxpayer didn't have his own clients; received sole process-server income from co., which
determined priority and geographic area of his services; taxpayer didn't invest in work facilities, had to report
service activity to co., and was paid specific amount for service, plus milage; and co. could discharge
taxpayer. (Kenneth W. Frische v. Commissioner, TC Memo 2000-237, 2000 RIA TC Memo ¶2000-237 )

Club Dancers -- Safe Harbor Relief; Reliance on Industry Practice

Adult entertainment club was denied new trial on its entitlement to '78 Revenue Act §530's safe harbor relief
from its erroneous "tenant" classification of fantasy booth performers/employees: jury verdict wasn't seriously
erroneous or miscarriage of justice where regardless of credibility issues, evidence supported finding of no
long-standing tenant classification practice in significant segment of taxpayer's local industry. Also, fact that
advisers based their opinions solely on taxpayer's representations supported unreasonable reliance finding;
taxpayer didn't prove actual reliance on prior audit; and any erroneous admission of evidence didn't
substantially affect parties' rights. (303 West 42Nd St. Enterprises, Inc. v. IRS, DC NY, 86 AFTR 2d
2000-5352 )
Purchaser of Employees' Wage Claims Responsible for Employment Taxes

Chief Counsel Advice 200019009

In Chief Counsel Advice, IRS said that a factor that purchased wage claims from employees of a Chapter 11
debtor was responsible for withholding and paying employment taxes.

Background. If the employer for whom services are performed doesn't have control of payment of wages to
the employee, whoever does have such control is treated as the employer for purposes of income tax
withholding. ( Code Sec. 3401(d)(1)) In Otte, William Jr., v. U.S., (1974, S Ct) 34 AFTR 2d 74-6194, 419 US
43, 42 L Ed 2d 212, 74-2 USTC ¶9822, which dealt with a trustee in bankruptcy that paid claims for wages
earned before bankruptcy, the Supreme Court held that an employer under the income tax withholding rules
also is an employer for purposes of FICA withholding. Several cases have extended the Otte decision to
provide that the person having control of the payment of wages is also an employer for purposes of the
employer share of FICA and for the employer's responsibility to pay FUTA.

Factor responsible. Applying Otte, the Chief Counsel Advice concluded that by purchasing the wage claims
from the employees, the factor became responsible for paying the wages, for withholding and paying
employment taxes, and for reporting the wage payments. For employment tax purposes, however, the amount
of wages was the amount paid by the factor to the employees, not the amount they should have been paid by
their employer.

Code Sec. 3402

Income Tax Collected at Source

IRS has alerted taxpayers to illegal scheme whereby employers fail to withhold income tax or employment tax
from wage payments under guise of arguments that have been universally rejected as frivolous by courts.
Steps taxpayers can take when employer refuses to issue W-2 were provided, along with admonition that in
cases where employer refused to withhold or pay over employment taxes, taxpayer has obligation to pay
income tax and their share of FICA tax. (IR 2001-18).The agency described such conduct as illegal. IRS said
these schemes are based on a faulty interpretation of the Internal Revenue Code that wages are not a
"source" of income and that the definition of "sources of income" does not apply to U.S. individuals. "We
don't want to see taxpayers caught in a bind because employers fail to properly withhold taxes," said IRS
Commissioner Charles Rossotti. Those with concerns that an employer is improperly failing to withhold
federal income and employment taxes should call IRS at 800-829-1040.

Code Sec. 6053

Reporting of Tips.

Final regs were issued concerning use of electronic reporting systems for tipped employees to substantiate
gratuities. (TD 8910 , United States Tax Reporter ¶ 86,506 )

Reporting of tips -- Tip Rate Determination/Educational Program. IRS finalized earlier Tip Rate
Determination Agreements (TRDA) and Tip Reporting Alternative Commitment (TRAC) agreements which
had been proposed for use in various industries in Ann 2000-19, Ann 2000-20, Ann 2000-21 , Ann 2000-22,
and Ann 2000-23. Substance of revised agreements was unchanged from proposed agreements. (Ann 2001-1,
2001-2 IRB )

Code Sec. 6302

Final Regs Issued on Small Business Employment Tax Deposit Liberalization

TD 8946; Reg § 31.6302-1(f)(4)

IRS has issued final regs increasing the de minimis exception to the monthly employment tax deposit
requirement from $1,000 to $2,500, effective Jan. 1, 2001. The final regs adopt temporary regs issued late last
year. Under the final regs, if the total amount of accumulated employment taxes for a post-2000 return period
is less than $2,500 and it is fully deposited or remitted with a timely filed return for the return period, the
amount will be treated as timely deposited. (Reg § 31.6302-1(f)(4)) The eased rule applies both for quarterly
and annual return periods beginning after 2000.

Observation: Thus, only employers with employment taxes (FICA taxes and withheld income taxes) of
$2,500 or more in an applicable (quarterly or annual) return period must deposit taxes on a monthly or more
frequent schedule.

Code Sec. 6501

Limitations Periods on Assessment -- Employment Taxes -- Fraud -- Proof.

