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Free State Income Tax Return

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Free State Income Tax Return

Free state income tax return Publication 971 - Main Content Table of Contents How To Request ReliefException for agreements relating to TEFRA partnership proceedings. Free state income tax return The IRS Must Contact Your Spouse or Former Spouse Tax Court Review of Request Community Property LawsRelief for Married Persons Who Did Not File Joint Returns Innocent Spouse ReliefUnderstated Tax Erroneous Items Actual Knowledge or Reason To Know Indications of Unfairness for Innocent Spouse Relief Separation of Liability ReliefLimitations on Relief Equitable ReliefConditions for Getting Equitable Relief Factors for Determining Whether To Grant Equitable Relief RefundsProof Required Refunds Under Equitable Relief Limit on Amount of Refund Filled-in Form 8857 Flowcharts How To Request Relief File Form 8857 to ask the IRS for the types of relief discussed in this publication. Free state income tax return If you are requesting relief for more than three tax years, you must file an additional Form 8857. Free state income tax return The IRS will review your Form 8857 and let you know if you qualify. Free state income tax return A completed Form 8857 is shown later. Free state income tax return When to file Form 8857. Free state income tax return   You should file Form 8857 as soon as you become aware of a tax liability for which you believe only your spouse or former spouse should be held responsible. Free state income tax return The following are some of the ways you may become aware of such a liability. Free state income tax return The IRS is examining your tax return and proposing to increase your tax liability. Free state income tax return The IRS sends you a notice. Free state income tax return   You must file Form 8857 no later than two years after the date on which the IRS first attempted to collect the tax from you that occurs after July 22, 1998. Free state income tax return (But see the exceptions below for different filing deadlines that apply. Free state income tax return ) For this reason, do not delay filing because you do not have all the documentation. Free state income tax return   Collection activities that may start the 2-year period are: The IRS offset your income tax refund against an amount you owed on a joint return for another year and the IRS informed you about your right to file Form 8857. Free state income tax return The filing of a claim by the IRS in a court proceeding in which you were a party or the filing of a claim in a proceeding that involves your property. Free state income tax return This includes the filing of a proof of claim in a bankruptcy proceeding. Free state income tax return The filing of a suit by the United States against you to collect the joint liability. Free state income tax return The issuance of a section 6330 notice, which notifies you of the IRS' intent to levy and your right to a collection due process (CDP) hearing. Free state income tax return The collection-related notices include, but are not limited to, Letter 11 and Letter 1058. Free state income tax return Exception for equitable relief. Free state income tax return   On July 25, 2011, the IRS issued Notice 2011-70 (available at www. Free state income tax return irs. Free state income tax return gov/irb/2011-32_IRB/ar11. Free state income tax return html) expanding the amount of time to request equitable relief. Free state income tax return The amount of time to request equitable relief depends on whether you are seeking relief from a balance due, seeking a credit or refund, or both: Balance Due – Generally, you must file your request within the time period the IRS has to collect the tax. Free state income tax return Generally, the IRS has 10 years from the date the tax liability was assessed to collect the tax. Free state income tax return In certain cases, the 10-year period is suspended. Free state income tax return The amount of time the suspension is in effect will extend the time the IRS has to collect the tax. Free state income tax return See Pub. Free state income tax return 594, The IRS Collection Process, for details. Free state income tax return Credit or Refund – Generally, you must file your request within 3 years after the date the original return was filed or within 2 years after the date the tax was paid, whichever is later. Free state income tax return But you may have more time to file if you live in a federally declared disaster area or you are physically or mentally unable to manage your financial affairs. Free state income tax return See Pub. Free state income tax return 556, Examination of Returns, Appeal Rights, and Claims for Refund, for details. Free state income tax return Both a Balance Due and a Credit or Refund – If you are seeking a refund of amounts you paid and relief from a balance due over and above what you have paid, the time period for credit or refund will apply to any payments you have made, and the time period for collection of a balance due amount will apply to any unpaid liability. Free state income tax return Exception for relief based on community property laws. Free state income tax return   If you are requesting relief based on community property laws, a different filing deadline applies. Free state income tax return See Relief from liability arising from community property law discussed later under Community Property Laws . Free state income tax return Form 8857 filed by or on behalf of a decedent. Free state income tax return   An executor (including any other duly appointed representative) may pursue a Form 8857 filed during the decedent's lifetime. Free state income tax return An executor (including any other duly appointed representative) may also file Form 8857 as long as the decedent satisfied the eligibility requirements while alive. Free state income tax return For purposes of separation of liability relief (discussed later), the decedent's marital status is determined on the earlier of the date relief was requested or the date of death. Free state income tax return Situations in which you are not entitled to relief. Free state income tax return   You are not entitled to innocent spouse relief for any tax year to which the following situations apply. Free state income tax return In a final decision dated after July 22, 1998, a court considered whether to grant you relief from joint liability and decided not to do so. Free state income tax return In a final decision dated after July 22, 1998, a court did not consider whether to grant you relief from joint liability, but you meaningfully participated in the proceeding and could have asked for relief. Free state income tax return You entered into an offer in compromise with the IRS. Free state income tax return You entered into a closing agreement with the IRS that disposed of the same liability for which you want to seek relief. Free state income tax return Exception for agreements relating to TEFRA partnership proceedings. Free state income tax return   You may be entitled to relief, discussed in (4) earlier, if you entered into a closing agreement for both partnership items and nonpartnership items, while you were a party to a pending TEFRA partnership proceeding. Free state income tax return (TEFRA is an acronym that refers to the “Tax Equity and Fiscal Responsibility Act of 1982” that prescribed the tax treatment of partnership items. Free state income tax return ) You are not entitled to relief for the nonpartnership items, but you will be entitled to relief for the partnership items (if you otherwise qualify). Free state income tax return Transferee liability not affected by innocent spouse relief provisions. Free state income tax return   The innocent spouse relief provisions do not affect tax liabilities that arise under federal or state transferee liability or property laws. Free state income tax return Therefore, even if you are relieved of the tax liability under the innocent spouse relief provisions, you may remain liable for the unpaid tax, interest, and penalties to the extent provided by these laws. Free state income tax return Example. Free state income tax return Herb and Wanda timely filed their 2008 joint income tax return on April 15, 2009. Free state income tax return Herb died in March 2010, and the executor of Herb's will transferred all of the estate's assets to Wanda. Free state income tax return In August 2010, the IRS assessed a deficiency for the 2008 return. Free state income tax return The items causing the deficiency belong to Herb. Free state income tax return Wanda is relieved of the deficiency under the innocent spouse relief provisions, and Herb's estate remains solely liable for it. Free state income tax return However, the IRS may collect the deficiency from Wanda to the extent permitted under federal or state transferee liability or property laws. Free state income tax return The IRS Must Contact Your Spouse or Former Spouse By law, the IRS must contact your spouse or former spouse. Free state income tax return There are no exceptions, even for victims of spousal abuse or domestic violence. Free state income tax return We will inform your spouse or former spouse that you filed Form 8857 and will allow him or her to participate in the process. Free state income tax return If you are requesting relief from joint and several liability on a joint return, the IRS must also inform him or her of its preliminary and final determinations regarding your request for relief. Free state income tax return However, to protect your privacy, the IRS will not disclose your personal information (for example, your current name, address, phone number(s), information about your employer, your income or assets) or any other information that does not relate to making a determination about your request for relief from liability. Free state income tax return If you petition the Tax Court (explained below), your spouse or former spouse may see your personal information. Free state income tax return Tax Court Review of Request After you file Form 8857, you may be able to petition (ask) the United States Tax Court to review your request for relief in the following two situations. Free state income tax return The IRS sends you a final determination letter regarding your request for relief. Free state income tax return You do not receive a final determination letter from the IRS within six months from the date you filed Form 8857. Free state income tax return If you seek equitable relief for an underpaid tax, you will be able to get a Tax Court review of your request only if the tax arose or remained unpaid on or after December 20, 2006. Free state income tax return The United States Tax Court is an independent judicial body and is not part of the IRS. Free state income tax return You must file a petition with the United States Tax Court in order for it to review your request for relief. Free state income tax return You must file the petition no later than the 90th day after the date the IRS mails its final determination notice to you. Free state income tax return If you do not file a petition, or you file it late, the Tax Court cannot review your request for relief. Free state income tax return You can get a copy of the rules for filing a petition by writing to the Tax Court at the following address:    United States Tax Court 400 Second Street, NW Washington, DC 20217 Or you can visit the Tax Court's website at www. Free state income tax return ustaxcourt. Free state income tax return gov Community Property Laws You must generally follow community property laws when filing a tax return if you are married and live in a community property state. Free state income tax return Community property states are Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin. Free state income tax return Generally, community property laws require you to allocate community income and expenses equally between both spouses. Free state income tax return However, community property laws are not taken into account in determining whether an item belongs to you or to your spouse (or former spouse) for purposes of requesting any relief from liability. Free state income tax return Relief for Married Persons Who Did Not File Joint Returns Married persons who live in community property states, but who did not file joint returns, have two ways to get relief. Free state income tax return Relief From Liability Arising From Community Property Law You are not responsible for the tax relating to an item of community income if all the following conditions exist. Free state income tax return You did not file a joint return for the tax year. Free state income tax return You did not include the item of community income in gross income. Free state income tax return The item of community income you did not include is one of the following: Wages, salaries, and other compensation your spouse (or former spouse) received for services he or she performed as an employee. Free state income tax return Income your spouse (or former spouse) derived from a trade or business he or she operated as a sole proprietor. Free state income tax return Your spouse's (or former spouse's) distributive share of partnership income. Free state income tax return Income from your spouse's (or former spouse's) separate property (other than income described in (a), (b), or (c)). Free state income tax return Use the appropriate community property law to determine what is separate property. Free state income tax return Any other income that belongs to your spouse (or former spouse) under community property law. Free state income tax return You establish that you did not know of, and had no reason to know of, that community income. Free state income tax return See  Actual Knowledge or Reason To Know , below. Free state income tax return Under all facts and circumstances, it would not be fair to include the item of community income in your gross income. Free state income tax return See Indications of unfairness for liability arising from community property law, later. Free state income tax return Actual knowledge or reason to know. Free state income tax return   You knew or had reason to know of an item of community income if: You actually knew of the item of community income, or A reasonable person in similar circumstances would have known of the item of community income. Free state income tax return Amount of community income unknown. Free state income tax return   If you are aware of the source of the item of community income or the income-producing activity, but are unaware of the specific amount, you are considered to know or have reason to know of the item of community income. Free state income tax return Not knowing the specific amount is not a basis for relief. Free state income tax return Reason to know. Free state income tax return   The IRS will consider all facts and circumstances in determining whether you had reason to know of an item of community income. Free state income tax return The facts and circumstances include: The nature of the item of community income and the amount of the item relative to other income items. Free state income tax return The financial situation of you and your spouse (or former spouse). Free state income tax return Your educational background and business experience. Free state income tax return Whether the item of community income represented a departure from a recurring pattern reflected in prior years' returns (for example, omitted income from an investment regularly reported on prior years' returns). Free state income tax return Indications of unfairness for liability arising from community property law. Free state income tax return   The IRS will consider all of the facts and circumstances of the case in order to determine whether it is unfair to hold you responsible for the understated tax due to the item of community income. Free state income tax return   The following are examples of factors the IRS will consider. Free state income tax return Whether you received a benefit, either directly or indirectly, from the omitted item of community income (defined below). Free state income tax return Whether your spouse (or former spouse) deserted you. Free state income tax return Whether you and your spouse have been divorced or separated. Free state income tax return  For other factors see Factors for Determining Whether To Grant Equitable Relief later. Free state income tax return Benefit from omitted item of community income. Free state income tax return   A benefit includes normal support, but does not include de minimis (small) amounts. Free state income tax return Evidence of a direct or indirect benefit may consist of transfers of property or rights to property, including transfers received several years after the filing of the return. Free state income tax return   For example, if you receive property, including life insurance proceeds, from your spouse (or former spouse) and the property is traceable to omitted items of community income attributable to your spouse (or former spouse), you are considered to have benefitted from those omitted items of community income. Free state income tax return Equitable Relief If you do not qualify for the relief described above and are now liable for an underpaid or understated tax you believe should be paid only by your spouse (or former spouse), you may request equitable relief (discussed later). Free state income tax return How and When To Request Relief You request relief by filing Form 8857, as discussed earlier. Free state income tax return Fill in Form 8857 according to the instructions. Free state income tax return For relief from liability arising from community property law, you must file Form 8857 no later than 6 months before the expiration of the period of limitations on assessment (including extensions) against your spouse for the tax year for which you are requesting relief. Free state income tax return However, if the IRS begins an examination of your return during that 6-month period, the latest time for requesting relief is 30 days after the date the IRS' initial contact letter to you. Free state income tax return The period of limitation on assessment is the amount of time, generally three years, that the IRS has from the date you filed the return to assess taxes that you owe. Free state income tax return Innocent Spouse Relief By requesting innocent spouse relief, you can be relieved of responsibility for paying tax, interest, and penalties if your spouse (or former spouse) improperly reported items or omitted items on your tax return. Free state income tax return Generally, the tax, interest, and penalties that qualify for relief can only be collected from your spouse (or former spouse). Free state income tax return However, you are jointly and individually responsible for any tax, interest, and penalties that do not qualify for relief. Free state income tax return The IRS can collect these amounts from either you or your spouse (or former spouse). Free state income tax return You must meet all of the following conditions to qualify for innocent spouse relief. Free state income tax return You filed a joint return. Free state income tax return There is an understated tax on the return that is due to erroneous items (defined later) of your spouse (or former spouse). Free state income tax return You can show that when you signed the joint return you did not know, and had no reason to know, that the understated tax existed (or the extent to which the understated tax existed). Free state income tax return See Actual Knowledge or Reason To Know, later. Free state income tax return Taking into account all the facts and circumstances, it would be unfair to hold you liable for the understated tax. Free state income tax return See Indications of Unfairness for Innocent Spouse Relief , later. Free state income tax return Innocent spouse relief will not be granted if the IRS proves that you and your spouse (or former spouse) transferred property to one another as part of a fraudulent scheme. Free state income tax return A fraudulent scheme includes a scheme to defraud the IRS or another third party, such as a creditor, former spouse, or business partner. Free state income tax return Understated Tax You have an understated tax if the IRS determined that your total tax should be more than the amount that was actually shown on your return. Free state income tax return Erroneous Items Erroneous items are either of the following. Free state income tax return Unreported income. Free state income tax return This is any gross income item received by your spouse (or former spouse) that is not reported. Free state income tax return Incorrect deduction, credit, or basis. Free state income tax return This is any improper deduction, credit, or property basis claimed by your spouse (or former spouse). Free state income tax return The following are examples of erroneous items. Free state income tax return The expense for which the deduction is taken was never paid or incurred. Free state income tax return For example, your spouse, a cash-basis taxpayer, deducted $10,000 of advertising expenses on Schedule C of your joint Form 1040, but never paid for any advertising. Free state income tax return The expense does not qualify as a deductible expense. Free state income tax return For example, your spouse claimed a business fee deduction of $10,000 that was for the payment of state fines. Free state income tax return Fines are not deductible. Free state income tax return No factual argument can be made to support the deductibility of the expense. Free state income tax return For example, your spouse claimed $4,000 for security costs related to a home office, which were actually veterinary and food costs for your family's two dogs. Free state income tax return Actual Knowledge or Reason To Know You knew or had reason to know of an understated tax if: You actually knew of the understated tax, or A reasonable person in similar circumstances would have known of the understated tax. Free state income tax return Actual knowledge. Free state income tax return   If you actually knew about an erroneous item that belongs to your spouse (or former spouse), the relief discussed here does not apply to any part of the understated tax due to that item. Free state income tax return You and your spouse (or former spouse) remain jointly liable for that part of the understated tax. Free state income tax return For information about the criteria for determining whether you actually knew about an erroneous item, see Actual Knowledge later under Separation of Liability Relief. Free state income tax return Reason to know. Free state income tax return   If you had reason to know about an erroneous item that belongs to your spouse (or former spouse), the relief discussed here does not apply to any part of the understated tax due to that item. Free state income tax return You and your spouse (or former spouse) remain jointly liable for that part of the understated tax. Free state income tax return   The IRS will consider all facts and circumstances in determining whether you had reason to know of an understated tax due to an erroneous item. Free state income tax return The facts and circumstances include: The nature of the erroneous item and the amount of the erroneous item relative to other items. Free state income tax return The financial situation of you and your spouse (or former spouse). Free state income tax return Your educational background and business experience. Free state income tax return The extent of your participation in the activity that resulted in the erroneous item. Free state income tax return Whether you failed to ask, at or before the time the return was signed, about items on the return or omitted from the return that a reasonable person would question. Free state income tax return Whether the erroneous item represented a departure from a recurring pattern reflected in prior years' returns (for example, omitted income from an investment regularly reported on prior years' returns). Free state income tax return Partial relief when a portion of erroneous item is unknown. Free state income tax return   You may qualify for partial relief if, at the time you filed your return, you had no knowledge or reason to know of only a portion of an erroneous item. Free state income tax return You will be relieved of the understated tax due to that portion of the item if all other requirements are met for that portion. Free state income tax return Example. Free state income tax return At the time you signed your joint return, you knew that your spouse did not report $5,000 of gambling winnings. Free state income tax return The IRS examined your tax return several months after you filed it and determined that your spouse's unreported gambling winnings were actually $25,000. Free state income tax return You established that you did not know about, and had no reason to know about, the additional $20,000 because of the way your spouse handled gambling winnings. Free state income tax return The understated tax due to the $20,000 will qualify for innocent spouse relief if you meet the other requirements. Free state income tax return The understated tax due to the $5,000 of gambling winnings you knew about will not qualify for relief. Free state income tax return Indications of Unfairness for Innocent Spouse Relief The IRS will consider all of the facts and circumstances of the case in order to determine whether it is unfair to hold you responsible for the understated tax. Free state income tax return The following are examples of factors the IRS will consider. Free state income tax return Whether you received a significant benefit (defined below), either directly or indirectly, from the understated tax. Free state income tax return Whether your spouse (or former spouse) deserted you. Free state income tax return Whether you and your spouse have been divorced or separated. Free state income tax return Whether you received a benefit on the return from the understated tax. Free state income tax return For other factors, see Factors for Determining Whether To Grant Equitable Relief later under Equitable Relief. Free state income tax return Significant benefit. Free state income tax return   A significant benefit is any benefit in excess of normal support. Free state income tax return Normal support depends on your particular circumstances. Free state income tax return Evidence of a direct or indirect benefit may consist of transfers of property or rights to property, including transfers that may be received several years after the year of the understated tax. Free state income tax return Example. Free state income tax return You receive money from your spouse that is beyond normal support. Free state income tax return The money can be traced to your spouse's lottery winnings that were not reported on your joint return. Free state income tax return You will be considered to have received a significant benefit from that income. Free state income tax return This is true even if your spouse gives you the money several years after he or she received it. Free state income tax return Separation of Liability Relief Under this type of relief, the understated tax (plus interest and penalties) on your joint return is allocated between you and your spouse (or former spouse). Free state income tax return The understated tax allocated to you is generally the amount you are responsible for. Free state income tax return This type of relief is available only for unpaid liabilities resulting from the understated tax. Free state income tax return Refunds are not allowed. Free state income tax return To request separation of liability relief, you must have filed a joint return and meet either of the following requirements at the time you file Form 8857. Free state income tax return You are no longer married to, or are legally separated from, the spouse with whom you filed the joint return for which you are requesting relief. Free state income tax return (Under this rule, you are no longer married if you are widowed. Free state income tax return ) You were not a member of the same household (explained below) as the spouse with whom you filed the joint return at any time during the 12-month per- iod ending on the date you file Form 8857. Free state income tax return Members of the same household. Free state income tax return   You and your spouse are not members of the same household if you are living apart and are estranged. Free state income tax return However, you and your spouse are considered members of the same household if any of the following conditions are met. Free state income tax return You and your spouse reside in the same dwelling. Free state income tax return You and your spouse reside in separate dwellings but are not estranged, and one of you is temporarily absent from the other's household as explained in (3) below. Free state income tax return Either spouse is temporarily absent from the household and it is reasonable to assume that the absent spouse will return to the household, and the household or a substantially equivalent household is maintained in anticipation of the absent spouse's return. Free state income tax return Examples of temporary absences include absence due to imprisonment, illness, business, vacation, military