Money Matters: IRS delays 2013 tax-filing season due to shutdown

 James W. Rahmlow, The Daily Record Newswire

For those who feel that the recent U.S. government shutdown had no effect on the economy and the government, please be advised that the IRS announced last week on its website that the 2014 filing season will be delayed by approximately one to two weeks.

According to the IRS, the government closure came during the “peak period for preparing IRS systems for the 2014 filing season. The IRS indicated that there are over 50 IRS systems needed to handle the processing of nearly 150 million tax returns and that while updating these systems is a year-round process, the majority of the work begins and is completed during the fall of each year.

The original start date of the 2014 filing season was Jan. 21, 2014. With the delay, the IRS will not start accepting and processing 2013 individual tax returns any earlier than Jan. 28 and any later than Feb. 4. For those who feel that filing paper returns will expedite the process, the IRS has indicated that it will not process paper returns before the opening of the filing season and in fact, taxpayers will receive their refunds much faster if they use e-file with direct deposit.

Value of gift may be reduced by their promise to pay related estate tax

In Steinberg, 141 TC No. 8, the Tax Court has concluded that the value of a mother’s gift for tax purposes can be reduced by the value of the donees’ promises to pay the estate tax that could result. In the case at hand, an 89 year old mother entered into a net gift agreement with her four adult daughters.  The $77.4 million that was transferred consisted of cash and securities.

In conjunction with the transfer, the donee daughters agreed to pay any federal gift tax liability for the gifts and also agreed to pay any federal or state estate tax that might be imposed under Code Sec. 2035(b), that is if the donor died within three years of the gifts. The Tax Court noted that the donees’ agreement to pay the donor’s gift tax liability clearly had value since it relieved the donor of an immediate and definite liability.

Also, the court found that the donees’ assumption of the potential estate tax could have value so as to reduce the value of the gift. The donees’ assumption of the potential estate tax liability may provide a tangible benefit to the donor’s estate and thus could meet the requirements of the estate depletion theory.

November 2013 AFR rates issued

In Revenue Ruling 2013-22, the IRS issued its various prescribed rates for federal income tax purposes for November  2013. Below is a summary of the monthly Applicable Federal Rates and the monthly Adjusted Applicable Federal Rates.

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Short Mid Long

Term Term Term

Applicable Federal Rate

0.27% 1.71% 3.32%

Adjusted Applicable 

Federal Rate

0.27% 1.71% 3.32%

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Supreme Court agrees to resolve dispute over FICA treatment of severance pay

Following the Sixth Circuit Court of Appeals decision In Quality Stores. 2012-2 USTC, the U.S. Supreme Court has agreed to take up the case to resolve conflicting treatments in the circuit courts. The case revolves around the issue of whether severance pay is subject to FICA. With the many downsizings and closings over the last few years, the amount of wages either subject to or not subject to FICA is substantial, both on the employer’s and the employee’s side. In fact, in the government’s petition to the Supreme Court, it emphasized that there are thousands of claims and cases worth well in excess of $1 billion currently in the lower courts.

Embattled IRS employee retires

A key former official in the IRS Exempt Organizations division who refused to testify before a House Ways and Means committee investigating the IRS oversight of exempt organizations has retired.

Lois Lerner, who previously had been on paid leave during the review of her employment by an internal review board bore much of the heat for the Exempt Organizations Division (EO) and its policies for processing Code Section 501(c )(4) applications for tax exempt status.

House hearings continue, with IRS Principal Deputy Commissioner Daniel Werfel indicating that the IRS has issued guidelines and instructions to EO personnel requiring that screening assessments be based upon activity, not names or labels. Werfel also indicated that the IRS has strengthened checks and balances in instances where additional detailed information is needed to process an application.

Religious school benefit plans are considered church plans

While many benefit plans must meet certain requirements of the Internal Revenue Code and ERISA in order to become and remain qualified, church-run plans usually are exempt from these requirements under Code Sec. 414(c ).

In a recent ruling, the IRS concluded that the same logic can be applied to plans maintained by a church-run school. In the situation at hand, a church-run school had a tax-sheltered annuity plan and a medical benefits plan. Ordinarily, school run plans are not exempt; however, since the school was a nonprofit school founded by a religious congregation and established as a church school, the school was considered to be associated with the Church under Code Sec. 414(e )(3)(D) and thus the employees were deemed employees of the church.

In making its determination, the IRS referenced the common religious bonds between the school and the church as well as the indirect control of the school by the church through the religious congregation.

Payments received by taxpayer were not excludable from income due to physical sickness

In a recent case, the Tax Court concluded that payments made to a taxpayer to settle the taxpayer’s employment discrimination case were not excludable from gross income as payments for personal injury or sickness even though the taxpayer claimed that he had suffered physically from stress caused by his employer’s hostile work environment.

When the taxpayer settled the lawsuit with the employer, the taxpayer received payments toward wages and other taxable benefits and also toward attorney fees. The IRS concluded that the signed agreement determined the nature of the payments received. Since the agreement did not reference the payments as being received for personal injuries or sickness, the taxpayer was not entitled to exclude the payments from adjusted gross income. The court did however find that the portion of the fees attributable to attorney fees was deductible.

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James W. Rahmlow, a certified public accountant, is a partner with Mengel, Metzger, Barr & Co. He can be contacted at Jrahmlow@mmb-co.com.