“Tax Briefs” by Frank C. Carnahan
Application of FICA tax to payments made to involuntarily terminated workers
In February of 2010, a federal district court ruled in U.S. v. Quality Stores, Inc., 105 AFTR 2d 2010-1110 (DC MI 2/23/2010), that payments made to involuntarily terminated workers by a company going out of business should not be classified as “wages” for FICA tax purposes. The IRS is continuing to follow an older decision by the Court of Appeals for the Federal Circuit that held that payments made to involuntarily terminated workers should be classified as “wages” for FICA tax purposes.
Taxpayers should consider filing a protective claim to preserve their opportunity to receive a refund if the courts were ultimately to decide that severance payments aren’t subject to FICA tax. Protective refund claims are filed to preserve a taxpayer’s right to claim a refund when the taxpayer’s right to the refund is contingent on future events (e.g., future litigation), and may not be determinable until after the statute of limitations expires. Without a protective refund claim, taxpayers will only have a three year statute of limitations in which to seek a refund.
Joint country audits of multinational corporations
IRS Commissioner Douglas H. Shulman said in prepared remarks delivered on June 8 before the OECD (the Organization for Economic Cooperation and Development)/BIAC (the Business and Industry Advisory Committee to the OECD) that the groundwork was being prepared for joint country audits of multinational corporations.
Spouses must request innocent spouse relief within 2 years of first collection activity
The Court of Appeals for the Seventh Circuit reversed a Tax Court decision invalidating Reg. § 1.6015-5(b)(1), which provides that a spouse must request equitable relief under Code Sec. 6015(f ) no later than two years from the first collection activity against the spouse. Lanz v. Comm., 105 AFTR 2d 2010-2780 (7th Cir. 6/08/2010). Spouses must request relief within two years of the first collection activity.
IRS announced the implementation of the Quality Examination Process (QEP)
The new process is to be “a systematic approach for engaging and involving Large and Mid-Size Business (LMSB) taxpayers in the tax examination process, from the earliest planning stages through resolution of all issues,” replacing IRS’s Audit Planning Process. The LMSB Guide for Quality Examinations in Internal Revenue Manual § 4.46 is being updated to reflect this change. In the Pub, IRS explains that the examination can generally be divided into 3 phases: planning, execution, and resolution. See: http://www.irs.gov/businesses/article/0,,id=224139,00.html
Tax lien without filed notice of tax lien continues to apply to excluded property after chapter 7 bankruptcy discharge
The Tax Court in Vance L. Wadleigh v. Commissioner, U.S. Tax Court, CCH Dec. 58,243, 134 T.C. No. 14, (Jun. 15, 2010), found that the § 6321 tax lien continued in effect against taxpayer’s pension excluded from his chapter 7 bankruptcy estate. A bankruptcy discharge extinguishes only one mode of enforcing a claim, an action against the debtor in personam, leaving intact an action against the debtor in rem (against the property). Title 11 U.S.C. § 522 allows a debtor to exempt from his bankruptcy estate a personal residence, a car, certain property used in a trade or business, retirement funds, and certain other assets, to ensure that the debtor has at least some property with which to make a fresh start. Exempt property initially is part of the debtor’s bankruptcy estate, but is removed from the bankruptcy estate and is therefore unavailable to satisfy creditors’ claims. Property that is exempt from the bankruptcy estate is not available to satisfy prepetition debts during or after the bankruptcy, except debts secured by liens that are not avoided in the bankruptcy and § 6321 liens with respect to which a notice of federal tax lien (NFTL) has been filed. Unlike exempt property, which is part of a debtor’s bankruptcy estate but unavailable to satisfy creditors’ claims, excluded property never becomes part of the bankruptcy estate and is therefore never subject to the bankruptcy trustee’s or the debtor’s power to avoid the § 6321 lien. Thus, if a § 6321 lien on excluded property survives the bankruptcy if it has not expired or become unenforceable under § 6322.