service, or education. Free state income tax return Burden of proof. Free state income tax return   You must be able to prove that you meet all of the requirements for separation of liability relief (except actual knowledge) and that you did not transfer property to avoid tax (discussed later). Free state income tax return You must also establish the basis for allocating the erroneous items. Free state income tax return Limitations on Relief Even if you meet the requirements discussed previously, separation of liability relief will not be granted in the following situations. Free state income tax return The IRS proves that you and your spouse (or former spouse) transferred assets to one another as part of a fraudulent scheme. Free state income tax return A fraudulent scheme includes a scheme to defraud the IRS or another third party, such as a creditor, former spouse, or business partner. Free state income tax return The IRS proves that at the time you signed your joint return, you had actual knowledge (explained below) of any erroneous items giving rise to the deficiency that were allocable to your spouse (or former spouse). Free state income tax return For the definition of erroneous items, see Erroneous Items earlier under Innocent Spouse Relief. Free state income tax return Your spouse (or former spouse) transferred property to you to avoid tax or the payment of tax. Free state income tax return See Transfers of Property To Avoid Tax , later. Free state income tax return Actual Knowledge The relief discussed here does not apply to any part of the understated tax due to your spouse's (or former spouse's) erroneous items of which you had actual knowledge. Free state income tax return You and your spouse (or former spouse) remain jointly and severally liable for this part of the understated tax. Free state income tax return If you had actual knowledge of only a portion of an erroneous item, the IRS will not grant relief for that portion of the item. Free state income tax return You had actual knowledge of an erroneous item if: You knew that an item of unreported income was received. Free state income tax return (This rule applies whether or not there was a receipt of cash. Free state income tax return ) You knew of the facts that made an incorrect deduction or credit unallowable. Free state income tax return For a false or inflated deduction, you knew that the expense was not incurred, or not incurred to the extent shown on the tax return. Free state income tax return Knowledge of the source of an erroneous item is not sufficient to establish actual knowledge. Free state income tax return Also, your actual knowledge may not be inferred when you merely had a reason to know of the erroneous item. Free state income tax return Similarly, the IRS does not have to establish that you knew of the source of an erroneous item in order to establish that you had actual knowledge of the item itself. Free state income tax return Your actual knowledge of the proper tax treatment of an erroneous item is not relevant for purposes of demonstrating that you had actual knowledge of that item. Free state income tax return Neither is your actual knowledge of how the erroneous item was treated on the tax return. Free state income tax return For example, if you knew that your spouse received dividend income, relief is not available for that income even if you did not know it was taxable. Free state income tax return Example. Free state income tax return Bill and Karen Green filed a joint return showing Karen's wages of $50,000 and Bill's self-employment income of $10,000. Free state income tax return The IRS audited their return and found that Bill did not report $20,000 of self-employment income. Free state income tax return The additional income resulted in a $6,000 understated tax, plus interest and penalties. Free state income tax return After obtaining a legal separation from Bill, Karen filed Form 8857 to request separation of liability relief. Free state income tax return The IRS proved that Karen actually knew about the $20,000 of additional income at the time she signed the joint return. Free state income tax return Bill is liable for all of the understated tax, interest, and penalties because all of it was due to his unreported income. Free state income tax return Karen is also liable for the understated tax, interest, and penalties due to the $20,000 of unreported income because she actually knew of the item. Free state income tax return The IRS can collect the entire $6,000 plus interest and penalties from either Karen or Bill because they are jointly and individually liable for it. Free state income tax return Factors supporting actual knowledge. Free state income tax return   The IRS may rely on all facts and circumstances in determining whether you actually knew of an erroneous item at the time you signed the return. Free state income tax return The following are examples of factors the IRS may use. Free state income tax return Whether you made a deliberate effort to avoid learning about the item in order to be shielded from liability. Free state income tax return Whether you and your spouse (or former spouse) jointly owned the property that resulted in the erroneous item. Free state income tax return Exception for spousal abuse or domestic violence. Free state income tax return   Even if you had actual knowledge, you may still qualify for relief if you establish that: You were the victim of spousal abuse or domestic violence before signing the return, and Because of that abuse, you did not challenge the treatment of any items on the return because you were afraid your spouse (or former spouse) would retaliate against you. Free state income tax return   If you establish that you signed your joint return under duress (threat of harm or other form of coercion), then it is not a joint return, and you are not liable for any tax shown on that return or any tax deficiency for that return. Free state income tax return However, you may be required to file a separate return for that tax year. Free state income tax return For more information about duress, see the instructions for Form 8857. Free state income tax return Transfers of Property To Avoid Tax If your spouse (or former spouse) transfers property (or the right to property) to you for the main purpose of avoiding tax or payment of tax, the tax liability allocated to you will be increased by the fair market value of the property on the date of the transfer. Free state income tax return The increase may not be more than the entire amount of the liability. Free state income tax return A transfer will be presumed to have as its main purpose the avoidance of tax or payment of tax if the transfer is made after the date that is 1 year before the date on which the IRS sent its first letter of proposed deficiency. Free state income tax return This presumption will not apply if: The transfer was made under a divorce decree, separate maintenance agreement, or a written instrument incident to such an agreement, or You establish that the transfer did not have as its main purpose the avoidance of tax or payment of tax. Free state income tax return If the presumption does not apply, but the IRS can establish that the purpose of the transfer was the avoidance of tax or payment of tax, the tax liability allocated to you will be increased as explained above. Free state income tax return Equitable Relief If you do not qualify for innocent spouse relief, separation of liability relief, or relief from liability arising from community property law, you may still be relieved of responsibility for tax, interest, and penalties through equitable relief. Free state income tax return Unlike innocent spouse relief or separation of liability relief, you can get equitable relief from an understated tax (defined earlier under Innocent Spouse Relief ) or an underpaid tax. Free state income tax return An underpaid tax is an amount of tax you properly reported on your return but you have not paid. Free state income tax return For example, your joint 2009 return shows that you and your spouse owed $5,000. Free state income tax return You paid $2,000 with the return. Free state income tax return You have an underpaid tax of $3,000. Free state income tax return Conditions for Getting Equitable Relief You may qualify for equitable relief if you meet all of the following conditions. Free state income tax return You are not eligible for innocent spouse relief, separation of liability relief, or relief from liability arising from community property law. Free state income tax return You have an understated tax or an underpaid tax. Free state income tax return You did not pay the tax. Free state income tax return However, see Refunds , later, for situations in which you are entitled to a refund of payments you made. Free state income tax return You establish that, taking into account all the facts and circumstances, it would be unfair to hold you liable for the understated or underpaid tax. Free state income tax return See Factors for Determining Whether To Grant Equitable Relief, later. Free state income tax return You and your spouse (or former spouse) did not transfer assets to one another as a part of a fraudulent scheme. Free state income tax return A fraudulent scheme includes a scheme to defraud the IRS or another third party, such as a creditor, former spouse, or business partner. Free state income tax return Your spouse (or former spouse) did not transfer property to you for the main purpose of avoiding tax or the payment of tax. Free state income tax return See Transfers of Property To Avoid Tax, earlier, under Separation of Liability Relief. Free state income tax return You did not file or fail to file your return with the intent to commit fraud. Free state income tax return The income tax liability from which you seek relief must be attributable to an item of the spouse (or former spouse) with whom you filed the joint return, unless one of the following exceptions applies: The item is attributable or partially attributable to you solely due to the operation of community property law. Free state income tax return If you meet this exception, that item will be considered attributable to your spouse (or former spouse) for purposes of equitable relief. Free state income tax return If the item is titled in your name, the item is presumed to be attributable to you. Free state income tax return However, you can rebut this presumption based on the facts and circumstances. Free state income tax return You did not know, and had no reason to know, that funds intended for the payment of tax were misappropriated by your spouse (or former spouse) for his or her benefit. Free state income tax return If you meet this exception, the IRS will consider granting equitable relief although the underpaid tax may be attributable in part or in full to your item, and only to the extent the funds intended for payment were taken by your spouse (or former spouse). Free state income tax return You establish that you were the victim of spousal abuse or domestic violence before signing the return, and that, as a result of the prior abuse, you did not challenge the treatment of any items on the return for fear of your spouse's (or former spouse's) retaliation. Free state income tax return If you meet this exception, relief will be considered although the understated tax or underpaid tax may be attributable in part or in full to your item. Free state income tax return Factors for Determining Whether To Grant Equitable Relief The IRS will consider all of the facts and circumstances in order to determine whether it is unfair to hold you responsible for the understated or underpaid tax. Free state income tax return The following are examples of factors that the IRS will consider to determine whether to grant equitable relief. Free state income tax return The IRS will consider all factors and weigh them appropriately. Free state income tax return Relevant Factors The following are examples of factors that may be relevant to whether the IRS will grant equitable relief. Free state income tax return Whether you are separated (whether legally or not) or divorced from your spouse. Free state income tax return A temporary absence, such as an absence due to imprisonment, illness, business, vacation, military service, or education, is not considered separation for this purpose. Free state income tax return A temporary absence is one where it is reasonable to assume that the absent spouse will return to the household, and the household or a substantially equivalent household is maintained in anticipation of the absent spouse's return. Free state income tax return Whether you would suffer a significant economic hardship if relief is not granted. Free state income tax return (In other words, you would not be able to pay your reasonable basic living expenses. Free state income tax return ) Whether you have a legal obligation under a divorce decree or agreement to pay the tax. Free state income tax return This factor will not weigh in favor of relief if you knew or had reason to know, when entering into the divorce decree or agreement, that your former spouse would not pay the income tax liability. Free state income tax return Whether you received a significant benefit (beyond normal support) from the underpaid tax or item causing the understated tax. Free state income tax return (For a definition of significant benefit, see Indications of Unfairness for Innocent Spouse Relief earlier. Free state income tax return ) Whether you have made a good faith effort to comply with federal income tax laws for the tax year for which you are requesting relief or the following years. Free state income tax return Whether you knew or had reason to know about the items causing the understated tax or that the tax would not be paid, as explained next. Free state income tax return Knowledge or reason to know. Free state income tax return   In the case of an underpaid tax, the IRS will consider whether you did not know and had no reason to know that your spouse (or former spouse) would not pay the income tax liability. Free state income tax return   In the case of an income tax liability that arose from an understated tax, the IRS will consider whether you did not know and had no reason to know of the item causing the understated tax. Free state income tax return Reason to know of the item giving rise to the understated tax will not be weighed more heavily than other factors. Free state income tax return Actual knowledge of the item giving rise to the understated tax, however, is a strong factor weighing against relief. Free state income tax return This strong factor may be overcome if the factors in favor of equitable relief are particularly compelling. Free state income tax return Reason to know. Free state income tax return   In determining whether you had reason to know, the IRS will consider your level of education, any deceit or evasiveness of your spouse (or former spouse), your degree of involvement in the activity generating the income tax liability, your involvement in business and household financial matters, your business or financial expertise, and any lavish or unusual expenditures compared with past spending levels. Free state income tax return Example. Free state income tax return You and your spouse filed a joint 2009 return. Free state income tax return That return showed you owed $10,000. Free state income tax return You had $5,000 of your own money and you took out a loan to pay the other $5,000. Free state income tax return You gave 2 checks for $5,000 each to your spouse to pay the $10,000 liability. Free state income tax return Without telling you, your spouse took the $5,000 loan and spent it on himself. Free state income tax return You and your spouse were divorced in 2010. Free state income tax return In addition, you had no knowledge or reason to know at the time you signed the return that the tax would not be paid. Free state income tax return These facts indicate to the IRS that it may be unfair to hold you liable for the $5,000 underpaid tax. Free state income tax return The IRS will consider these facts, together with all of the other facts and circumstances, to determine whether to grant you equitable relief from the $5,000 underpaid tax. Free state income tax return Factors Weighing in Favor of Equitable Relief The following are examples of factors that will weigh in favor of equitable relief, but will not weigh against equitable relief. Free state income tax return Whether your spouse (or former spouse) abused you. Free state income tax return Whether you were in poor mental or physical health on the date you signed the return or at the time you requested relief. Free state income tax return Refunds If you are granted relief, refunds are: Permitted under innocent spouse relief as explained later under Limit on Amount of Refund . Free state income tax return Not permitted under separation of liability relief. Free state income tax return Permitted in limited circumstances under equitable relief, as explained under Refunds Under Equitable Relief. Free state income tax return Proof Required The IRS will only refund payments you made with your own money. Free state income tax return However, you must provide proof that you made the payments with your own money. Free state income tax return Examples of proof are a copy of your bank statement or a canceled check. Free state income tax return No proof is required if your individual refund was used by the IRS to pay a tax you owed on a joint tax return for another year. Free state income tax return Refunds Under Equitable Relief In the following situations, you are eligible to receive a refund of certain payments you made. Free state income tax return Underpaid tax. Free state income tax return   If you are granted relief for an underpaid tax, you are eligible for a refund of separate payments that you made after July 22, 1998. Free state income tax return However, you are not eligible for refunds of payments made with the joint return, joint payments, or payments that your spouse (or former spouse) made. Free state income tax return For example, withholding tax and estimated tax payments cannot be refunded because they are considered made with the joint return. Free state income tax return   The amount of the refund is subject to the limit discussed later under Limit on Amount of Refund. Free state income tax return Understated tax. Free state income tax return   If you are granted relief for an understated tax, you are eligible for a refund of certain payments made under an installment agreement that you entered into with the IRS, if you have not defaulted on the installment agreement. Free state income tax return You are not in default if the IRS did not issue you a notice of default or take any action to end the installment agreement. Free state income tax return Only installment payments made after the date you filed Form 8857 are eligible for a refund. Free state income tax return   The amount of the refund is subject to the limit discussed next. Free state income tax return Limit on Amount of Refund The amount of your refund is limited. Free state income tax return Read the following chart to find out the limit. Free state income tax return IF you file Form 8857. Free state income tax return . Free state income tax return . Free state income tax return THEN the refund cannot be more than. Free state income tax return . Free state income tax return . Free state income tax return Within 3 years after filing your return The part of the tax paid within 3 years (plus any extension of time for filing your return) before you filed Form 8857. Free state income tax return After the 3-year period, but within 2 years from the time you paid the tax The tax you paid within 2 years immediately before you filed Form 8857. Free state income tax return Filled-in Form 8857 This part explains how Janie Boulder fills out Form 8857 to request innocent spouse relief. Free state income tax return Janie and Joe Boulder filed a joint tax return for 2007. Free state income tax return They claimed one dependency exemption for their son Michael. Free state income tax return Their return was adjusted by the IRS because Joe did not report a $5,000 award he won that year. Free state income tax return Janie did not know about the award when the return was filed. Free state income tax return They agreed to the adjustment but could not pay the additional amount due of $815 ($650 tax + $165 penalty and interest). Free state income tax return Janie and Joe were divorced on May 13, 2009. Free state income tax return In February 2010, Janie filed her 2009 federal income tax return as head of household. Free state income tax return She expected a refund of $1,203. Free state income tax return In May 2010, she received a notice informing her that the IRS had offset her refund against the $815 owed on her joint 2007 income tax return and that she had a right to file Form 8857. Free state income tax return Janie applies the conditions listed earlier under Innocent Spouse Relief to see if she qualifies for relief. Free state income tax return Janie meets the first and second conditions because the joint tax return they filed has an understated tax due to Joe's erroneous item. Free state income tax return Janie believes she meets the third condition. Free state income tax return She did not know about the award and had no reason to know about it because of the secretive way Joe conducted his financial affairs. Free state income tax return Janie believes she meets the fourth condition. Free state income tax return She believes it would be unfair to be held liable for the tax because she did not benefit from the award. Free state income tax return Joe spent it on personal items for his use only. Free state income tax return Because Janie believes she qualifies for innocent spouse relief, she first completes Part I of Form 8857 to determine if she should file the form. Free state income tax return In Part I, she makes all entries under the Tax Year 1 column because she is requesting relief for only one year. Free state income tax return Part I Line 1. Free state income tax return   She enters “2007” on line 1 because this is the tax year for which she is requesting relief. Free state income tax return Line 2. Free state income tax return   She checks the box because she wants a refund. Free state income tax return Note. Free state income tax return Because the IRS used her individual refund to pay the tax owed on the joint tax return, she does not need to provide proof of payment. Free state income tax return Line 3. Free state income tax return   She checks the “No” box because the IRS did not use her share of a joint refund to pay Joe's past-due debts. Free state income tax return Line 4. Free state income tax return   She checks the “Yes” box because she filed a joint tax return for tax year 2007. Free state income tax return Line 5. Free state income tax return   She skips this line because she checked the “Yes” box on line 4. Free state income tax return Part II Line 6. Free state income tax return   She enters her name, address, social security number, county, and best daytime phone number. Free state income tax return Part III Line 7. Free state income tax return   She enters Joe's name, address, social security number, and best daytime phone number. Free state income tax return Line 8. Free state income tax return   She checks the “divorced since” box and enters the date she was divorced as “05/13/2009. Free state income tax return ” She attaches a copy of her entire divorce decree (not Illustrated) to the form. Free state income tax return Line 9. Free state income tax return   She checks the box for “High school diploma, equivalent, or less,” because she had completed high school when her 2007 joint tax return was filed. Free state income tax return Line 10. Free state income tax return   She checks the “No” box because she was not a victim of spousal abuse or domestic violence. Free state income tax return Line 11. Free state income tax return   She checks the “No” box because neither she nor Joe incurred any large expenses during the year for which she wants relief. Free state income tax return Line 12. Free state income tax return   She checks the “Yes” box because she signed the 2007 joint tax return. Free state income tax return Line 13. Free state income tax return   She checks the “No” box because she did not have a mental or physical condition when the return was filed and does not have one now. Free state income tax return Part IV Line 14. Free state income tax return   Because she was not involved in preparing the return, she checks the box, “You were not involved in preparing the returns. Free state income tax return ” Line 15. Free state income tax return   She checks the box, “You did not know anything was incorrect or missing” because she did not know that Joe had received a $5,000 award. Free state income tax return She explains this in the space provided. Free state income tax return Line 16. Free state income tax return   She checks the box, “You knew that person had income” because she knew Joe had income from wages. Free state income tax return She also lists Joe's income. Free state income tax return Under “Type of Income” she enters “wages. Free state income tax return ” Under “Who paid it to that person,” she enters the name of Joe's employer, “Allied. Free state income tax return ” Under “Tax Year 1” she enters the amount of Joe's wages, “$40,000. Free state income tax return ” Because she is only requesting relief for one tax year, she leaves the entry spaces for “Tax Year 2” and “Tax Year 3” blank. Free state income tax return Line 17. Free state income tax return   She checks the “No” box because she did not know any amount was owed to the IRS when the 2007 return was signed. Free state income tax return Line 18. Free state income tax return   She checks the “No” box because, when the return was signed, she was not having financial problems. Free state income tax return Line 19. Free state income tax return   She checks the box, “You were not involved in handling money for the household” because Joe handled all the money for the household. Free state income tax return She provides additional information in the space provided. Free state income tax return Line 20. Free state income tax return   She checks the “No” box because Joe has never transferred money or property to her. Free state income tax return Part V Line 21. Free state income tax return   She enters the number “1” on both the line for “Adults” and the line for “Children” because her current household consists of herself and her son. Free state income tax return Line 22. Free state income tax return   She enters her average monthly income for her entire household. Free state income tax return Line 23. Free state income tax return   She lists her assets, which are $500 for the fair market value of a car, $450 in her checking account, and $100 in her savings account. Free state income tax return Signing and mailing Form 8857. Free state income tax return    Janie signs and dates the form. Free state income tax return She attaches the copy of her divorce decree (not illustrated) required by line 8. Free state income tax return Finally, she sends the form to the IRS address or fax number shown in the instructions for Form 8857. Free state income tax return This image is too large to be displayed in the current screen. Free state income tax return Please click the link to view the image. Free state income tax return Boulder's filled-in Form 8857 page 1 This image is too large to be displayed in the current screen. Free state income tax return Please click the link to view the image. Free state income tax return Boulder's filled-in Form 8857 page 2 This image is too large to be displayed in the current screen. Free state income tax return Please click the link to view the image. Free state income tax return Boulder's filled-in Form 8857 page 3 This image is too large to be displayed in the current screen. Free state income tax return Please click the link to view the image. Free state income tax return Boulder's filled-in Form 8857 page 4 Flowcharts The following flowcharts provide a quick way for determining whether you may qualify for relief. Free state income tax return But do not rely on these flowcharts alone. Free state income tax return Also read the earlier discussions. Free state income tax return Figure A. Free state income tax return Do You Qualify for Innocent Spouse Relief? Please click here for the text description of the image. Free state income tax return "Do You Qualify for Innocent Spouse Relief?" Figure B. Free state income tax return Do You Qualify for Separation of Liability Relief? Please click here for the text description of the image. Free state income tax return "Do You Qualify for Separation of Liability Relief?" Figure C. Free state income tax return Do You Qualify for Equitable Relief? This image is too large to be displayed in the current screen. Free state income tax return Please click the link to view the image. Free state income tax return "Do You Qualify for Equitable Relief?" Prev  Up  Next   Home   More Online Publications
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Railroad Retirement Tax Act (RRTA) Desk Guide (January 2009)

