Posts Tagged ‘refund’

On Friday, July 31, 2015, President Obama signed into law the Surface Transportation and Veterans Health Care Choice Improvement Act of 2015 (the “Act”), which extended funding to the Highway Trust Fund (“HTF”) for an additional three months.
This Act contains several important tax provisions, including modified due dates for several common tax returns, overruling of the Supreme Court’s Home Concrete decision, required additional information on mortgage information statements, and required consistent basis reporting between estates and beneficiaries.
Tax Return Due Date Modifications

The Act sets new due dates for partnership and C corporation returns, as well as FinCEN Form 114, Report of Foreign Bank and Financial Accounts (“FBAR”), and several other IRS information returns.

Partnership Returns

The new due date is March 15 (for calendar-year partnerships) and the 15th day of the third month following the close of the fiscal year (for fiscal-year partnerships). Currently, these returns are due on April 15 for calendar-year partnerships. The Act directs the IRS to allow a maximum extension of six months for Forms 1065, U.S. Return of Partnership Income.

C Corporations

The new due date is the 15th day of the fourth month following the close of the corporation’s year. Currently, these returns are due on the 15th day of the third month following the close of the corporation’s year.

Corporations will be allowed a six-month extension, except that calendar-year corporations would get a five-month extension until 2026 and corporations with a June 30 year end would get a seven-month extension until 2026.

The new due dates will apply to returns for tax years beginning after December 31, 2015. However, for C corporations with fiscal years ending on June 30, the new due dates will not apply until tax years beginning after December 31, 2025.

Other Forms Affected

The new Act directs the IRS to modify its regulations to allow the following maximum extensions:

5 and 1/2 months on Form 1041, U.S. Income Tax Return for Estates and Trusts;
3 and 1/2 months on Form 5500, Annual Return/Report of Employee Benefit Plan;
6 months on Form 990, Return of Organization Exempt From Income Tax, Form 4720, Return of Certain Excise Taxes Under Chapters 41 and 42 of the Internal Revenue Code, Form 5227, Split-Interest Trust Information Return, Form 6069, Return of Excise Tax on Excess Contributions to Black Lung Benefit Trust Under Section 4953 and Computation of Section 192 Deduction, Form 8870, Information Return for Transfers Associated With Certain Personal Benefit Contracts, and Form 3520-A, Annual Information Return of a Foreign Trust With a U.S. Owner.
The due date for Form 3520, Annual Return to Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts, will be April 15 for calendar-year filers, with a maximum six-month extension.

FinCEN 114 (former FBAR)

The due date for FinCEN Form 114 is changed from June 30 to April 15, and for the first time taxpayers will be allowed a six-month extension to October 15.

Additional Information on Mortgage Interest Related Returns

The Act amends Sec. 6050H to require new information on the mortgage information statements that are required to be sent to individuals who pay more than $600 in mortgage interest in a year. These statements will now be required to report the outstanding principal on the mortgage at the beginning of the calendar year, the address of the property securing the mortgage, and the mortgage origination date. This change applies to returns and statements due after December 31, 2016.

Changes Related to Basis Reporting Between Estate and Beneficiaries

The Act amends Sec. 1014 to mandate that anyone inheriting property from a decedent cannot treat the property as having a higher basis than the basis reported by the estate for estate tax purposes. It also creates a new Sec. 6035, which requires executors of estates that are required to file an estate tax return to furnish information returns to the IRS and payee statements to any person acquiring an interest in property from the estate. These statements will identify the value of each interest in property acquired from the estate as reported on the estate tax return. The new basis reporting provisions apply to property with respect to which an estate tax return is filed after the date of enactment.

The Home Concrete Case is Overruled

In Home Concrete & Supply, LLC, 132 S. Ct. 1836 (2012), the Supreme Court held that the extended six-year statute of limitation under Sec. 6501(e)(1)(A), which applies when a taxpayer “omits from gross income an amount properly includible” in excess of 25% of gross income, does not apply when a taxpayer overstates its basis in property it has sold.

In response to this decision, the Act amends Sec. 6501(e)(1)(B) to add this language: “An understatement of gross income by reason of an overstatement of unrecovered cost or other basis is an omission from gross income.” The change applies to returns filed after the date of enactment as well as previously filed returns that are still open under Sec. 6501 (determined without regard to the amendments made by the Act).

