Baldwin Haspel Burke & Mayer LLC

BHBM Tax Law Alert 3/13/2013


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In this newsletter you will find information on updates and changes in the law on both the Federal and State level. If you have any questions, please feel free to contact us at (504) 569-2900.

FEDERAL TAX LAW UPDATES

Construction Workers Hired on a Project-by-Project Basis Were W-2 Employees

The U.S. Tax Court issued a memorandum opinion (TC Memo 2013-64) concluding that workers hired by a construction company to work on various residential projects were employees despite the fact that the workers were hired on a project-by-project basis. The court held that the workers were controlled by the company’s sole proprietor and that they were an integral part of the business which indicated an employer-employee relationship.

The facts of the case state that in 2005, Mieczyslaw Kurek was the sole proprietor of KMA Construction, a home improvement company that was engaged to install tile, sheetrock, doors and windows, painting and carpentry. Throughout 2005, Kurek hired twenty-eight (28) workers to work on approximately twenty (20) to thirty (30) projects in the Brooklyn, NY area. Kurek supervised the workers telling them what needed to be done and setting deadlines of the jobs. Each worker was hired on a project-by-project basis, and the workers did not work under business names or advertise to the public. Each worker was paid a flat fee which was negotiated for a particular job on a particular project. The workers were paid weekly, by personal check, based on the percentage of the job completed.

The workers in the case set their own hours and work schedules, provided their own transportation to the worksites, and used their own sets of small tools, with Kurek supplying the larger tools. Kurek did not tell the workers how to do their jobs, but he would replace workers if a deadline was approaching or if a worker was holding up a job, and he would order workers to repair problems or redo work if he felt it was being done improperly. He did not provide training, offer employee benefits or carry unemployment insurance.

The court analyzed the facts and found that the workers were employees of Kurek as follows:

• The court determined that Kurek had control over the workers. The court characterized the right of Kurek to exercise control over the employees as the “crucial test” in determining the employee status of the workers. The court noted that Kurek set the deadlines, monitored the work done, visited the worksites, instructed the workers on the work they were to do and had the right to approve of the quality, paid the workers weekly, and was ultimately responsible for the success of the project.

• The fact that Kurek supplied the heavy tools and purchased all of the materials favored employee status.

• Due to the payment of a flat fee to the workers, the workers were insulated from suffering a loss or realizing a profit, and were also prevented from increasing their earning through their efforts which favored employee status.

• Kurek had the ability to discharge a worker if any worker failed to meet a deadline or perform to Kurek’s satisfaction, which favored employee status.

• Kurek would not have been able to complete 20-30 projects in 2005 if not for the workers which favored employee status.

Given these factors, the court agreed with the IRS that the workers were employees of Kurek and not independent contractors.

Transitional Relief Enables Eligible Employers to Claim Revived WOTC

Notice 2013-13 carries transitional relief for eligible employers who want to claim the work opportunity tax credit (WOTC), as retroactively extended by the American Taxpayer Relief Act of 2012. The transitional relief gives employers extra time – until April 29, 2013 – to file the form necessary to claim the credit for certain eligible workers.

The American Taxpayer Relief Act of 2012 (the “Act”) extended the WOTC to include wages paid or incurred to: (1) a non-veteran who began work after December 31, 2011; or (2) a veteran who began work after December 31, 2012. The Act retroactively extended the WOTC so that it applies to eligible veterans and non-veterans who begin work for an eligible employer before January 1, 2014. However, the Act did not provide a mechanism for eligible employers to meet an essential prerequisite for claiming the WOTC.

Under Notice 2013-13:

• A taxable employer that hires a member of a targeted group (as defined in Code Sec. 51(d)(2) through Code Sec. 51(d)(10), other than a qualified veteran described in Code Sec. 51(d)(3)), on or after Jan. 1, 2012, and on or before Mar. 31, 2013, will be treated as having satisfied the requirements of Code Sec. 51(d)(13)(A)(ii), if it submits the completed Form 8850 to the DLA to request certification not later than Apr. 29, 2013.

