Taxation of Employee's Expenses Reimbursements - Research Paper Example

Taxation of Employee’s Expenses Reimbursements Before embarking on the case in question, it is of essence to note that this relates to individual income taxation. Taxes on income are usually imposed and levied by most states, federal government as well as some local governments. Taxes on income are imposed upon estates corporations, trusts as well as individuals. Majority of the available tax jurisdictions on individual tax often apply the system of pay-as-you-go in collecting taxes. The structure of tax states that the formula applied to compute basic tax for each of the mentioned taxable entities is that the income is vastly used in the tax base. On the other hand, deductions have to be particularly provided for legally. The rates of tax for individual income tax are progressive and for individuals they range from 10%-15%. The taxation of income for individuals uses the intermediate sum which is usually referred to as Adjusted Gross Income so that the two deduction types can be differentiated. That is, deduction for the Adjusted Gross Income and the deductions for Adjusted Gross Income. Many of the states in the USA impose taxes on income unlike the situations where few cities do the same. To some extent, compensation of individual income taxes depend upon the law on Federal income tax and the compensation that go tandem alike. (Smith, et al, 2009) For the purpose of USA taxation, the amount of gross income is not inclusive of any qualified expenses of moving reimbursements. These include the costs that the employer caters for or reimburses as costs of moving, which would have been deductible if such were incurred by the given employee directly. The rules of Canadian taxation are similar. The rule goes on to specify the fact that all payments made besides qualified types of reimbursements are a must when it comes to inclusion of the employment income of the employee. Just specific travel costs expenses from one place to a new one in the course of employment as well as actual cost related to moving of personal effects and household goods are deductible in the US. (Levine, et al, 2005 p 147) This case does not involve reimbursement of transfer costs, but it involves the requirement to determine whether they must be included in the employment income of the employee when it comes to taxation purposes. The main idea is to determine whether the reimbursements to Sam Sellit are inclusive to his income for his taxation purposes. Several court cases are going to be considered before giving a final answer to this. The major case is Ritter vs The United States. This particular case was presented to the Chief Trial Commissioner for reference purposes. The chief Trial Commissioner of the day was Marion T. Bennett and she was supposed to give as per the order of reference as well as the Rule number 57 (a). A precedent to the case was the one done by the commissioner in August, 1966. Based on the fact that the court was in agreement with the commissioner as far as findings were concerned, opinions and the conclusion recommended in law, the same judgement basis was to be applied in this case. The case, according to the Chief Commissioner, Bennett, fundamentally involved a bid by the plaintiff to recover federal taxes on income and the interest on the same. The plaintiff’s transfer of work places was for the purpose of the employer’s comfort, involved ordinary income to this employee and as such if the expenses incurred for the same would be deducted from the income. In this case it was held that according to tax laws, these payments would be taxable as would be ordinary income and thus not deductible. This claim by the plaintiff was therefore to be dismissed. The facts of the case involved IBM Company as the employer and the employee was the Regional Controller of San Francisco. The movement became a necessity since the offices would move from San Francisco to another area- Los Angeles. The policy by IBM, during the time of the move was that it would reimburse particular expenses by the employees of the company due to the transfer of location on the basis of permanency. Contested, thus, was the tax implication of the reimbursements in this case. These two parties did not dispute the fact that the expenses were actually incurred in the process of the move. The main contesting point of the plaintiff was whether he was legally required to pay taxes on income upon the reimbursements on expenses that resulted from his moving with a fundamental company’s convenience or benefit. He interpreted these reimbursements not to represent income or to be bearing any essential income elements. The plaintiff, therefore, contended that the reimbursements on expenses are not income and thus he was entitled to an income deduction as per sections 62 as well as 162 both of code 68 A statute 17 to 45. The code of Internal Revenue in 1954 section 61 (a) provided that the general income’s definition relating to gross income referred to the entire income derived from any source with the inclusion of compensation for any services offered- these compensations include commissions, fees, and other items similar to such. Further, according to the definition provided by the Regulation of Treasury upon income tax- code of 1954 section 1.61-1 (a) says that Gross income is the entire income emanating from any given source, unless the law excludes such a source. According to the Supreme Court, the expression Gross Income is provided with a definition by the code of Revenue so as to ensure that all gains are taxed apart from the gains that are exempted. In other court cases like Smith vs The Commissioner of Internal Revenue and Glenshaw vs Commissioner of Internal Revenue, the employer of the