3-year limitations period barred IRS from assessing additional employment taxes against sole proprietor: IRS
didn't clearly and convincingly show that underpayments arising from taxpayer's failure to report cash
payments to allegedly misclassified workers were attributable to fraud, which involved same elements in
employment tax context as in income, estate and gift tax contexts. Taxpayer's testimony about his lack of
knowledge of misreporting and return's inaccuracies was highly credible and supported by accountants'
testimonies to his honesty; IRS agent admitted taxpayer cooperated throughout exam; and cash payment
arrangement that taxpayer agreed to only at certain workers' behest and with stipulation that Forms 1099
would be issued wasn't scheme to defraud IRS. (U.R. Neely v. Commissioner, 116 TC No. 8 )

Code Sec. 6651

Penalties -- Failure to Timely File, Deposit and Pay Employment Taxes

Magistrate judge improperly upheld penalties for failure to timely file, deposit and pay employment taxes
against taxpayer-law corp. with respect to wages of attorney/officer who it erroneously treated as
independent contractor: court's conclusion, without considering factual nature of attorney's physical and
mental problems, that such personal problems couldn't constitute reasonable cause was erroneous. Also, court
erroneously relied on bright line rule that financial difficulties couldn't as matter of law be reasonable cause
rather than considering nature of financial strain and payment's impact on corp.'s survival; and erroneously
rejected taxpayer's claimed reliance on accountant without 1st determining if taxpayer merely relied on
accountant's advice or delegated its payment duty to him as agent. (Van Camp Bennion v. U.S., CA 9, 87
AFTR 2d 2001-2408 )

Code Sec. 6672

100% Responsible Person; Willfulness

Taxpayer was entitled to refund of amount paid toward assessed Code Sec. 6672 penalty: although facts that
taxpayer was 20% owner of family-owned plumbing co., had check-signing authority and held considerable
influence over children's management of business showed he was responsible person for co.'s unpaid
withholding taxes, taxpayer's failure to pay wasn't willful where he didn't control co.'s finances, and, based on
his history of loaning co. money whenever asked, didn't know of taxes' nonpayment. (Pitts v. U.S., DC AZ, 87
AFTR 2d 2001-2054 )
100% Penalty-- Notice.

District court properly upheld Code Sec. 6672 penalty against corp. pres./CEO: corp.'s failure to file return for
or make list of employment taxes didn't affect IRS's authority to assess penalty; Reg § 301.6201-1-based
argument challenging delegation of assessment authority to district director was meritless; and fact that
assessment notices, which explained how to pay unchallenged penalty, also included payment demand didn't
disqualify them as proper notices "preced[ing] any notice and demand of penalty" under Code Sec.
6672(b)(2). Also, admission of assessment certificate plus attested, sealed Form 2866, Certificate of Official
Record was proper, regardless of assessment certificate's potential date error; and taxpayer didn't show that
date was in fact erroneous or that assessment wasn't made within limitations period. (U.S. v. Bisbee, CA 8, 87
AFTR 2d 2001-1611 )

100% Penalty -- Willfulness

District court properly upheld corp. pres./CEO/shareholder's Code Sec. 6672 penalty liability on summary
judgment: taxpayer was responsible person where he met with customers and suppliers, had hiring/firing
authority, made key decisions as to withholding taxes, and had power over and check-signing authority on
corp.'s accounts. Also, taxpayer acted willfully where he knew taxes were unpaid but directed that available
funds be applied to payroll; and claim that he believed that Connecticut law required him to pay payroll or be
held criminally liable was rejected. (Powers v. U.S., CA 2, 87 AFTR 2d 2001-1419 )

100% Penalty -- Exercised Authority.

Due to the appearance of an "intra-circuit conflict" with other precedent of the First Circuit, IRS won't
acquiesce in part of holding in Vinick v U.S., 85 AFTR 2d 2000-1177 , 205 F3d 1, reversing and remanding
District Court, which was on remand from (CA1;1997) 79 AFTR 2d 97-1905 , 110 F2d 168, which affirmed
in part, and reversed and remanded in part, (DC MA;1996) 77 AFTR 2d 96-1995, that concluded that "actual,
exercised authority" over co.'s financial affairs was necessary to find that officer was personally responsible
under Code Sec. 6672. IRS noted that two "undisturbed" First Circuit cases held to the contrary, and
concluded that they, not Vinick, were the proper statement of law in the circuit. (Action on Decision
2001-002, 02/28/2001)

100% Penalty -- Willfulness

Corp. pres.'s Code Sec. 6672 penalty liability was upheld on partial summary judgment. Taxpayer was
responsible person for bankrupt corp.'s unpaid trust fund taxes where he had authority over corp.'s daily
operations and finances, personally guaranteed corp. loan to pay taxes and signed corp. checks; his alleged
nonexercise of authority for certain periods was irrelevant; cases involving individuals uninvolved in daily
management or check signing were distinguishable; and taxpayer didn't show assessments were erroneous.
Also, taxpayer's failure to pay over taxes was willful where he was put on notice of risk taxes wouldn't be
paid by earlier meeting with IRS; decided to pay other creditors over IRS in reckless disregard of that known
risk; and didn't show funds were unavailable for periods at issue. (U.S. v. Bruno, et al., DC IL, 86 AFTR 2d
2000-6840 )