LMSB-4-0908-048

1. Preface

  • Ground Transportation Technical Advisor

2.  Introduction

  • Role of RRB

The Railroad Retirement Systems

Types of Tax

  • RRTA - Tiers and Rates

Filing Requirements, IRS
  • Forms
  • Form CT-
  • Form CT-2
  • Form 941
  • Form W-2
  • Form W-3

Filing Requirements, RRB
  • RRB Reports

Deposit Requirements

3.  Interaction Between IRS and RRB

  • Memorandum of Understanding (Coordination and Implementation Agreements)
  • On-site Information Exchange
  • IRS Reports
  • RRB Determination of Coverage
  • RRB Audit Report
  • IRS Follow-up

4.  Definitions

Employer

  • RRA vs. RRTA
  • Employer
  • Owned Company
  • Controlled Companies
  • Stock Ownership
  • Licenses
  • Agreements
  • Any Railroad Service
  • Indirect Services
  • Indirect
  • Companies
  • Casual Service
  • Receiver or Trustee as Employer
  • Railroad Associations
  • Railway Labor Organizations
  • Exclusions From "Employer"

Employee

  • In the Service of One or More Employers
  • Officer
  • Special Categories
  • Exclusions

Compensation

  • Comparison of RRTA to FICA
  • Included and Excluded
  • Earned vs. Paid

5.  Audit Techniques

Audit Plan

  • Preliminary
  • Payroll System
  • Computer Audit Specialist (CAS) Applications
  • Reconciliation of CT-1's
  • Supplemental Annuity Tax
  • RURT
  • Fringe Benefits
  • Backup Withholding
  • Conversion Issues
  • FICA vs. RRTA.

