Case #1
Facts
Tracey is employed as a salesperson by a renowned company that supplies pharmaceuticals. The region she handles is very vast and thus she uses the company automobile to reach out to the customers. It takes her over 16-19 hours every day and sometimes it is required to be done a couple of times a week. While on such trips, she usually pulls over to a selected area like a rest point to take a brief nap in her automobile.
Issue
The issue which arises from this fact is the cost of meals Tracy purchased while on her usual rounds deductible?
Conclusion
No, the cost of meals Tracy purchased while on her usual rounds is not deductible.
Analysis
According to Section 162, (2) of the Internal Revenue Code, any traveling expense incurred while an employee is away from home is subjected to taxation (Davis, 2011). As per the facts on the table, there is no provision by the company which requires that Tracey rests while executing her duties. This implies that the overnight rule is not applicable in this particular case. In addition to this fact, according to the situation issued, Tracey was not away from her home as Sec. 162(a) (2) fully provides. The Supreme Court seems to have constricted the issue to business trips that only require a brief moment of rest, just like in Tracey’s case. Based on this assumption, this should not be the case.
Case #2
Facts
Mark is a captain of a certain boat that ferries tourists on their trip from Seattle to Victoria and back. Every round takes 15-17 hours, with a provision of 6-7 layover hours on arrival in Victoria. It is within this layover moment that Mark takes a 4-hour nap in the ferryboat
Issue
Is the cost of meals Mark purchased while on his usual rounds deductible?
Conclusion
Yes, the cost of meals Mark purchased while on his usual rounds is deductible.
Analysis
Code 162(a) (2) provides rest and sleep as a standard rule which gauges if a taxpayer is “away from home” (Davis, 2011). When applying this to Mark’s case, we come to a conclusion that he is not warranted by his work/employer to be absent from his home overnight. Secondly, Mark’s nature of work requires that he get some sleep when he is far away from his home and when he is released. This rest is necessary for him to be able to properly dispense his duties. This is as per the stipulation that all expenditures by the employee which comprise expenses that are incidental like tips for sleep or rest taking purposes are deductible. Mark can hence deduct his meals expenses that he claimed are between every trip.
Case #3
Facts
According to the issue of Ralph and Cindy who own TidyCo. Inc, as per my records, they have a negative accumulated and current E&P, as well as a substantial basis of the stock which amounts to $300,000 (Anonymous, 2009). The Internal Revenue Service (IRS) has revealed that the two have $200,000 of income that is unaccounted for both by the company and IRS. This amount is said to have been hidden in shoe boxes and taken to their home instead of being deposited to the bank account of the company’s rules. Therefore, the Internal Revenue Service is planning to take them to court and make criminal charges against them for allegedly defrauding the government (Anonymous, 2009).
Issue
Do these facts have any dire consequences related to the fraudulent activities, as well as evasion charges the Internal Revenue Service is seeking to file in court against the two?
Conclusion
Yes, this issue has dire consequences related to fraudulent activities. However, this issue appears to be hanging on the fence, as sources below reveal, two separate but very similar scenarios yielded two quite different conclusions.
Analysis
In reality, Internal Revenue Service has not substantially proved the diversion of TidyCo. Inc.’s $200,000 by the Edmonds is against the law, as Section 7201 of the Internal Revenue Code stipulates. The company, in both its current E&P and accumulated accounts, has a negative E&P that was not reported as a constructive dividend (Davis, 2011). The IRS thus can not allege that the two have intentions to evade payment of taxes. Besides, the same exercise of tax payment is not yet due.
As per the authorities, however, there is a disparity in whether these affidavits are substantial to stir up an argument against tax evasion charges that are pursuant to Sec. 7201 (Anonymous, 2009). Therefore, such income is only taxable to the extent that the company has E&P. In addition, because no tax was due and no given income subjective to taxation was reported, then no tax evasion charges should be held (Anonymous, 2009). The court argued that there must be some evidence that proves beyond reasonable doubt that there willingness and incident was affirming indeed there was an attempt to evade taxes. As opposed to this, in the William’s case, the U.S. court of appeal purported that the government ought not to prove that the company’s distributions as per the issue were subject to taxation. The idea that the shareholder has a control over the company’s funds is sufficient to give the way for the tax evasion charges to hold. What is a controversy?
In the current economic climate of the United States, publicly traded companies normally pay dividends on a regular basis and in a fixed manner, but they always declare availability of dividends for members at any given time. Such abrupt dividends are referred to as special dividends, so called to differentiate them from the regular dividends (Dividends explained, 2013). On the other hand, closely held corporations issue and align dividends based on the activities undertaken by each member. This makes such dividends to be considered as expenses that are pre-taxed.
No matter what the type of corporation is, dividends are paid in various forms. The most common ones are:
- Cash dividends; it is the most preferred form of dividend payment. The shareholders receive them to inform of currency and hence they are considered as income to the recipient. As such, the shareholders are taxed during the year in which such payments are made. The approach is simple: a given amount is allocated to every shareholder by a member. This means that the more shares a shareholder owns, the more s/he earns.
- Stock dividends; in this case, extra shares of the stock are distributed to shareholders (Dividends explained, 2013). As a result, the total share a member owns increases.
- Interim dividends; when using this method, shareholders receive their dividends just before the Annual General Meeting of the company. In most cases, such dividends come together with financial statements of the corporation or company.
In most cases, closely held corporations are managed by family members. These entities have a nature whereby only few persons are both crucial employees and stakeholders and thus, providing keen scrutiny by IRS as far as compensating members reasonably is concerned (Englebrecht, Mitchell, & Martinson, 1998). This makes them consider the business as a family property. Dividend payment in such cases becomes rare as all members have a sense of belonging and thus work towards strengthening the family’s financial base (Merino, 1981).
When it comes to taxation, closely held corporations do the following to ensure that IRS does not reclassify the compensation they do to their members: all members’ salaries are within the bracket of provisions of the industry standards, the compensation of members is based on a fraction of employee’s gross income, and finally, ensure that overall salaries are not too large to do away with taxable income. There is generally no specific formula used in order to determine the amount of compensation awarded to employees (Theisen & Kleiman, 1991). On the other hand, dividends in publicly-traded companies are solely announced by the board of directors. Resolutions by shareholders concerning dividends are highly forbidden.
To minimize double or over taxation in publicly-held companies, most of the dividends are ploughed back to the business.
References
Anonymous. (2009). Internal Revenue Service. Standard Federal Tax Reports, 96(12), 7.
Davis, G.T. (2011). S Corporation Reasonable Compensation. The Tax Adviser, 42(5), 308.
Dividends explained (2013). Money City Direct. Web.
Englebrecht, T.D., Mitchell, C., & Martinson, O. (1998). What is reasonable compensation in closely held corporations? Management Accounting, 79(9), 38.
Merino, B.D. (1981). United States Government Internal Revenue Service Field Agents’ Income Tax Auditing Manual. Journal of Accountancy (pre-1986), 151(6), 114.
Theisen, B.A., & Kleiman, R.T. (1991). Employee Stock Ownership Plans: The Right Choice for Closely Held Corporations? The Tax Adviser, 22(1), 40.