If you have any questions, please contact your WithumSmith+Brown professional, a member of WS+B’s National Tax Services Group or email us at taxbriefs@withum.com.

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In a case with far-reaching implications — including the potential for refund claims to be filed by any employer making severance payments to terminated employees during the recent economic downturn — the Court of Appeals for the Sixth Circuit concluded on Friday that severance pay pursuant to an involuntary layoff was not subject to FICA employment taxes.

First, a bit of history: The treatment of certain supplemental unemployment compensation benefits (“SUB”) for FICA purposes has long been clouded. SUB payments were created in the 1950s as a way to supplement the state unemployment compensation benefits received by employees upon involuntary termination, and were defined in Section 3402(o) as amounts:

1) Which are paid to an employee, 2) Pursuant to an employer’s plan; 3) Because of an employee’s involuntary separation from employment, whether temporary or permanent, 4) Resulting directly from a reduction in force, the discontinuance of a plant or operation, or other similar conditions; and 5) Are Included in the employee’s gross income. [Ed note: this will encompass most involuntary severance payments.]

These SUB payments have always been subject to federal income tax withholding by virtue of that same Section 3402(o), which provides that for purposes of determining whether a SUB payment is subject to withholding, it “shall be treated as if it were a payment of wages by an employee to an employee for a payroll period.”

In the most important court decision on this issue prior to last Friday, the Court of Appeals for the Fifth Circuit had concluded in CSX Corporation v. United States, 518 F.3d 1328 (5th Cir., March 2008), that this language did not mean that SUB payments were treated as wages only for purposes of determining whether they were subject to federal income tax withholding. Rather, the court held that SUB payments were also wages for purposes of FICA taxes, stating:

…because we have rejected the first part of CSX’s argument-that the reference to the term “wages” in section 3402(o) necessarily implies that all payments falling within the definition of SUB in that subsection are non-wages, we reject CSX’s statutory argument.   Based on that analysis, we disagree with the trial court’s conclusion that all payments that qualify as SUB under the statutory definition in section 3402(o)(2)(A) are non-wages for purposes of FICA. We therefore reverse those portions of the trial court’s judgment that were based on the trial court’s adoption of that theory of the case.

On Friday, the 6th Circuit took a different approach, and reached a different conclusion, in Quality Stores, Inc. v United States, holding that severance payments were not subject to FICA.

Quality Stores was an agricultural-specialty retailer who filed for Chapter 11 during 2001. Prior to November, 2001, Quality Stores involuntarily terminated 75 employees, with all remaining employees terminated after November 2001 when Quality Stores closed its doors and went out of existence.

As part of the severance packages offered by Quality Stores, employees were paid based on years of service, and the payments were not tied to the receipt of any state unemployment compensation.Because SUB payments clearly represent income that is subject to federal income tax withholding pursuant to Section 3402(o), Quality Stores reported the payments on the recipients’ Forms W-2, and remitted over $1,000,000 in FICA tax to the IRS. Soon after, Quality Stores filed a claim of refund for the FICA taxes, arguing that the severance payments were not subject to FICA as they were not “wages” for those purposes.

In an initial hearing, a bankruptcy court ruled in favor of Quality Stores in 2005, and late last week, the 6th Circuit affirmed the bankruptcy court’s decision, holding that the SUP payments were not wages subject to FICA tax.

The 6th Circuit reached its conclusion by first looking to the legislative history of Section 3402(o). When the provision was enacted in 1969, Congress recognized that SUB payments “are not subject to federal income tax withholding because they do not constitute wages or remuneration for services.” Because SUB payments represent taxable income to the recipient, however, Congress wanted to take the income tax burden of the recipient by requiring withholding at the source, adding:

Although these benefits are not wages, since they are generally taxable payments they should be subject to withholding to avoid the final tax payment problem for employees.