6.  Potential Issues

General

  • General Comments
  • Employee vs. Independent Contractor
  • Section 530
  • General Issues

Industry Specific Issues:

  • Severance Pay/ Termination Pay
  • Annual Productivity Fund Payments
  • Productivity Fund Buyouts
  • Employee Achievement Awards
  • Housing Allowances
  • Meals, Travel, Lodging
  • SEGREGATION
  • Excluded Companies
  • Principally Engaged in Railroad Activities
  • Separate, Identifiable Enterprise
  • Court Cases

Employer Issues

  • Common Paymaster
  • Successor Employers

Related Corporations:

  • Car Repair Shops
  • Warehousing and Warehouse Companies
  • Construction Companies
  • Real Estate Companies
  • Data Processing Companies

Examination Techniques, Related Corporations

  • Subsidiary Records
  • Parent Records
  • Contractual Relationship
  • General Inquiries
  • Other Considerations

7.  Report Writing

  • General
  • ET Version 8.0
  • Form 4665, Form 4666, Form 886A, Form 2504, Form 2297, Form 3363
  • Form 4668-RT
  • Form 4667
  • Conversion Case
  • IRC § 3509

Computation of Tax

  • Tier I 
  • Tier II

8.  Other Considerations

  • Statutory Period of Limitations
  • Form SS-1O
  • RRB Report Title
  • BA-3a Annual Report of Creditable Compensation
  • BA-4 Report of Creditable Compensation Adjustments
  • BA-9 Report of Separation Allowance or Severance Pay
  • BA-10 Report of Miscellaneous Compensation and Sick Pay
  • Form G-241 Summary Statement of Quarterly Report of Railroad Retirement
  • Supplemental Annuity Tax Liabilities
  • Form G-245 Summary Statement of Quarterly Report of Railroad Retirement
  • Supplemental Tax Credits
  • Form G-440 Report Specifications Sheet
  • Penalties, Interest Free Adjustments, Abatements


1.  Preface

This Desk Reference Guide is intended as a resource tool to assist Revenue Agents who are assigned the examination of a railroad employer. The Guide was prepared presuming that the reader has already received employment tax training. The guide will provide:

  • An overview of the Railroad Retirement System.
  • An explanation of the role of the Railroad Retirement Board (RRB).
  • An explanation of the interaction of the IRS and the RRB.
  • Definitions specific to railroad retirement terminology.
  • A suggested audit plan.
  • A list of potential issues with possible position write-ups.

We have attempted to include as many citations as possible throughout the text to relevant court cases, revenue rulings, revenue procedures, private letter rulings, etc.

Ground Transportation Technical Advisor
Technical Advisors assist the field in identifying, developing and resolving industry specific and cross-industry issues; provide educational opportunities to internal and external customers as appropriate; and maintain and develop industry and issue expertise. The Ground Transportation  Technical Advisor (TA) provides these services for the railroad and trucking industries. The TA maintains a liaison with various functions within the IRS as well as in other governmental agencies, and may also be aware of issues being raised at various other examination sites throughout the country.  As a result, the TA may be able to provide the examiner with current information to consider during the course of the audit.

The TA also maintains a web site at: http://lmsb.irs.gov/hq/pftg/railroad/index.asp

This web site may be useful in obtaining information on topics of an even more current nature The railroad industry is unique in many ways and we encourage examiners to use the web site as a means of obtaining knowledge and understanding about the industry.

It is recommended that the examiner use four hours to review the guide during the planning stages of the examination. The guide can then be used on a continuing basis during the course of the examination as a reference tool.

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2.  Introduction

Railroad employers are subject to a separate and distinct system of employment taxes from the Federal Insurance Contributions Act (FICA) and the Federal Unemployment Tax Act (FUTA) systems covering most other employers.  Parts of the system are the responsibility of the IRS, and parts of the system are the responsibility of the Railroad Retirement Board, an independent governmental agency.

Because this is a separate system for railroad employers, payments subject to railroad retirement taxes are specifically excepted from FICA, FUTA, and the Self-Employment Contributions Act (SECA).

The Railroad Retirement Board (RRB) is an independent agency in the executive branch of the Federal Government.  The RRB is headed by a three member Board appointed by the President of the United States, with the advice and consent of the Senate.  One member is appointed upon the recommendation of railroad employers, one is appointed upon the recommendation of railroad labor organizations, and the third member, who is the Chairman, is appointed to represent the public interest.  The Board Members' terms of office are five years, and are scheduled to expire in different years.

The primary function of the Board is the determination and payment of benefits under the retirement-survivor and unemployment-sickness programs. To this end, the Board employs field representatives to assist railroad personnel and their families in filing claims for benefits, examiners to adjudicate the claims, and information technology staff to operate the data processing equipment and administer the automated programs needed to maintain earnings records, calculate benefits and process payments.

The Board also employs actuaries to predict the future income and outlays of the railroad retirement trust funds, statisticians and economists to provide vital data, and attorneys to interpret legislation and represent the Board in litigation. Internal administration requires a procurement staff, a budget and accounting staff, and personnel specialists. The Inspector General employs auditors and investigators to detect any waste, fraud or abuse in the benefit programs.

The Board's headquarters is located in Chicago, Illinois.  The Board maintains field offices across the United States in localities easily accessible to large numbers of railroad workers.

Role of RRB
The role of the RRB is to administer the benefits of the Railroad Retirement Act (RRA) and Railroad Unemployment Insurance Act (RUIA) systems. Thus, the RRB maintains earnings records for each railroad employee in a manner similar to those maintained by the Social Security Administration.   The RRB’s relationship with the Social Security Administration (SSA) is particularly extensive because of the coordination between the two systems.  Railroad retirement annuities may be based in part on social security credits and social security benefit amounts awarded after 1974 to railroad retirement annuitants are made through the Board as part of combined railroad retirement-social security monthly benefit payments.

The RRB and the Social Security Administration have an interagency agreement providing for system-to-system access between the two agencies.
 
The Railroad Retirement System
Railroad employment taxes consist of employer and employee taxes. The employer and employees pay certain taxes at different rates and some are only paid by one or the other, though all taxes are collected by the employer and the employer makes deposits of these taxes.

  1. Railroad Retirement Tax Act (RRTA) – RRTA taxes fund railroad worker retirement benefits.  Collection of these taxes is the responsibility of the IRS.  These taxes are imposed by chapter 22 of the Internal Revenue Code (IRC).
  2. Railroad Retirement Act (RRA) – RRA is the benefit system through which payments are made to retired railroad workers. Benefits are administered by the RRB.
  3. Railroad Unemployment Insurance Act (RUIA) - This system provides unemployment and sickness insurance benefit program for railroad workers. The system is administered, and the taxes are collected by, the RRB.
  4. Railroad Unemployment Repayment Tax (RURT) - in periods of economic downturn, when the RUIA account becomes insufficient to cover payments of unemployment benefits, funds are advanced to the RUIA account from the RRTA account.  RURT taxes are then collected as a means of repaying the advance, bringing the RUIA fund back into balance.  Thus, this tax goes into and out of effect, depending on the balance in the RUIA account.

    As of June 29, 1993, the RUIA account was fully funded and all advances from the RRTA account had been repaid.  As a result, the RURT was terminated effective with respect to wages paid on or after July 1, 1993.  This tax could be reinstated at some future date.  When in effect this tax is imposed by Chapter 23A of the IRC.
  5. Tax on Employee Representatives - Certain individuals perform services as an officer or official representative of a railway labor organization for purposes of representing employees under the Railway Labor Act.  These individuals are subject to RRTA taxes, and file a separate return to report the wage payments and RRTA taxes. Individuals subject to this tax will not be covered in detail in this desk guide due to the limited number of returns filed for this special situation.  Discussion of employee representatives will be limited to an awareness only basis.
  6. IRC 6103 (l) (1) (C) - The IRS is authorized to disclose tax information regarding RRTA taxes to the RRB for purposes of its administration of the RRA.  The RRB may not use such tax information to administer any other statutes.  Such tax information may not be disclosed to RRB contractors (in connection with the administration of the RRA).  The IRS may not disclose RURT information to the RRB.

RRTA – Tiers and Rates
Legislation was enacted in 1934, 1935, and 1937 to establish a railroad retirement system separate from the Social Security Act of 1935.  Under Railroad Retirement provisions, service was credited back to 1936 and rail workers received a somewhat higher benefit than they would have under Social Security.  Additional legislation passed in 1974 restructured railroad retirement benefits into two tiers to coordinate them more fully with social security benefits. 

Railroad retirement replaces the social security system for railroad workers. The taxes under the railroad retirement system are included in two tiers.  The first tier is based on combined railroad retirement and social security credits, using social security benefit formulas.  The second tier is based on railroad service only and is comparable to the pensions paid over and above social security benefits in other heavy industries.  These tiers and rates are as follows:

RRTA

2008

2007

2006

Tier I Wage Base/Rate *

$102,000/6.20%

$97,500/6.20%

$94,200/6.20%

Tier I Wage Base/Rate *

unlimited/1.45%

unlimited/1.45%

unlimited/1.45%

Tier II ER Wage Base/Rate

$75,900/12.1%

$72,600/12.1%

$69,900/12.6%

Tier II EE Wage Base/Rate

$75,900/3.9%

$72,600/3.9%

$69,900/4.4%

* Subject to both employer and employee

 

 


When looking at the rates for RRTA, and comparing them to the rates used for social security, it is readily apparent that a railroad employer is subject to a much higher rate of tax than a non-railroad employer.  Thus, there is a significant incentive for an employer to attempt to be classified as a non-railroad, to classify workers as independent contractors, or to classify payments as something other than wages.
 
Filing Requirements, IRS

Forms

Because railroad employers do not come under the social security system, they file different employment tax returns from those used to report FICA wages.

The forms used to report railroad employment taxes are presented below.

Form CT-1

Employer's Annual Railroad Retirement Tax Return

A railroad employer files an annual CT-1 to report RRTA taxes.  All CT-1 returns are filed with the IRS Cincinnati Campus, and must be filed by the last day of the second month following the end of the calendar year (normally, by February 28th).

The IRS Cincinnati Campus provides information to the RRB to allow the RRB to reconcile railroad employer accounts.

Note: For any year in which the RURT is applicable, a separate entry is provided in order for the RURT to be reported on the Form CT-1.

Form CT-2

Employee Representative's Quarterly Railroad Tax Return

A CT-2 is filed on a quarterly basis by individuals subject to the Tax on Employee Representatives.

Form 941

Employer’s Quarterly Federal Tax Return

Although railroad employers are not subject to FICA, they are still required to withhold income tax on behalf of their railroad employees; there is no provision on Form CT-l to report the income tax withholding, so railroad employers use Form 941 for this purpose.

It is also conceivable that an employer could have some employees covered by FICA, and other employees covered by RRTA. In this situation the employer would be reporting FICA wages on the Form 941.  (This subject will be discussed in greater detail in the “Potential Issues” section of the guide.)

Form W-2

Wage and Tax Statement

Railroad employers use Form W-2 to report wage payments to employees and to SSA.  RRTA taxes are shown in Box 14, and Boxes 3, 4, 5, 6 and 7, relating to FICA and Medicare, should be blank.

Form W-3

Transmittal of Income and Tax Statements

Railroad employers use Form W-3 to transmit Forms W-2 to SSA.  Form W-3 provides a box to indicate that the employer is a railroad, alerting SSA to the fact that the information reported reflects RRTA rather than FICA and Medicare.

If an employer has some employees covered under FICA and Medicare as well as RRTA, the Form W-2's must be segregated by type, and separate Forms  W-3 prepared for each batch.

Filing Requirements, RRB

RRB Reports

A railroad employer is also required to submit numerous reports to the RRB which can be used by the examiner as a cross check of the amounts reported on the Form CT-1. Some of the reports are as follows:

RRB Report

Title

BA-3a

Annual Report of Creditable Compensation

BA-4

Report of Creditable Compensation Adjustments

BA-9

Report of Separation Allowance or Severance Pay

BA-10

Report of Miscellaneous Compensation and Sick Pay

Form G-241

Summary Statement of Quarterly Report of Railroad Retirement Supplemental Annuity Tax Liabilities

Form G-245

Summary Statement of Quarterly Report of Railroad Retirement Supplemental Tax Credits

Form G-440

Report Specifications Sheet

Deposit Requirements

Railroads are under the same rules as any other business or employer for determining deposit requirements for all types of tax.  RRTA taxes are also subject to deposit requirements.  The “Instructions for Form CT-1”, contain a detailed discussion of deposit rules for RRTA taxes. There were major changes made to the deposit requirements in 1999.  See News Release IR-1999-27 and Notice 99-20, 1999-17 I.R.B. 16.