taxpayer in the first case the court stated the fact that the Gross Income’s definition as per the Revenue Act includes any financial benefit or economic benefit despite the mode or form such a benefit’s payment is effected. In another case of Lo Bue vs Internal Revenue, the court also broadened this concept about what taxable compensation is. Here, the taxpayer was offered a choice to buy stock by his employer. It was held by the court that it did not matter in the case, but if an economic benefit was given to the employee so as to get better services by the employer, therefore, the employee has to consider such as a realization of income that is taxable. The court, in the case of Lo Bue vs Internal Revenue, held that it has always been defining the expression- gross income- vastly to be intended by the congress to take all the gains that are realised aprt from those gains that are particularly exempted. In a case where assets are given to the employee by the employer for the purpose of incentives to secure better services from him/her, such is considered to be compensation. Further, as per the statement given by section 22 subsection (a) under “gross income” the taxes on income are supposed to be imposed upon all forms of compensation despite the mode applied for payment. Therefore, the court ruled that Lo Bue got a significant financial and economic benefit emanating from his employer so that the employer would get a better service from him. This is this translated as compensation for the purposes of personal service. The verdict given by the commissioner was that any payments by the employer in a direct way or in form of reimbursements to enhance that the actual cost by the employee is defrayed while moving himself as well as his family from an employment place to another, and where such change would entirely benefit the employer. Such is not included in gross income to the employee. A situation where the money is sometimes referred to as ‘extraordinary’ or ‘indirect’ form of expense, in relation to the move are part of income to such an employee and as such no deduction for offering income is allowed. In other cases of court like England vs United States, where an employee was moved from Kansas City to Springfield, it was held by the court that expense reimbursements for such costs as lodging, meals as well as incidental costs of housing were considered as personal expenses of living and thus would be inclusive in income and therefore, were not deductible as travel or business expenses while such an employee was away from home. Basically, moving expenses reimbursements to an employee who is existing would form part of gross income under the definition that is considered comprehensive under the 1954’s Revenue Code. (openjurist.org, 2009) The case given involves, not an actual movement, but a process of planning the same. Thus, Sam Jellit- an employee of Panoramic pools in the company St. Louis is in the process of planning or contemplating over starting a new office which would eventually call for his movement for his current office to another. It was during this process that he incurs costs or expenses and it is also of importance that he had his wife with him. He was involved in an attendance of Franchisees’ meeting despite his being a salesman with his wife as mentioned earlier. Then, the company offered to reimburse all the cost outlays incurred by him and his wife in the trip involving meals, air fare, lodging as well as entertainment. The estimated amount of his expenses on the trip was $3,500 and thus the company offered to reimburse the same. The employee, Sam, wants to know how this would be treated under the legal requirements of federal taxation. Considering all facts; the trip was supposed to lead to more benefits to be realised by the company. Thus, the reimbursement comes across as just another incentive by St. Louis to its highly performing salesman, Sam. Also considering the facts of the problem at hand, the employee has not yet decided whether such would be a deduction or a part of taxable income. Considering all the court cases looked at in the research then, a conclusion can be formed in this scenario. Therefore, it is part of gross income and the verdict is that the amount of reimbursement of $3,500 is to be taxed together with the rest of Sam’s employment income. This is after considering the stipulation of the taxation law that: The code of Internal Revenue in 1954 section 61 (a) provided that the general income’s definition relating to gross income referred to the entire income derived from any source with the inclusion of compensation for any services offered- these compensations include commissions, fees, and other items similar to such. Further, according to the definition provided by the Regulation of Treasury upon income tax- code of 1954 section 1.61-1 (a) says that Gross income is the entire income emanating from any given source, unless the law excludes such a source. The conclusion to the Sam’s case is after a consideration of the findings of the case that has been used as the basis of the research. That is, the case of Ritter vs The United States. Other precedents have been applied in the same. Work cited: Levine, Shelley. et al. Canada-U.S. Employment Transfers: A Guide To Personal Tax Planning. CCH Canadian Limited. Edition 5, 2005. openjurist.org. 393 F2d 823 Ritter v. United States. 2009. Retrieved November 21, 2009 http://openjurist.org/393/f2d/823/ritter-v-united-states Smith, James E. et al. South-Western Federal Taxation: Taxation of Business Entities. 2009. Retrieved November 21, 2009 http://209.85.229.132/search?q=cache:ZsUwA5cUQ4gJ:academic.cengage.com/reso urce_uploads/downloads/0324660510_131078.pdf+USA+federal+taxation+of+empl oyment+income&cd=8&hl=en&ct=clnk Read More