Having established that SUB payments were not wages for federal income tax purposes, the Sixth Circuit then looked to prior case law, which held that Congress intended for the definition of wages for federal income tax and FICA purposes to be one and the same.[i]

Congress imposed federal income tax withholding on SUB payments because they qualify as gross income, not because they are “wages.” Reading the definitions of “wages” found in the FICA and federal income tax statutes consistently, SUB payments do not constitute “wages” under either statutory scheme.

What’s the lesson? With the Fifth and Sixth Circuit Court of Appeals disagreeing on such an impactful issue, the determination of whether SUB severance payments are wages subject to FICA is likely heading to the Supreme Court. In the meantime, it may behoove any employers who recently paid FICA tax on SUB payments to file a  protective claim for refund.

[i] See Rowan Cos. v. United States, 452 U.S. 247 (1981)

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Yesterday, the IRS revealed that they’ve been sitting on a cool $1 billion in unclaimed tax refunds belonging to taxpayers. Taxpayers who neglected to file 2008 tax returns, but taxpayers nonetheless.

If you think you’re owed a piece of this pie, you’ve got until April 17, 2012 to file your 2008 return and claim your refund. Of course, if you want to get paid, it’s in your best interest to make sure you’ve filed your 2009 and 2010 returns as well.

Below is a chart detailing the unclaimed refunds by state. And don’t let Wyoming fool you; while they’re compliance rate might look impressive, keep in mind that 2,600 people comprise 94% of the state’s residents.[i]

Individuals Who Did Not File a 2008 Return with a Potential Refund








Refunds ($000)*

































District of Columbia




















































































New Hampshire




New Jersey




New Mexico




New York




North Carolina




North Dakota




















Rhode Island




South Carolina




South Dakota




























West Virginia












Grand Total




[i] May not be statistically accurate

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The most brilliant members of society are often among its most corrupt. Consider Richard Nixon. Or Bernie Madoff. Or Dr. Evil.

Or Joseph Nacchio. Nacchio is the former chairman and CEO of Qwest Communications who leveraged insider information to sell Qwest stock for $44,000,000 in 2007.  A more honest tax filer than businessman, Nacchio properly reported his illegal gains on his 2007 tax return and paid the resulting $18,000,000 tax liability to the IRS.

Since insider trader is generally frowned upon, Nacchio was later convicted on criminal charges and sentenced to 70 months in rich-white-guy-prison. As part of his penance, he was forced to repay the $44,000,000 proceeds, with the government tacking on a $19,000,000 penalty for good measure.

Nacchio is now asking the perfectly logical question, “Since I had to pay back all of the proceeds on the sale of my stock, shouldn’t I be entitled to a refund of my $18,000,000 tax liability?” and suing the IRS to get it.

Will it work?

Interestingly, the statute does provide Nacchio an opportunity to effectively receive a “refund” of the tax attributable to the stock sale in the form of I.R.C. § 1341. Section 1341 allows a taxpayer who included an amount in income during a year because they believed they had an unrestricted right to the income to receive a refund of taxes paid on the income in the event they later have to pay back the previously recognized amounts.

To maximize the tax benefit to the taxpayer, two alternatives are permitted in computing the amount of the refund:

1. The taxpayer can simply deduct the repayment in the year it occurs, or

2. The taxpayer can go back to the year the amount was included in income and recalculate taxable income by excluding the amount, and take the decrease in the prior year’s tax liability as a reduction in the current year tax liability. 

Applying I.R.C. § 1341 to Nacchio’s situation, he could either deduct the $44,000,000 repayment on his tax return for the year of the repayment or alternatively, remove the gain from his 2007 return, compute the reduction in 2007 tax, and seek a refund for that amount on a current year return.

However, it is highly unlikely that Nacchio’s suit for refund will be successful. It is much more likely that the IRS and the courts will maintain either:

1) Nacchio may not avail himself of I.R.C. § 1341, as he could not have believed he had an unrestricted right to the income received in 2007 because he knowingly broke the law to earn it; or

2) Allowing Nacchio to recover his previously paid tax will frustrate public policy by shifting the burden of a portion of his ill-gotten gains away from Nacchio and to the government.

Obviously, Nacchio is extremely hopeful he’ll win his suit. Eighteen million is the minimum buy-in at the weekly country club prison poker game, and he’s sick and tired of watching that smug Jeffrey Skilling clean up every week.

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