In general RRTA taxes are deposited with an authorized financial institution or a Federal Reserve Bank by using Form 8109, Federal Tax Deposit Coupon.  Based on a dollar threshold there is a mandatory electronic deposit requirement.  That threshold has been increased from $50,000 to $200,000. If the total Federal tax deposits made in 2006 exceed $200,000 they must use the Electronic Federal Tax Payment System (EFTPS) or RRBLINK beginning January 1,2007.   

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3.  Interaction Between IRS and RRB

Agreement Between the Railroad Retirement Board and Internal Revenue Service

The Agreement between the Railroad Retirement Board and Internal Revenue Service (Agreement)  facilitates the sharing of information between the two agencies.

The terms of the Agreement call for each agency to share the results of its investigations with the other agency and to provide supporting work papers or documentation on an as needed basis, to the extent authorized under IRC § 6103(l)(1)(c) and other applicable federal laws.

On-site Information Exchange

On occasion, the IRS and RRB may be simultaneously involved in an audit of the same employer.  In such an event, each agency may share information with the other as permitted by applicable federal laws.  The LMSB Ground Transportation Technical Advisor should be contacted before any information is shared

IRS Reports

The Agreement calls for the IRS to furnish a copy of any examination report to the RRB.  For an agreed case, the report is furnished when the examiner is closing the case. Unagreed reports are furnished after Appeals action.

It is important to note that the RRB is NOT entitled to receive any information with respect to RURT taxes and/or social security taxes. If an examination results in changes to RURT and/or social security taxes, the report should be sanitized so that RURT and/or social security information is not included in the copy being provided to the RRB.  Such sanitizing should be coordinated with the local IRS disclosure officer.
 
RRB Determination of Coverage

The RRB conducts investigations with regard to whether or not an employer is an RRA employer, the results of which are referred to as determinations of coverage.

The RRB employs a legal staff charged with the responsibility of submitting a recommendation to the Board concerning questions of coverage.  The Board then makes the final determination of coverage after analyzing the recommendation of legal counsel.

The results of a determination of coverage can fall into three categories, and are forwarded to the IRS for appropriate action, as shown below.

Note that while the Board makes the determination of coverage, the IRS must conduct any follow-up action since the assessment and collection of applicable RRTA taxes are the responsibility of the IRS.

RRB Audit Report

The RRB also conducts audits of existing RRA employers.  During the course of such audits, the RRB may identify compensation that is not being reported as wages for RRTA purposes. The RRB forwards a copy of its report to the IRS for follow-up since the IRS is responsible for the assessment and collection of applicable RRTA taxes.

IRS Follow-up

With regard to both determinations of coverage and RRB audit reports, the IRS must decide what action is appropriate relative to assessment and collection of RRTA. This decision should take into account the relative size of the potential adjustment, the year(s) involved, other workload priorities, etc.

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4.  Definitions

Employer  RRA vs. RRTA

RRTA, RRA and RUIA each contain a definition of the term "employer". The IRS has endorsed the policy of construing and applying the term "employer" for RRTA purposes in the same manner as that term is construed and applied for RRA and RUIA purposes.  See Rev. Rul. 77-445, 1977-2 C.B. 357 and Rev. Rul. 74-121, 1974-1 C.B. 300.  See also City of Galveston by and Through Board of Trustees v. United States, 33 Fed. Cl. 685 (1995); Standard Office Bldg. Corp. v. United States, 819 F.2d 1371 (7th Cir. Ill. 1987); Galveston by and Through Board of Trustees v. United States, 22 Cl. Ct. 600 (1991); Carland, Inc. v. United States, 75 A.F.T.R.2d 1234 (W.D. Mo. 1995).

Employer

A RRTA "employer" is a railroad carrier or any company that: (1) is "directly or indirectly owned or controlled by" a railroad carrier or is "under common control" with such a carrier; and (2) "operates any equipment or facility or performs any service (except trucking service, casual service, and the casual operation of equipment or facilities) in connection with the transportation of passengers or property by railroad, or the receipt, delivery, elevation, transfer in transit, refrigeration or icing, storage, or handling of property transported by railroad. (see  IRC § 3231(a))

Owned Company

The Surface Transportation Board requires companies involved in the transportation industry to file reports and to list in these reports all affiliated companies.  These reports provide information regarding the principal business activity, the form of control, the percentage of control, along with information regarding any other company that may own a portion of the affiliated company.  Any company listed in these schedules will generally be railroad employers set out in Treas. Reg. § 31.3231(a)-1.

Controlled Companies

Companies that perform railroad service and are controlled by one or more carriers are employers.  Control may be by means of:

  • Stock ownership
  • Agreements
  • Licenses.
  • Any other devices which insure that the operation of the company is in the   interest of one or more carriers

Stock Ownership

If this is the form of control used, then the examiner should be able to show that a majority of the stock owners are also stock owners of one or more companies that control a carrier.  The examiner should request from the controlled company a list of their stock owners and other companies that they own stock in.

Licenses

If this is the form of control used, then the examiner should be able to show that the licensor of the controlled company has the same licenses with those of one or more companies that control a carrier.

Agreements

This means of control may be present through a contract or agreement. For example, when a carrier enters into a cost plus contract, the carrier may step in and control management action to prevent cost overruns. Another example of this means of control may occur when the right to control is set out in an agreement even though the company is designated as an independent contractor. Look for a separate agreement, like a union agreement, that simply states that the carrier will maintain the control necessary to determine whether workers are employees. Also a contract or agreement may spell out the control over the manner and method of accomplishing results. Such control may be found in an addendum to the contract or in the form of general specifications which set out the results and the manner and method of accomplishing the results.

The examiner is looking for a situation in which a result could be accomplished by one or more different methods. When the contract spells out the results to be achieved, as well as the method of accomplishing that result, the company is not free to use its own method, and is controlled.

Any Railroad Service

In addition to being owned or controlled, a company must also be performing a railroad service.  The service may be direct or indirect.

Direct Services

Direct services are those that involve the transportation by rail of:

  • Passengers
  • Property

Indirect Services

Indirect services involve those that are connected with, or supportive of rail transportation and/or essential to its proper functioning, but which are not casual or trucking services. The following list represents examples of services that are included in indirect services:

  • Accounting services
  • Bookkeeping
  • Bridge services
  • Building services
  • Construction
  • Engineering
  • Equipment leasing and rental
  • Loading and unloading freight
  • Maintenance of way
  • Office building rental
  • Piggyback trailer ramping, deramping and repair
  • Purchasing department
  • Repair services
  • Servicing overhead trolley lines
  • Stenographic services

Listed below are the kinds of companies that may provide indirect services:

  • Communications Company - Look for those that use microwave relays such as TV antenna (Cable TV) companies or other companies that may handle the railroad's communication, signal, and switching operations.
  • Computer Company - Look for those owned by a carrier that are performing accounting services or use computers to operate signals, keep track of shipments, rolling stock; and other rail activities. See Revenue Ruling 77-445, 1977-2 C.B. 357.  See also City of Galveston by and Through Board of Trustees v. United States, 33 Fed. Cl. 685 (1995); Galveston by and Through Board of Trustees v. United States, 22 Cl.Ct. 600 (1991).
  • Concrete Company - Look for those that pour pre-stressed concrete.  Check to see if they make concrete cross ties.
  • Dock Company - Look for all types of terminal companies, including potential subdivisions of a state such as port authorities which may also be subject to RRTA tax. See Revenue Ruling 77-386, 1977-2 C.B. 356 and Revenue Ruling 82-64, 1982-1 C.B. 154.
  • Financial Companies - Look for those that own or lease rolling stock.
  • Fuel Companies - Check to see if they are fueling, heating, or cooling units on cars or piggyback trailers. See Revenue Ruling 74-552, 1974-2 C.B. 338.  But See Missouri Pacific Lines, Inc. v. United States, 3 Cl. Ct. 14 (1983).
  • Gravel Companies – Look for those that furnish ballast including crushed slag.
  • Ice Companies - Icing boxcars generally have been replaced by refrigerator cars but sometimes ice companies fuel these cars. Revenue Ruling 69-306 1969-1 C.B. 267.
  • Lumber Companies - Look for those that furnish railroad ties or plywood cut to fit in railroad boxcars.
  • Manufacturing Companies - Look for those owned by a carrier that manufacture or remanufacture railroad pans, accessories, or other equipment used by a carrier. See Revenue Ruling 85-177, 1985-2 C.B. 203.  See also Trans-Serve, Inc. v. United States, 521 F.3d 462 (5th Cir. 2008).
  • Real Estate Company - Look for those owned by a carrier that own office buildings, warehouses, terminal tracks, and furnish or lease these to or on behalf of the railroad. See Revenue Ruling 74-121, 1974-1 C.B. 300.  See also Standard Office Bldg. Corp. v. United States, 819 F.2d 1371 (7th Cir. Ill. 1987); Carland, Inc. v. United States, 75 A.F.T.R.2d 1234 (W.D. Mo. 1995).
  • Steel Companies - Look for those that repair or build rolling stock. See Despatch Shops, Inc. v. Railroad Retirement Board, 153 F.2d 644 (D.C. Cir. 1946) regarding RUIA and Despatch Shops v. Railroad Retirement Board, 154 F.2d 417 (2d Cir. 1946) regarding RRA.
  • Warehouse Company - Look at each of these very carefully. Include any produce terminal company buildings, grain elevators, etc.

Casual Service

Treas. Reg. § 31.3231(a)-1(c) states that:

"... the term casual applies when the service rendered or the operation of equipment or facilities by a controlled company or person in connection with the transportation of passengers or property by railroad is so irregular or infrequent as to afford no substantial basis for an inference that such service or operation will be repeated, or whenever such service or operation is insubstantial."

The RRB regulations define “casual service” essentially the same: “…whenever such service or operation is so irregular or infrequent as to afford no substantial basis for an inference that such service or operation will be repeated, or whenever such service or operation is insubstantial.”  As a guideline in applying the definition of “insubstantial”, the RRB uses less than 10 percent of total revenue, employees, and output. This guideline, however, is not part of the RRB regulations. 20 CFR 202.6.

When issuing its regulations, the IRS declined to implement a less than 10 percent rule.  The Service stated that situations can arise where one of the factors is less than 10 percent while the remaining factors are greater than 10 percent, (factors here refers to revenue, employees and output). It is not clear that the service or operation of equipment or facilities would be insubstantial in those situations.

Receiver or Trustee as Employer

The definition of employer, at IRC § 3231(a), also includes:

"...Any receiver, trustee, or other individual or body, judicial or otherwise, when in the possession of the property or operating all or any part of the business of any such employer;…”

This would only apply to individuals who would be employees if the property or business operation had continued in the possession of the preceding employer.  This situation could occur, for example, if a railroad sought protection through the bankruptcy court, and the bankruptcy court appointed a trustee to operate the company.  The trustee would be a railroad employer of the carrier's employees.

Railroad Associations

The definition of employer also includes railroad associations, tariff bureaus, demurrage bureaus, weighing and inspection bureaus, collection agencies, and other organizations that are:

  1. Controlled and maintained wholly or principally by two or more employers and
  2. Engaged in performing services in connection with or incidental to railroad transportation.  An organization is engaged in performing services incidental to railroad transportation when such function would normally, in the absence of the organization, be performed by the constituent employers.

Railway Labor Organizations

The term employer includes railway labor organizations that are national in scope and organized in accordance with the provisions of the Railway Labor Act. "Employer" also includes the following railway labor organization subordinate units established according to constitution and by laws:

  1. State and national legislative committees
  2. General committees
  3. Insurance departments
  4. Local lodges and divisions.

Exclusions From "Employer"

IRC § 3231(a) excludes certain companies from the definition of "employer".

  1. A street railway, or interurban or electric railway, unless it is operating as a part of a general steam-railroad system of transportation.  (This definition also includes a general rail transportation system operated by electric, diesel, or other means of power.)
  2. any company because it is engaged in mining coal, supplying coal to an employer if delivery is not beyond the mine tipple, and operating equipment or facilities therefore, or in any of these activities.

Employee

For purposes of RRTA, "employee” is defined at IRC § 3231(b), and Treas. Reg. § 31.3231(b)-1 provides that an employee includes any individual who is:

  1. In the service of one or more employers,
  2. An officer of an employer,
  3. An employee of a local lodge or division defined as an employer, or
  4. In the service of a general committee.

In the Service of One or More Employers

The definition of "employee”, for RRTA purposes, is very similar to the definition of an employee for FICA purposes.  Treas. Reg. § 31.3231(b)-1 defines a worker as an employee if he or she is:

  1. Subject to the continuing authority of the employer who supervises and directs the manner in which the employee's services are rendered,
  2. Rendering professional or technical services integrated into the staff of the employer
  3. Rendering other personal services on the property used in the operations of the employer which are an integral part of those operations.

With respect to 2 and 3 above, an individual performing services as an independent contractor may be, with regard to such services, in the service of an employer within the meaning of these paragraphs. See Treas. Reg. § 31.3231(b)-1(a)(3).

Treas. Reg. § 31.3231(b)-1 goes onto provide additional facts to be considered, including:

  • It is the right to control, not the actual exercise of this right, that is important
  • The right of the employer to discharge the worker is an important indication that the worker is subject to direction and control
  • The furnishing of tools and the furnishing of a place to work are important indications that the worker is subject to direction and control
  • If the worker is subject to control and direction merely as to the results to be achieved, and not as to the means for achieving those results, the worker would generally be considered an independent contractor
  • Whether or not a worker is an employee must be determined based upon an examination of the particular facts of the case
  • If a worker is an employee, it is of no consequence that the worker is designated as a partner, independent contractor, etc.
  • If a worker is an employee, it is of no consequence that the worker performs the services on a part-time basis.

Officer

Similar to the rules under FICA, an officer of an employer is one who performs the duties of his or her office for compensation.

Special Categories

The definition also includes provision to include as an employee those individuals performing services on behalf of a railway labor organization.  If you are involved in the examination of a labor organization, refer to the code and regulations for the rules to be applied.

