Tax Issues Concerning Independent Contractors and Loan-Out Corporations
Part 1: Independent Contractor
A critical question faced by a business is whether the business is obligated to withhold and pay over employment taxes to the IRS on wages it pays to its workers. This liability hinges upon whether the workers are properly classified as employees or as independent contractors. For this purpose, classification of a worker as an employee or independent contractor is subject to the “common law test” set out in Regs. §31.3401 (c)-1 (income tax withholdings), Regs. §31.3121 (d) 1 (FICA) and Regs. §31.3306 (i)-1 (FUTA). This test generally provides that the relationship of employer and employee exists when the person for whom services are performed has the right to control and direct the individual who performs the services, not only as to the result to be accomplished by the work but also as to the details and means by which that result is accomplished. It is not necessarily that the employer actually direct or control the manner in which the services are performed; it is sufficient if he or she has the right to do so.
Tax Issues Concerning Independent Contractors and Loan-Out Corporations
Part 2: Loan-Out Corporations
Historically, a number of benefits were available to loan-out corporations that were not available to individuals, including greater deductible pension plan contributions, ability to defer income through use of a fiscal year, deduction of more fringe benefits such as medical insurance, and lower corporate tax rates. Legislation over recent years has dramatically narrowed these benefits. Nevertheless, in certain circumstances, a loan-out corporation may still offer significant benefits.
Microsoft Loses Big In The Ninth Circuit And The Employee – Independent Contractor Controversy Climbs To New Troubling Heights
The tension between the private right of employers and workers to define their relationship by contract and the need to collect tax revenues and protect workers from overbearing employers … has been taken to new, troubling heights by a series of cases in the Ninth Circuit the Microsoft Corporation against workers it employed as independent contractors.
Independent Contractors, Employees, the Entertainment Industry and the IRS Head for Hollywood
By Paul Husband, Marilyn Barrett, and Mitchell R. Miller
The Internal Revenue Service (IRS) recently began devoting time and attention to tax compliance issues pertinent to the entertainment industry, an industry unquestionably unique in many ways. A Market Segment Specialization Program (MSSP) Entertainment Industry Group has been organized by the Internal Revenue Service. Its Branch Chief, Pamela Christensen, said to an entertainment industry audience in December 1992: “The entertainment industry is more unique than I have seen in 18 years [with the Internal Revenue Service].” Apparently, there is truth in the old song lyric: “There’s no business like show business.”
Independent Contractor/Employee Classification in the Entertainment Industry: The Old, The New and The Continuing Uncertainty
A critical question faced by any business, including those in the entertainment industry, is whether the business is obligated to withhold and pay over employment taxes to the Internal Revenue Service on wages it pays to its workers. This determination hinges upon whether the workers are properly classified as employees or as independent contractors. The importance of this issue cannot be overstated.
Has the Insanity Stopped? IRS Partially Reverses Punitive Policy Denying Deductibility of Clean-up Costs – But Questions Remain
The need for clean up of hazardous waste is painfully apparent and politicians in recent years have made this a priority of their public agenda. Former President Bush wanted to be known as the “environmental” president. President Clinton referenced the need for environmental protection in his 1994 State of the Union address. Despite the overwhelming support for policies to encourage clean up of hazardous waste, the Internal Revenue Service (IRS) adopted a position that penalizes taxpayers who clean up hazardous waste by denying deduction of their clean up costs for federal income tax purposes, and encourages taxpayers to contest their liability instead, a glaring example of the IRS’s willingness to forsake critical social and health needs in order to maximize tax revenues.
U.S. Supreme Court Upholds Income Tax Exemption for Local Bonds
Department of Revenue v Davis (2008) _US,_ 170 L ED 2nd 685, 128 S Ct 1801
In this decision, issued May 19, 2008, the U.S. Supreme Court considered whether the State of Kentucky is allowed to exempt interest on bonds issued by it or its political subdivisions from Kentucky state income tax, even though interest on out of state municipal bonds is not exempt.
