Archives for June 2016

This is a tale of two taxpayers being audited by the IRS for non-cash charitable contributions.  Let’s see how their audit exams went.

Taxpayer A (let’s call her Mary) made $3,000 worth of contributions to Goodwill, the Salvation Army, Wounded Warriors, and other non-profit organizations. Before delivering these goods to these charities, Mary always [Read more…] about TALE OF TWO TAXPAYERS AND NON CASH CHARITABLE CONTRIBUTIONS

Some employers allow employees to defer current earnings until their retirement years. There are numerous rules regarding the taxation of deferred compensation which may include how long the compensation was delayed (the two and a half month rule) and whether the deferred compensation was paid from a qualified or a non-qualified plan.

While the employee likes the sound of deferring income until their retirement years when their tax rate will be less than what it is today (which is not necessarily true), often the taxation of the deferred compensation is not understood.

Let’s look at the 2016 U.S. Court of Appeals case of Christine Peterson who was a successful Mary Kay cosmetics salesperson. Mary Kay salespeople are independent contractors, and all agreements they enter into emphasize that status. Ms. Peterson had reached the level of national sales director (NSD) before she retired in 2009. NSDs are eligible to participate in a Mary Kay program called the Family Program, under which participating NSDs receive payments after they retire based on a reduced percentage of the sales commissions they received while they were working for the company, if they agree to retire at age 65. Peterson also received payments from another program (the Futures Program) that pays a percentage of foreign sales commissions.

In 2009, the year at issue in the case, Peterson did not pay self-employment tax on payments that she received under either plan. The IRS found [Read more…] about DEFERRED COMPENSATION – HOW IS IT TAXED?

Ronald Weiszmann (Weiszmann v. Commissioner, U.S. Tax Court) graduated from college as an engineer. Not wishing to be employed as an engineer, Mr. Weiszmann took a job with Marathon Oil Company as a patent trainee with the understanding that he would be required to attend law school on a full-time basis while working for Marathon part time during most of the school year and full time during vacation periods. His agreement with Marathon was that upon graduation he would no longer work as a patent trainee, but that he would be promoted to a patent attorney with Marathon or that he would seek employment outside of Marathon if Marathon had no job openings as a patent attorney. After graduating from law school, Mr. Weiszmann obtained employment with Chevron Research Company as a patent attorney.

As a graduate student, Weiszmann [Read more…] about EDUCATION EXPENSES THAT ARE NOT TAX DEDUCTIBLE