Exclusions

The term "employee” excludes individuals engaged in certain coal mining operations, as follows:

  • Coal mining
  • Preparing coal
  • Loading coal at the tipple
  • Handling coal between the mine and the tipple, unless the handling consists of movement by rail with standard locomotives.

Compensation

Comparison of RRTA to FICA

The definition of compensation for RRTA purposes is found at IRC § 3231(e), and, while there are historical differences between the FICA and RRTA statutes, there are also significant similarities. Legislation enacted over the years has made the RRTA Tier I tax identical to the FICA tax as well as conforming the Tier I wage ceiling to the FICA wage ceiling.

Along with conforming the structure of the RRTA to parallel that of the FICA, the exclusions from the definition of compensation under RRTA, with few exceptions, mirror the exclusions from the definition of wages under FICA.  These exclusions from compensation include non-monetary benefits such as fringe benefits, meals and lodging excludable under IRC § 119, and employer-paid life insurance premiums for group-term life insurance under $50,000.

In amending RRTA, Congress often indicated the purpose was to provide conformity to FICA.  Congress has added references to FICA provisions in the RRTA definition of successor employer and the rules for non-qualified deferred compensation (IRC §§ 3231(e)(2)(C) and 3231(e)(8), respectively).  In addition, Tier I benefits are designed to be equivalent to social security benefits, and are subject to federal income taxation in the same manner as social security benefits.

For calendar years after December 31, 1992, Treas. Reg. § 31.3231(e)-1(a)(1) provides that "compensation" for computation of RRTA taxes has the same meaning as the term "wages" under IRC § 3121(a), except as specifically limited by the Railroad Retirement Act or regulations

Included and Excluded

The Code provides for the inclusion or exclusion of the following items:

  • IRC § 3231(e)(1) -

Include -
1. Money remuneration for services rendered 
Exclude -
2. Payment for health insurance plan
3. Tips (but see IRC 3231(e)(3) below)
4. Employee business expense advance or reimbursement

  • IRC § 321l(e)(2) - provides for the application of the Tier I and II wage base amounts
  • IRC § 3231(e)(3) -
    includes cash tips unless the amount of cash tips is less than $20 for any calendar month
  • IRC § 3231(e)(4) -
    excludes payments from Tier I taxes that are made on account of sickness or accident disability to the extent they are received under a workmen's compensation law or RUIA.
  • IRC § 3231(e)(5) -
    excludes amounts for employee achievement awards, scholarship and fringe benefits, if the employee will meet the requirements or IRC §§ 74(C), 117, and 132, respectively.
  • IRC § 3231(e)(6) -
    excludes educational assistance program payments if the employee will meet the requirements of IRC § l27,
  • IRC § 3231(e)(7) -
    excludes qualified group legal service plan if the employee will meet the requirements of IRC § 120.
  • IRC § 323l(e)(8) -
    includes amounts contributed to a 401(k) plan in general, conforms RRTA rules with FICA rules with respect to non-qualified deferred compensation.
  • IRC § 3231(e)(9) -
    excludes meals and lodging if the employee will meet the requirements of IRC § 119.

Earned vs. Paid

As a historical note, in prior years RRTA was computed at the time of payment using the tax rates in effect when the compensation was earned.  RRTA also used a monthly wage base limitation rather than an annual wage base.

The statute was eventually modified to bring RRTA into conformity with FICA. Since 1985, the tax has been computed using rates in effect at the time of payment, regardless of when the compensation was earned. In addition, RRTA uses the annual wage base limitations rather than monthly limits.

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5.  Audit Techniques

Audit Plan

This chapter provides a suggested audit plan for the examination of a railroad for employment tax purposes.  The audit plan presented would result in a fairly complete review of the employer for compliance with filing requirements, correct treatment of various types of payments, employee/independent contractor issues, etc.  Depending on the time allotted to your specific examination, or prior examination history, it may be necessary to tailor the plan to your case by eliminating certain steps.

  1. Preliminary
    • Request copies of the following reports from the taxpayer
    • ICC Form A & B
    • RRB Form BA-3a
    • RRB Form BA-4
    • RRB Form BA-9
    • RRB Form BA-10
  2. Request a listing of all payroll returns filed by company and by type (i.e. Forms CT-1, 941, 940).
  3. Establish which companies and/or employees are covered by each return.

Payroll System

  1. Ask the taxpayer the following questions:
    • Are there any known errors on the returns under examination?
    • Are there any outstanding amended/corrected returns in regard to the Forms CT-1/941 for the years under examination?
    • Are there any amended/corrected returns being prepared or contemplated by the taxpayer regarding the Forms CT-1/941?
    • Are there any work papers or summaries available reconciling the return to the books or showing the account summaries for reporting the various taxable components on the Form CT-1?
    • Are there any work papers or summaries relating to payroll from other sources, such as audits or examinations by Internal Audit, State Agencies, RRB, other internal/external sources?

      Follow-up to secure copies of any of the above information, as appropriate.
  2. Have the taxpayer explain the payroll and accounting process with regard to:
    • How the determination is made as to whether an employee is covered by RRTA or FICA.
    • Payroll payments that may be excluded from Tier I and Tier II tax.
    • Whether compensation is reported on an earned or paid basis.
    • How the work hours for the supplemental annuity tax are determined.

Computer Audit Specialist (CAS) Applications

  1. Obtain the following computer information:
    • Form W-2 tapes
    • Form 1099 tapes
    • RRB Forms BA-3a, BA-4, BA-9 and BA-10 tapes
    • Payroll master file or record layouts
  2. Have the CAS:
    • Reconcile the W-2's to the 1099's to identify the conversion of workers from employees to independent contractors and/or to identify payments being made to employees who have been excluded from RRTA taxation.
    • Reconcile the Form W-2 tape to the BA-3a tape, taking into account 401(k) contributions and group term life insurance calculations.  This may identify payments reported on the BA-3a but excluded from RRTA taxation.
    • Reconcile the W-2 tape to the BA-9 tape. Discrepancies may indicate severance or dismissal payments which have been excluded from RRTA taxation.
    • Reconcile the W-2 tape to the BA-3a tape. Discrepancies may indicate sick pay payments which have been excluded from RRTA taxation.

Reconciliation of CT-1's

Determine whether or not Tier I and Tier II wage and tax amounts have been correctly reported by conducting the following tests:

  • Reconcile CT-1, line 5, to BA-3a. (Tier I)
  • Reconcile CT-1, line 6, to BA-3a. (Tier I)
  • Reconcile CT-1, line 11, to BA-4. (Tier I)
  • Reconcile CT-1, line 11, to BA-4. (Tier II)
    Note: request all Forms BA-4 filed with the RRB during the year and identify the reason for each adjustment.  Consider only those adjustments with a RRTA tax affect.  Compare this total to the railroad’s supporting work papers for line 11 of the CT-1.  Watch for statute of limitations, cash vs. earned, correction of errors, and incorrectly reported compensation
  • Verify that the correct wage base and tax rates have been used.
  • Review the chart of accounts for account titles that are related to employee compensation.  If any are found, test to determine whether or not they were included in taxable compensation.  Be aware of payments being made through accounts payable or voucher accounts.

Supplemental Annuity Tax

Determine whether or not the Supplemental Annuity Tax (SAT) has been correctly reported.  A safe harbor method of computing SAT is available for years after 12-31-93.  See the Section on SAT in the "Definitions" section of this guide.

RURT

Railroad Unemployment Repayment Tax - This tax was terminated effective with respect to payments made on or after July 1, 1993.  However, in the event it is reinstated, the following audit techniques are suggested:

  • Ask the taxpayer how the tax was computed.
  • Reconcile CT-1 RURT wages to Form BA-3a RUIA wages.
  • Select a sample of employees from the Form BA-3a to test for proper RURT computation.
  • Determine the impact of any discrepancies found for Tier I and/or Tier II purposes for RURT purposes.

Fringe Benefits

  1. Review the chart of accounts for account titles that indicate which fringe benefits are being offered.
  2. Request policy statements for fringe benefits that are offered to employees.  The policy should describe the following:
    • The benefit.
    • Which employees or group of employees are entitled to the benefit.
    • The requirements any employee must satisfy to qualify for the benefit.
    • Any limitations that are placed on any employee or group of employees in regard to use of the benefit.
    • The accountability requirements, if any, an employee is required to follow.
    • The RRTA Tier I and Tier II treatment of the benefit.
    • The federal income tax withholding treatment of the benefit.
    • How the benefit is reported to the recipient (i.e W-2, Form 1099, no reporting, etc.).
  3. Determine whether the fringe benefits are being treated properly for RRTA Tier I, Tier II and income tax withholding purposes. Consider:
    • Is a nontaxable benefit being offered that is not covered by IRC § 3121(a)?  If so, pursue further.
    • Is a nontaxable benefit being offered that appears to discriminate in favor of highly compensated individuals?  If so, pursue further.
    • Is a nontaxable benefit being offered on a flat rate basis without proper accountability? If so, pursue further.

Backup Withholding

Backup withholding applies to a railroad employer just as to any other type of employer.

The filed 1099's should be inspected, either by hard copy or tape, to determine whether or not any were filed with missing, incomplete, or obviously incorrect taxpayer identification numbers.  Take appropriate action with respect to any discrepancies discovered.

The taxpayer’s policies and procedures for determining when a 1099 must be issued should be reviewed and tested by comparison to accounts payable vendor listings.  The agent will have to make a decision on the necessity and/or depth of this compliance check based on such factors as prior audit history with the taxpayer, completeness and accuracy of policies and procedures, availability of computerized records for conducting the compliance test, etc.

Conversion Issues

Section 530 of the Revenue Act of 1978 applies to a railroad employer just as to any other type of employer, and must be considered prior to initiating any conversion issues.  This section, as amended through the years, provides an employer with relief from Federal employment taxes with respect to workers who have been reclassified as employees.  Section 530 relieves the employer from paying and withholding any employment taxes (including withholding on income tax) with respect to these employees not only for the period covered by the audit, but for future periods as well.

The Classification Settlement Program (CSP) is also available to railroad employers in the event of a reclassification issue.

The examiner should refer to the materials relating to worker classification that are included in this desk guide.

FICA vs. RRTA.

Determine whether the taxpayer has a group of employees who are covered by FICA rather than RRTA and if this is appropriate. Consider reclassifying for RRTA coverage under IRC Section 3231(a) and (b).

Determine whether the taxpayer owns or directly controls any entities that meet the definition of a carrier under IRC Section 3231(a) and has employees that are covered for FICA rather than RRTA.  Consider reclassifying for RRTA coverage under IRC Section 3231(a) and (b).

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6. Potential Issues

General

General Comments

Almost any issue that might be present in a FICA employment tax case may also be present with respect to a railroad employer.  Therefore, the examiner should consider current issues from other types of cases whenever examining a railroad employer.

Employee vs. Independent Contractor

The method of determining a worker to be an independent contractor or an employee is the same for a railroad employer as it is for any non-railroad employer.

Reference materials concerning worker classification have been included in this guide to assist the examiner in developing these issues.

The Classification Settlement Program would also apply to a railroad employer.

Section 530

Section 530 has the same application to a railroad employer as it does to any other type of employer.  The taxpayer should be provided the handout concerning Section 530 before beginning any conversion issues.

General Issues

Consider the following during the course of the employment tax examination:

  • Treatment of severance pay as non-qualified deferred compensation
  • Treatment of bonus and award payments as other-than compensation
  • Treatment of employees as independent contractors
  • Treatment of medical reimbursement plans
  • Treatment of employee relocation expense reimbursements
  • Treatment of related entities as FICA employers

This list is not meant to be all-inclusive.  It is only meant to demonstrate the fact that issues present in non-railroad employment tax cases may also be present, and should be considered, in a railroad employer examination.

Industry Specific Issues:

Severance Pay/ Termination Pay

Railroad employers have been very aggressive in attempts to treat severance pay and/or termination pay as not subject to RRTA.

Some of the arguments for this are...

  1. Severance/termination pay represents the buyout of a contract right, and is not taxable based on Revenue Ruling 58-301, 1958-1 C.B. 23.
  2. Severance payments are not subject to RRTA tax because the payments represent supplement unemployment benefit payments (SUB pay).  See CSX Corp. et. al v. United States, 518 F.3d 1328 (Fed. Cir. 2008).  
  3. Severance payments made after the year of termination constitute nonqualified deferred compensation under IRC § 3121(v)(2) as incorporated in IRC § 3231(e)(8)(B). 

With regard to the first argument, the government takes the position that Revenue Ruling 75-44, 1975-1 C.B. 15, is controlling, and that the payments represent compensation for past services rather than the buyout of contract rights.

With regard to the employer's secondary argument, there is no statutory provision for SUB-pay under IRC § 3221(e).  SUB-pay is excluded administratively from compensation for RRTA purposes as a result of the Service’s issuance of a series of FICA and FUTA revenue rulings dating back to 1956.  Revenue Ruling 56-249, 1956-1 C.B. 488, provides a limited exception from the definition of wages for FICA, FUTA and federal income tax withholding for certain payments made upon the involuntary separation of an employee from the service of the employer.  Rev. Rul. 56-249 sets forth eight criteria for determining if payments meet the limited exception. By extending the application of this revenue ruling to the railroad employer's severance/termination plan, it can usually be demonstrated that the plan fails most, if not all, of the eight criteria. Thus the payments made to the employees are not excludable from RRTA.

The third argument is that the payments are compensation in the form of periodic severance pay and if made beyond the year of termination constitutes nonqualified deferred compensation under IRC § 3121(v)(2) as incorporated in IRC § 3231(e)(8)(B). The Service’s position is that payments made under a severance plan are not deferred compensation (see Treas. Regs. § 31.3121(v)(2)-1, and Kraft Foods v. United States, 58 Fed. Cl. 507(2003))

Annual Productivity Fund Payments

In order to reduce costs, some railroad employers have negotiated agreements with their employees to reduce the size of the crew operating the train. In return for agreeing to reduce the size of the crew, the employees receive additional payments from the employer.