The case explores the application of the so- called dormant commerce clause – a legal doctrine that the U.S. Supreme Court has inferred from the commerce clause – to such state tax exemptions.
The Taxpayer Relief Act of 1997 (aka The Tax Lawyer Relief Act of 1997)
Over the last year there has been considerable discussion over the need to reduce the overwhelming complexity of the Internal Revenue Code. It is in this environment that Congress passed the most complex tax legislation since the Tax Reform Act of 1986. The Taxpayer Relief Act of 1997 (Pub L 105-34 111 Stat _) provides tax relief in five areas: a $500 child credit, expanded IRAs, educational tax incentives, estate tax relief and a reduction in the capital gains tax rate for individuals. However, it increases the tax burden on others. Because the Act is more than 900 pages long, rather than summarize all provisions, this article will succinctly describe the most significant developments that affect business.
Federal Taxation: Property Tax
The Supreme Court holds that the Railroad Revitalization and Regulatory Reform Act permits railroads to challenge state methods for valuing railroad property.
Federal Taxation: Protective Refund Claims
Plain language of 26 USC §§ 6511 and 7422 (a) requires a taxpayer seeking a refund for a tax assessed in violation of the export clause, just as for any other unlawfully assessed tax, to file a timely administrative refund claim before bringing suit against the government.
Federal Taxation: Offers in Compromise
IRS did not abuse its discretion by rejecting taxpayers’ $7,500 offer in compromise of $104,000 interest owed on tax liabilities.
Federal Taxation: Employment Taxes
Ability to pay not necessary to uphold criminal conviction for failure to pay payroll taxes.
Federal Taxation: Loan-Out Corporations
Ninth Circuit rides to the rescue as the IRS continues its assault on loan-out corporations.
Federal Taxation: Stock Options 1
Ninth Circuit holds that founders of emerging company must pay ordinary income tax on value of stock covered by stock options when options were sold as part of company’s acquisition, because options had no ascertainable value when issued.
Federal Taxation: Stock Options 2
Alternative minimum tax capital losses are subject to the limitation of IRC §§ 172 (d) and 1211 (b) and are not deductible as alternative tax net operating losses under IRC § 56 (d).
Federal Taxation – Like-Kinded Exchanges
Substance prevails over form in the like-kind exchange arena.
Teruya Bros., Ltd v Commissioner (9th Cir 2009) 580 F3d 1038.
Teruya Brothers is a rare decision that applies IRC § 1030 (f) (4) and disallowed like-kind exchange treatment even though the technical requirements were satisfied.
Choosing The Right Form of Entity In A World Of Changing Tax Rates, Sunset Provisions And Globalization
By Marilyn Barrett and Mark Saulino
Primary considerations in choosing form of entity, different types of entities, federal classifications and corporate characteristics.
Section 482 and Nonrecognition Transfers
Section 482 of the Internal Revenue Code (the “Code”) authorizes the Commissioner of Internal Revenue (the Commissioner”) to reallocate income among commonly controlled entities in order to prevent tax avoidance or where necessary to clearly reflect income. Historically, section 482 and its predecessors frequently have been applied to transactions otherwise within a nonrecognition provision of the Code. In this regard, Treas. Reg. section 1.482-1 (d) (5) expressly provides that, when necessary to prevent the avoidance of taxes or to clearly reflect income, section 482 may be applied in circumstances described in sections of the Code (such as section 351) which otherwise provide for the nonrecognition of gain or loss.
California Sales Tax
WHEN IS THE SALE OF A BUSINESS SUBJECT TO SALES TAX LIKE AN OVER-THE-COUNTER RETAIL SALE? IN CALIFORNIA, MOST OF THE TIME
When is a sale of a business deemed a retail sale in California and subject to sales tax? Marilyn discusses the broad application of the sales tax laws in California and how they impact not only over-the-counter sales but sales of an entire business.