Tax, Trusts & Estates Law Monitor : Estate Planning Lawyer & Attorney : Cole Schotz Meisel Forman & Leonard Law Firm : NJ, Mid-Atlantic Gift Tax & Trust Issues

This post should provide fodder for all the tax reformers out there who want to simplify the tax code.  Employers, employees take note:  the IRS has simplified the recordkeeping requirements for employer-provided cell phones!  Uh, sort of.

Let us explain:  the Internal Revenue Code defines gross income as all income from whatever source derived.  Gross income of course includes things like compensation for services, but it also includes fringe benefits received by employees from their employers, such as car services, nonqualified moving expenses, etc.

There are exceptions to the fringe benefit rule.  For example, Code §132(a)(3) provides that gross income does not include any fringe benefit which qualifies as a “working condition fringe,” that is, a work-related benefit that would be deductible if the employee had to pay for it.  Code §132(a)(4) provides that gross income does not include any fringe benefit which qualifies as a “de minimis fringe,” that is, property or a service so small as to make accounting for it unreasonable or administratively impracticable.  There are substantiation requirements for these fringe benefits.  In addition, there are “heightened substantiation rules” for property specifically listed by Congress because it is subject to “abuse.” 

Prior to the Small Business Jobs Act of 2010 (the “Act”), employer-provided cell phones were listed property and subject to the aforementioned heightened substantiation rules.  But the Act, among other things, removed employer-provided cell phones from the heightened substantiation list. 

The IRS has now come out with its own guidance, clarifying its position on whether employer-provided cell phones are taxable fringe benefits.  The IRS takes the following position:  although an employee’s use of an employer-provided cell phone is a fringe benefit and generally includible in income, if the employee’s use of the phone is for business purposes such that it would be deductible by the employer, then the business use of the cell phone qualifies as a working condition fringe and is excludible from the employee’s income.  Furthermore, if an employer provides a cell phone to an employee for business reasons (the “business reason cell phone”), then the employee’s use of the cell phone for personal calls is a de minimis fringe and also is excludible from income.  Notice 2011-72.  Employers no longer have to record which of the employees’ calls are business and which are personal.  Employees no longer have to report the cost of those personal calls (paid by the employer) as income. 

On the other hand, if the employer provides the cell phone to the employee only to promote morale or goodwill (the “non-business reason cell phone”), then the value of the phone and service is a taxable fringe benefit. 

So, are the rules simplified, still overly complex, or both?  Is the IRS’ position on employer-provided cell phones sound tax policy that gets to the core principle of taxing income in any form, or does it represent everything that is wrong with America today (is this really what Congress does)?  We leave these questions for our readers to answer.

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The New York Department of Taxation and Finance recently announced that it will follow the IRS and eliminate the two year time limit for innocent spouse equitable relief claims. 

For federal tax law purposes, a taxpayer can request innocent spouse relief by any of three methods:  (1) making a timely election within two years from the date the IRS has begun collection activities (and meeting other requirements), (2) electing to allocate a tax deficiency in proportion to each spouse’s contribution to the deficiency, or (3) by petitioning the IRS for “equitable relief” when relief is not available under the first two alternatives if it would be inequitable under the circumstances to hold the spouse liable. 

Pursuant to 2002 regulations, an innocent spouse equitable relief claim (the third method above) had to be made within two years of the date that the IRS began collection activities.  But in July, 2011, the IRS repealed this requirement.  Notice 2011-70. 

New York has similar innocent spouse rules.  New York Tax Law §654.  On September 27, 2011, New York announced that it will follow the IRS’ lead and also will eliminate the two year time limit on innocent spouse equitable relief claims.  TSB-M-11(11)I.  This change may apply to pending and past innocent spouse claims as well.

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Estate planners frequently prepare both life insurance trusts and family limited partnerships.  These planning tools are similar in that the client has ongoing administrative and management jobs after the legal work has been completed.  With life insurance trusts, clients typically have to manage a new bank account for the trust, prepare and send proper Crummey notices, keep trust records, etc.  With family limited partnerships, clients have to make investment and distribution decisions, and manage the partnership as a legitimate business.  Lawyers always are concerned about whether a client will properly administer the planning after the legal work has been completed.

In Estate of Turner, a recent Tax Court case (TC Memo 2011-209), the IRS asserted two arguments – (1) that the decedent had not managed his family limited partnership as a legitimate business, and therefore all of the partnership assets were includible in his estate under Code §2036, and (2) that the decedent’s faulty annual exclusion gifts to his insurance trust failed to qualify for the $13,000 per person per year annual exclusion. 

The court found for the IRS on the Code §2036 claim, finding that there was no bargaining among the family members in creating the family partnership, that the decedent commingled personal and partnership funds when he used partnership funds to make gifts, pay premiums on life insurance policies and pay legal fees, that the partnership was not funded for at least eight months following the formation of the entity, and that the decedent treated the partnership as his own at-will investment account. 

However, the court found for the estate on the issue of annual exclusion gifts.  Even though the decedent had paid the insurance premiums from his own funds rather than gifting funds to the trust (which the trustee could then use to pay premiums), and even though no Crummey notices had been sent to the trust beneficiaries, the court found that the premium payments were indirect gifts that qualified as “present interest” gifts for purposes of the annual gift tax exclusion. 

Clients who have struggled to follow the administrative requirements of an insurance trust to the letter (and their advisors who have explained it to them) can take heart from the second part of the Tax Court’s opinion in this case.  Like the Crummey and Cristofani cases before it, Turner represents another taxpayer victory on the issue of present interest gifts to insurance trusts.
 

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On September 21, 2011 the IRS announced a new program to permit taxpayers to voluntarily reclassify workers as employees rather than independent contractors for employment tax purposes with minimal tax consequences for prior years.  The new program is called the Voluntary Classification Settlement Program (“VCSP”) and permits employers to make the change with minimal federal tax consequences.  To be eligible, an applicant must meet the following criteria:

• Consistently have treated the workers in the past as non-employees.
• Have filed all required Forms 1099 for the workers for the previous 3 years.
• Not currently be under audit or investigation by the IRS, the Department of Labor or any State agency concerning the classification of these workers.

In exchange for prospectively treating the workers as employees for future tax periods, the taxpayer will only have to pay an amount equal to 10% of the employment taxes that may have been due related to compensation paid to the workers for the most recent tax year.  This typically equals just over 1% of compensation. No interest or penalties will be due on the liability and the taxpayer will not be subject to an employment tax audit with respect to the worker classification issue for prior years.  Taxpayers participating in the VCSP must agree to extend the period of limitations on assessment of employment taxes for 3 years for the first, second and third calendar years beginning after the date on which the taxpayer has agreed to begin treating the workers as employees. 

Before participating in the program other issues need to be considered including, without limitation employee benefits, retirement plans, wage and hour and state tax considerations.

You should consult a qualified professional with respect to these issues.
 

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