The employer agrees to set aside a certain amount of money throughout the course of the year, based on the number of trains operated with a reduced crew. Then, after year-end, each employee who participated in the operation of a train with a reduced crew receives a pro rata share of the funds set aside by the employer.

Employers have attempted to classify these payments as other than compensation for services, and therefore as not subject to RRTA. Employers generally base their position on Revenue Ruling 58-301, 1958-1 C.B. 23, modified and superseded by, Rev. Rul. 2004-110, 2004-2 C.B. 960.

The service has taken the position that these payments represent compensation for services rendered, and are subject to RRTA.  The service position is based on Revenue Ruling 75-44, 1975-1 C.B. 15.  In Rev. Rul. 75-44, the Service expressly distinguished the unexplained holding in Rev. Rul. 58-301 by pointing out that lump sum payments "for the past performance of services reflected in the employment rights [an employee] was giving up" are wages, whereas the relinquishment of a purely contractual right is not "wages."  STA of Baltimore – ILA Container Royalty Fund v. United States, 621 F. Supp. 1567 (1985), aff’d, 804 F.2d 296 (4th Cir. 1986).  This case held that payments made by employers into a “royalty fund” that were subsequently shared by eligible employees were “wages” for FICA and FUTA purposes.

If these types of payments are found, it is suggested that a request for Technical Advice be submitted because of the fact intensive nature of this issue.  Revenue Ruling 75-44, is not sufficient to support this type of issue.

Productivity Fund Buyouts

Some employers, having negotiated a productivity fund system, have subsequently offered employees a lump sum payment in exchange for the employees’ giving up any rights to receive future payments from the productivity fund.  These plans generally call for a payment to be made to the employee at the time the employee accepts the buyout, with an additional payment to be made to the employee at the time the employee leaves the service of the employer.

As with the issue presented above, employers have attempted to classify these payments as other than compensation for services, and therefore as not subject to RRTA, basing their position on Revenue Ruling 58-301.

The Service relies on Rev. Rul. 75-44 and Rev. Rul. 2004-110 to support its position that these payments represent compensation for services rendered, and are subject to RRTA.

Employee Achievement Awards

Employers frequently institute programs to recognize and reward employees for safety, perfect attendance, and other similar types of achievement.  In at least a few cases, railroads have chosen to give the employees shares of stock as the reward under these programs.  A dispute has arisen concerning the taxability of the stock for RRTA purposes.  The railroads are taking the position that stock does not meet the definition of compensation. (Other railroads may be taking this same position with respect to other forms of remuneration such as “reward points”, "bonus points”, etc.)

The argument of the railroad employers can be summarized as follows:

Both the RRA and RRTA define compensation as ”money remuneration". "Money" is a well defined term referring to coin and paper currency, and stock does not meet this definition.

For FICA purpose, compensation is defined as all remuneration, including the cash value of remuneration paid in some medium other than cash.  Stock would meet this broader definition of compensation.

Over the years Congress has had many opportunities to conform the definition of compensation for RRTA and FICA purposes, and in fact has done so with respect to some aspects of the definition.  However, Congress has never chosen to remove the term “money" from either the RRTA or RRA definition.

Since Congress included “money" in the definition of compensation, it must have had a reason for doing so, and the RRB and/or IRS cannot ignore the use of the word when issuing regulations.

Therefore, payments made to employees in the form of shares of stock are excludable from compensation for RRTA and RRA purposes.

The IRS and RRB position, on the other hand, is as follows:

While there are historical differences between the FICA and RRTA statutes, there are also significant similarities.  Legislation enacted over the years has made the RRTA Tier I tax identical to the FICA tax as well as conforming the Tier I wage ceiling to the FICA wage ceiling.  See, e.g., T.D. 8582, 1995-1 C.B. 187.

Along with conforming the structure of the RRTA to parallel that of the FICA, the exclusions from the definition of compensation under RRTA, with few exceptions, mirror the exclusions from the definition of wages under FICA.  These exclusions from compensation include non-monetary benefits such as fringe benefits, meals and lodging excludable under section 119 of the Internal Revenue Code, and employer-paid life insurance premiums for group-term life Insurance under $50,000.

In amending RRTA, Congress often indicated the purpose was to provide conformity to FICA.  Congress has added references to FICA provisions in the RRTA definition of successor employer and the rules for non-qualified deferred compensation (323l(e)(2)(C) and 323l(e)(8), respectively).  In addition, Tier I benefits are designed to be equivalent to social security benefits, and are subject to federal income taxation in the same manner as social security benefits.

Although the two statutes are not completely identical, the language of the regulations for RRTA indicates that the term compensation has the same meaning as the term wages for FICA.

It should be noted that new regulations regarding the definition of compensation were issued in 1994, clarifying that compensation for RRTA and FICA purposes was essentially the same. See Treas. Reg. § 31.3231(e)-1(a).

If you encounter this issue contact the Ground Transportation Technical Advisor for current information on our position.

Housing Allowances

See Rev. Rul. 69-391; 1969-2 C.B. 191, concerning of the value of housing provided to railroad employees.

Meals, Travel, Lodging

See Rev. Rul. 75-279, 1975-2 C.B. 409. Generally, allowances for travel expenses are not wages subject to RRTA taxes if the employee is required to take a period for substantial rest away from home, or if the employee is away from home overnight while on service, and made a full accounting for the allowance.

Other allowances for shorter trips when the employee does not require substantial rest away from home or is not away from home overnight are includible in wages subject to RRTA taxes.

Segregation

Segregation is a concept used for the separation of employees subject to FICA taxes from those subject to RRTA taxes.  Although the concept of segregation at one time was not present in the IRC or Regulations, the Service had used the concept in publishing rulings.  In 1994, Treas. Reg. § 31.3231(a)-1 was amended, by adding paragraph (f).  This new paragraph incorporated the concept of segregation into the regulations.

The purpose of segregation is to obtain a fair and reasonable application of law, but it cannot be used in all cases.  For example, it cannot be used if the records are inadequate or if the railroad and non-railroad work is so commingled that it cannot be separately identified.

Segregation is permitted only if the employer in question is principally engaged in non-railroad activities.  "Principally engaged," for this purpose, is 50 percent or more.  This determination requires consideration of relative revenues, number of employees, payrolls, output, facilities in use, and the character of customers.  Sound judgment will dictate the test or combination of tests to use for your determination.  You may want to incorporate into your determination process consideration of relative net profits and the amount of control over such profits exercised by the parent railroad; also, you may take into consideration the demonstrated purpose for creation of the company and the principal occupation and interest of company executives.

Excluded Companies

Segregation cannot be used for express companies, sleeping car companies, or carrier railroads.  Segregation can be used when, for example, a company has two different businesses and there is a definite separation between them.

Principally Engaged in Railroad Activities

Since, as stated, segregation is not applicable to a company that is principally engaged in railroad activities, you will have to determine the status of a given company by some or all of the following comparisons.

  • Revenues
  • Number of employees
  • Payrolls
  • Output
  • Facilities in use
  • Character of customers

Because the objective is to cover under RRTA all employees that perform some railroad services, it is important that the tests clearly reflect the business activities of the company.  The best tests to accomplish this purpose must be selected on a case-by-case basis.

  • Illustration - In the case of an office building, test by output (relative occupancy) and character of tenants (relative number of RRTA and non-RRTA employers).  It is immaterial to the latter test that non-RRTA employers include those owned or controlled by RRTA employers.  The ultimate test is whether the building primarily serves RRTA employers and if so, it is not eligible for segregation.

Separate, Identifiable Enterprise

Segregation can be applied only to a separate identifiable enterprise. Therefore, when a company's records are commingled so that the enterprise cannot be separately identified, segregation cannot be applied.

In some cases, the records for railroad activities and for non-railroad activities must, in order to meet the test, be kept as if the company were operating two separate divisions.  In other cases, the records do not need to be as separate.  In determining the extent to which records need to be separately maintained, consider the extent, scope, and inter-relationship of the railroad and non-railroad operations.  The larger the size of the company and the territory covered, and the more the railroad and non-railroad operations are related, the more independent the records should be in order for the railroad operation to quality as a separate identifiable enterprise for purposes of segregation.

Court Cases

A number of court cases and revenue rulings have dealt with the issue of segregation.  See in general, the discussion that follows concerning related corporations.
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Employer Issues

Common Paymaster

The common paymaster rules apply when the total wages of an employee of two or more related RRTA employers are paid by one of the RRTA employers.  The common paymaster is treated as the sole employer for purposes of the RRTA taxes and the annual wages base.

The common paymaster rule, however, does not apply if the employers are not related, or if the employers are not all RRTA employers.  Thus, an RRTA employer cannot be a common paymaster for FICA purposes and a FICA employer cannot be a common paymaster for RRTA purposes.

Successor Employers

The RRTA adopts the successor provisions found under FICA at IRC § 3121(a)(1), allowing an employer that acquires and continues a business of another employer to include wages paid by the prior employer for purposes of determining the annual wage base limitation.  However, the RRTA requires that the terms "employer", "service" and "compensation" be given their meaning under RRTA.  As a result, successor employer issues involving FICA and RRTA employers cannot be commingled.
 
Related Corporations:

“Employer” is defined by IRC § 3231(a) for RRTA purposes as a company under some kind of control by a railroad that provides a railroad-related service that is not a trucking service, casual service, or the casual operation of equipment or facilities.  This definition has generated a long line of court cases dealing with the issue of whether or not a related company should be considered a railroad employer.  The courts have generally held that if an entity’s operations are related both “functionally” and “economically” to a carrier under common control with the entity, the entity is an “employer” within the meaning of the RRTA.

Some of the related corporation issues that have been considered by the courts are presented below.

Car Repair Shops

Car repair shops – Despatch Shops, Inc. v. Railroad Retirement Board, 153
F.2d 644 (D.C. Cir. 1946) regarding RUIA and Despatch Shops, Inc. v. Railroad Retirement Board, 154 F.2d 417 (2d Cir. 1946) regarding RRA.  The taxpayer argued that it should not be treated as a railroad employer because it was a separately incorporated manufacturing company distinct from its parent, a railroad, and because it was doing heavy repairs and manufacturing similar to that done by other, similar non-railroad companies.  The court rejected this argument, stating:

“If Despatch, in this situation, is not an 'employer' under the Act it can be readily seen that the railroads would be free to take from under the Act virtually all of their workers whose employment is in the ‘supporting’ activities, through the simple expedient of setting up wholly owned corporate affiliates to perform these services.  It is conceivable that everything from maintenance-of-way through engineering or bookkeeping might be done by so called 'independent' corporations.”

Warehousing and Warehouse Companies

Warehousing and warehouse companies - Railroad Retirement Board v. Duquesne Warehouse Co., 326 U.S. 446(1946).

Construction Companies

Construction companies - Southern Development Company v Railroad Retirement Board, 243 F.2d 351 (8th Cir. 1957).

Real Estate Companies

Real estate companies - Standard Office Building Corp. v. United States, 819 F.2d 1371 (7th Cir. 1987).  In this case, the position of the Service was that employees of Standard, owner and operator of an office building, were RRTA employees because the company was controlled by a railroad and the building was more than half occupied by offices of the railroad.

Although the position of the Service was sustained by the district court, that court was reversed by the appellate court on the basis that the taxpayer was not covered by RRTA because it was incorporated prior to the passage in 1937 of the RRTA, and because its employees would have secured a pension windfall if covered under RRTA. The portion of the building occupied by the railroad did not exceed 57 percent during the period in question.

By contrast, in the Southern Development case, cited earlier, Southern was controlled by a railroad and owned an office building, 64 percent of which was occupied by offices of the railroad.  The railroad paid 73 percent of the total rents of the building equal to 39 percent of Southern's total income.  Although Southern owned other properties all of its employees were engaged in the operation of the office building.  Based on these facts, Southern was held to be an RRTA employer. The rationale of Southern was adopted in Rev. Rul. 74-121, l974-l C.B. 300.

These contrasting decisions highlight the fact that it cannot be assumed that any subsidiary corporation performing a railroad related function will be held to be an RRTA employer, even though it appears to meet the two tests of IRC § 3231(a). The result will depend on how the subsidiary unit fits into the general scheme of corporate operations.  If its service is truly significant to transportation, a good case can be made and, if not, all attempts to classify it as an RRTA employer may be fruitless.

Data Processing Companies

Issues involving these companies do not markedly differ from the preceding ones, particularly if the data processing company is controlled by a railroad and appears to have little reason for coming into existence other than to take a group of employees out of RRTA and make them subject to the lesser FICA taxes.

However, assume for discussion that a subsidiary of a railroad conglomerate provides data processing services to the railroad while also providing such services to banks, mutual funds, and other non-railroad clients.  In addition, another subsidiary is formed to provide computer programmers and software to the first subsidiary to the extent of 3O percent of its services, with the balance being provided to non-railroad clients.

Taxability of the subsidiaries for RRTA purposes is not dependent on the percentage of service as much as it is dependent on the degree to which the services are integrated into the normal functions of the railroad.

It can be argued that computer programming and design of software is as essential to railroad operations as is the leasing of office space or the furnishing of accounting services.  It would follow then that employees of the subsidiaries who render such services are subject to RRTA taxes.  However, it does not necessarily follow that the companies are RRTA employers with respect to all of their operations or all of their employees.

Examination Techniques, Related Corporations

Most issues concerning a parent and subsidiary relationship can be developed in a similar fashion. The guidelines presented below present a suggested method that can be modified, as appropriate, to fit the circumstances of your specific case. Also remember that while a subsidiary of a railroad employer may also be a railroad employer, the parent of a railroad employer is not a railroad employer under Union Pacific Corporation v. United States, 26 Cl. Ct. 739 (1992), aff'd, 5 F.3d 523 (Fed. Cir. 1993).