• For all employers that hire qualified veterans, an employer that hires any qualified veteran described in Code Sec. 51(d)(3), on or after Jan. 1, 2013, and on or before Mar. 31, 2013, will be considered to have satisfied the requirements of Code Sec. 51(d)(13)(A)(ii), if it submits the completed Form 8850 to the DLA to request certification not later than April 29, 2013.

Foreign Financial Assets

The IRS announced that it has deferred the requirement for specified domestic entities to report foreign financial assets under the Foreign Account Taxpayer Compliance Act. The proposed regulations previously were set to apply to tax years beginning after December 31, 2011, but the IRS in IRS Notice 2013-10 clarified that final regulations which will be promulgated under IRC §6038D will modify this date. The IRS announced that the effective date will not be earlier than tax years beginning after December 31, 2012.

Specified domestic entities include certain domestic corporations, partnerships and trusts if the following three (3) conditions exist:

1. The domestic corporation or partnership must have an interest in specified foreign financial assets with a certain threshold, other than those excepted from reporting;

2. The domestic corporation or partnership must be closely held; and

3. The domestic corporation or partnership must also meet conditions concerning passive income.

A trust is a specified domestic entity if it has an interest in specified foreign financial assets other than those excepted from reporting with an aggregate value exceeding a certain threshold and one or more specified persons as current beneficiaries.

Currently, specified individuals with specified foreign financial assets exceeding certain thresholds (which vary depending upon filing status) must file Form 8938, Statement of Specified Foreign Financial Assets, with their annual income tax returns.

Revised Form I-9

United States Citizenship and Immigration Services (“USCIS”) recently published a revised Form I-9 for each employee hired in the United States. The USCIS announced that employers may continue to use previously accepted revisions until May 7, 2013, but after May 7, 2013, all employers must only use the Form I-9 which was published on March 8, 2013. The revised forms are available in English and Spanish online at www.uscis.gov. Please note the publication date of the form on the bottom left-hand corner of the form.

New Safe Harbor to Calculate Home Office Deduction

In Rev. Proc. 2013-13, the IRS provided an optional safe harbor method that individual taxpayers may elect to use to determine the amount of deductible expenses attributable to certain business uses of a residence.

The safe harbor allows a taxpayer to determine the amount of deductible expenses for a qualified business use of the home by multiplying the allowable square footage by the prescribed rate. The prescribed rate is currently $5.00 and the allowable square footage is limited to 300 square feet. The safe harbor is limited to qualified business use of the residence as defined in IRC §280A(c) and cannot exceed the gross income derived from the qualified business use.

Hart-Scott-Rodino Filings

The Hart-Scott-Rodino federal premerger notification thresholds have increased, effective January 1, 2013, to $70.9 million for proposed mergers and acquisitions subject to Section 7a of the Clayton Act. For transactions that exceed that amount, the parties must notify federal antitrust authorities.

STATE TAX LAW UPDATES

Update on Louisiana State Tax Reform

Louisiana Governor Bobby Jindal has recently called for the elimination of Louisiana state personal income tax, corporate income tax, and corporate franchise tax. While the details of such a plan have not yet been fleshed out, the tax attorneys at Baldwin Haspel Burke & Mayer LLC have recently attended meetings with the Louisiana Department of Revenue, and conferences by the local business chambers and public research institutes, to discuss the possible changes to the state tax code.

With the elimination of the above mentioned taxes, new sources of tax revenue must be found. It is anticipated that the revenue shortfall will be made up by increasing the rate on the sales and use tax. It is not yet clear how much the rate will increase, and if the increase will occur at the local level in addition to the state level. The sales and use tax base is also expected to increase with the addition of certain services which were previously exempt from taxation. However, it is not yet certain which services will be subject to tax.

Governor Jindal is expected to announce more details of his tax reform plan on March 15, 2013.

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