Subsidiary Records

Review the subsidiary's corporate minute book and stock record book to ascertain:

  • The date of incorporation
  • The stated corporate purpose
  • The exact location of the subsidiary
  • The stock authorized and issued, including a complete stock history from inception to the present

Parent Records

Analyze the following schedules on Form R-1, Annual Report to the Surface Transportation Board, of the parent corporation:

  • Schedule A, Identity of Respondent with Affiliated Companies
  • Schedule 310, Investments in Affiliated Companies
  • Schedule 310A, Investments in Common Stock of Affiliated Companies
  • Schedules 352A to 352B, Road and Equipment Property (These schedules can help in reconciling and locating property used by the entity under examination)
  • Schedule 410, Railway Operating Expenses (Look for expenses paid to a subsidiary that is supposedly not an RRTA company)
  • Schedule 512, Transactions Between Respondent and Companies or Persons Affiliated with Respondent for Services Received or Provided

Review the corporate minute book for:

  • Advances from the parent to the affiliate (Note date, amount, terms and purpose)
  • Financial forecasts for the affiliate, including monthly, quarterly, semiannual, annual, and other long-range forecasts
  • Budgets, proposed and actual, prepared by or for the company

Contractual Relationship

Determine the contractual relationship between the parent and subsidiary by examining all intercorporate contracts.  Pay particular attention to those for services to be rendered by the parent company.  Compare the contracts with similar contracts between non-affiliated companies and ascertain:

  • Whether transactions were at arms length
  • The amount of income derived by the subsidiary from the parent as compared with income from other sources
  • Contractual amounts expended by the parent to its affiliate, compared with similar amounts expended to non-affiliated companies
  • Whether persons presently under contract with the affiliate were formerly employed by the parent

General Inquiries

Make the following general inquiries:

  • Were private letter rulings obtained with reference to the issue? (If so, obtain copies and determine whether or not the facts as presented were complete and accurate in their presentation of the situation in question.)
  • Was the entity in question ever subject to RRTA taxes? (If so, determine why and when it was removed from coverage.)
  • Were letter opinions obtained from the Railroad Retirement Board? (If so, obtain copies and determine whether or not the facts as presented were complete and accurate in their presentation of the situation in question.)

Note: Letter opinions on coverage were issued by the RRB’s General Counsel prior to 1992.  After 1991, the RRB’s Board Members made such coverage rulings referred to as Board Determinations on coverage.

  • Obtain a copy of the Employer Status Listing published by the RRB, and, if necessary, secure more specific information from the Board via the Ground Transportation Technical Advisor
  • Refer to Moody's Transportation manuals for other useful information
  • Compute the operating ratio of the company in question for several years, if possible, and make further studies if the ratio exceeds 100 for a sustained period

Other Considerations

Analyze any statistical, financial, profitability, and feasibility studies made by or on behalf of the parent company.  Such studies would generally provide a basis for important decisions that may affect the subsidiary in question.

Review the Authority for Expenditures (AFE's) or at least the AFE logbook for acquisitions that affect the subsidiary in question and, if found, determine if they were subsequently charged back to the parent.

Review correspondence and filed records if the company maintains an index or log of such documentation.

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7. Report Writing

General

Report writing for RRTA purposes is similar to report writing for any other type of employment tax examination.  However, certain forms must be modified  for differences between RRTA and FICA rates and tax categories.

Form 4665, Form 4666, Form 886A, Form 2504, Form 2297, Form 3363

The forms listed above are used in a similar fashion for an RRTA report as in any other type of employment tax report.  In an unagreed case the report should include a complete narrative write up of facts, law, and argument.  Refer to general employment tax report writing instructions when completing these forms.

Form 4668

Form 4668 must be modified to account for Tier I and Tier II taxes.

Care should be taken to ensure that the appropriate wage base and tax rate amounts are used when completing this form.

Form 4667

Since railroad employers are not subject to FUTA, Form 4667 is not used. However, if workers were treated by the employer as being subject to FUTA and those workers are being converted to railroad employees, the examiner should prepare a report reflecting the over assessment of FUTA.  The examiner should include a recommendation to transfer the FUTA to any RUIA liability. See IRM 4.23.8.6.2.

Conversion Case

If an employer treated certain workers as employees subject to FICA, and it is determined that the workers should correctly be treated as employees subject to RRTA, or vice versa, it may be necessary to prepare two reports: one to process the deficiency, and one to process the over assessment.

Refer in general to IRM 4.23.8.6.2 for special rules concerning this type of case.

Prior to making a conversion, consideration must be given to the statutory period of limitations. Some employers may already have filed 941 returns as well as CT-1 returns. Do not undertake a conversion issue unless the statute on the return for which additional tax is due has been protected.

Where the conversion case involves a delinquent return, follow the usual substitute for return/delinquent return procedures.

In an agreed conversion case, where wages are converted from FICA to RRTA, only the net additional tax due will be assessed.

If the conversion is unagreed, the taxpayer should be advised to file a claim under IRC § 3503 for the FICA.  The examiner will propose the assessment of the full amount of the RRTA taxes, and the claim will not be acted upon until the final resolution of the unagreed case.

IRC § 3509

The provisions of IRC § 3509 do not apply to RRTA taxes.
 
Computation of Tax

Tier I
Tier I tax is the equivalent of FICA and Medicare, and is computed in the same manner, using the same annual wage base and tax rates.  It is assessed equally on the employer and employee.

Tier II
Tier II tax uses a separate annual wage base and tax rate from those applicable for Tier I.  In addition, the tax is not assessed equally on the employer and employee. Instead, the employer pays a significantly greater share of this tax.

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8. Other Considerations

Statutory Period of Limitations

Form CT-1 is an annual return, due by the last day of the second month following the end of the calendar year (i.e., February 28th) see Treas. Reg.   § 31.6071(a)-1(b). The normal statutory period of limitations expires three years after the due date, or the date filed, whichever is later.

The presumptive filing date pertaining to Form 941, found at IRC § 6501(b)(2), DOES NOT apply to Form CT-1.

Various courts have considered the question of whether or not the filing of Form 941 starts the running of the statute of limitations with respect to Form CT-1. Although the IRS has been sustained in some courts in its position that the filing of a Form 941 does not start the running of the statutory period of limitations with respect to the CT-1 at least one court has ruled otherwise. The court found that the Form 941 provided sufficient information for the IRS to assess the RRTA taxes, and, therefore, the three year statute for the Form CT-1 had started with the filing of the Form 941. As a result, aggressive action should be taken to protect the statutory period of limitations in all situations.

Form SS-1O
The statutory period of limitations for RRTA purposes is extended using Form SS-10.

Form SS-10 must be modified in order to extend the statutory period of limitations with regard to RURT taxes.  Line 1(a), which is normally used to extend the statutory period of limitations with respect to FUTA taxes, will not be effective for extending the statute with respect to RURT taxes.  Since FUTA taxes do not normally apply to a railroad employer, Line (1)(a) on Form SS-l0 should be changed to state: "The Railroad Unemployment Repayment Tax for Calendar years".

Questions or concerns with regard to extending the RURT statute should be discussed with the Ground Transportation Technical Advisor.  The Ground Transportation Technical Advisor can assist in obtaining advice from Counsel.

Penalties, Interest Free Adjustments, Abatements

Penalties, the provisions for interest free adjustments, and abatements apply to RRTA cases in the same manner as in any other type of employment tax examination.
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Page Last Reviewed or Updated: 24-Jan-2014

The Free State Income Tax Return

Free state income tax return Publication 551 - Main Content Table of Contents Cost BasisStocks and Bonds Real Property Business Assets Allocating the Basis Adjusted BasisIncreases to Basis Decreases to Basis Adjustments to Basis Example Basis Other Than CostProperty Received for Services Taxable Exchanges Nontaxable Exchanges Property Transferred From a Spouse Property Received as a Gift Inherited Property Property Changed to Business or Rental Use How To Get Tax HelpLow Income Taxpayer Clinics (LITCs). Free state income tax return Cost Basis The basis of property you buy is usually its cost. Free state income tax return The cost is the amount you pay in cash, debt obligations, other property, or services. Free state income tax return Your cost also includes amounts you pay for the following items. 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Free state income tax return Identifying stock or bonds sold. Free state income tax return   If you can adequately identify the shares of stock or the bonds you sold, their basis is the cost or other basis of the particular shares of stock or bonds. Free state income tax return If you buy and sell securities at various times in varying quantities and you cannot adequately identify the shares you sell, the basis of the securities you sell is the basis of the securities you acquired first. Free state income tax return For more information about identifying securities you sell, see Stocks and Bonds under Basis of Investment Property in chapter 4 of Publication 550. Free state income tax return Mutual fund shares. Free state income tax return   If you sell mutual fund shares acquired at different times and prices, you can choose to use an average basis. Free state income tax return For more information, see Publication 550. 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Free state income tax return   Settlement costs do not include amounts placed in escrow for the future payment of items such as taxes and insurance. Free state income tax return   The following items are some settlement fees and closing costs you cannot include in the basis of the property. Free state income tax return Casualty insurance premiums. Free state income tax return Rent for occupancy of the property before closing. Free state income tax return Charges for utilities or other services related to occupancy of the property before closing. Free state income tax return Charges connected with getting a loan. Free state income tax return The following are examples of these charges. Free state income tax return Points (discount points, loan origination fees). Free state income tax return Mortgage insurance premiums. Free state income tax return Loan assumption fees. Free state income tax return Cost of a credit report. Free state income tax return Fees for an appraisal required by a lender. Free state income tax return Fees for refinancing a mortgage. Free state income tax return If these costs relate to business property, items (1) through (3) are deductible as business expenses. Free state income tax return Items (4) and (5) must be capitalized as costs of getting a loan and can be deducted over the period of the loan. Free state income tax return Points. Free state income tax return   If you pay points to obtain a loan (including a mortgage, second mortgage, line of credit, or a home equity loan), do not add the points to the basis of the related property. Free state income tax return Generally, you deduct the points over the term of the loan. Free state income tax return For more information on how to deduct points, see Points in chapter 4 of Publication 535. Free state income tax return Points on home mortgage. Free state income tax return   Special rules may apply to points you and the seller pay when you obtain a mortgage to purchase your main home. Free state income tax return If certain requirements are met, you can deduct the points in full for the year in which they are paid. Free state income tax return Reduce the basis of your home by any seller-paid points. Free state income tax return For more information, see Points in Publication 936, Home Mortgage Interest Deduction. Free state income tax return Assumption of mortgage. Free state income tax return   If you buy property and assume (or buy subject to) an existing mortgage on the property, your basis includes the amount you pay for the property plus the amount to be paid on the mortgage. Free state income tax return Example. Free state income tax return If you buy a building for $20,000 cash and assume a mortgage of $80,000 on it, your basis is $100,000. Free state income tax return Constructing assets. Free state income tax return   If you build property or have assets built for you, your expenses for this construction are part of your basis. Free state income tax return Some of these expenses include the following costs. Free state income tax return Land, Labor and materials, Architect's fees, Building permit charges, Payments to contractors, Payments for rental equipment, and Inspection fees. Free state income tax return In addition, if you own a business and use your employees, material, and equipment to build an asset, do not deduct the following expenses. Free state income tax return You must include them in the asset's basis. Free state income tax return Employee wages paid for the construction work, reduced by any employment credits allowed; Depreciation on equipment you own while it is used in the construction; Operating and maintenance costs for equipment used in the construction; and The cost of business supplies and materials used in the construction. Free state income tax return    Do not include the value of your own labor, or any other labor you did not pay for, in the basis of any property you construct. Free state income tax return Business Assets If you purchase property to use in your business, your basis is usually its actual cost to you. Free state income tax return If you construct, create, or otherwise produce property, you must capitalize the costs as your basis. Free state income tax return In certain circumstances, you may be subject to the uniform capitalization rules, next. Free state income tax return Uniform Capitalization Rules The uniform capitalization rules specify the costs you add to basis in certain circumstances. Free state income tax return Activities subject to the rules. Free state income tax return   You must use the uniform capitalization rules if you do any of the following in your trade or business or activity carried on for profit. Free state income tax return Produce real or tangible personal property for use in the business or activity, Produce real or tangible personal property for sale to customers, or Acquire property for resale. Free state income tax return However, this rule does not apply to personal property if your average annual gross receipts for the 3 previous tax years are $10 million or less. Free state income tax return   You produce property if you construct, build, install, manufacture, develop, improve, create, raise, or grow the property. Free state income tax return Treat property produced for you under a contract as produced by you up to the amount you pay or costs you otherwise incur for the property. Free state income tax return Tangible personal property includes films, sound recordings, video tapes, books, or similar property. Free state income tax return    Under the uniform capitalization rules, you must capitalize all direct costs and an allocable part of most indirect costs you incur due to your production or resale activities. Free state income tax return To capitalize means to include certain expenses in the basis of property you produce or in your inventory costs rather than deduct them as a current expense. Free state income tax return You recover these costs through deductions for depreciation, amortization, or cost of goods sold when you use, sell, or otherwise dispose of the property. Free state income tax return   Any cost you cannot use to figure your taxable income for any tax year is not subject to the uniform capitalization rules. Free state income tax return Example. Free state income tax return If you incur a business meal expense for which your deduction would be limited to 50% of the cost of the meal, that amount is subject to the uniform capitalization rules. Free state income tax return The nondeductible part of the cost is not subject to the uniform capitalization rules. Free state income tax return More information. Free state income tax return   For more information about these rules, see the regulations under section 263A of the Internal Revenue Code and Publication 538, Accounting Periods and Methods. Free state income tax return Exceptions. Free state income tax return   The following are not subject to the uniform capitalization rules. Free state income tax return Property you produce that you do not use in your trade, business, or activity conducted for profit; Qualified creative expenses you pay or incur as a free-lance (self-employed) writer, photographer, or artist that are otherwise deductible on your tax return; Property you produce under a long-term contract, except for certain home construction contracts; Research and experimental expenses deductible under section 174 of the Internal Revenue Code; and Costs for personal property acquired for resale if your (or your predecessor's) average annual gross receipts for the 3 previous tax years do not exceed $10 million. Free state income tax return For other exceptions to the uniform capitalization rules, see section 1. Free state income tax return 263A-1(b) of the regulations. Free state income tax return   For information on the special rules that apply to costs incurred in the business of farming, see chapter 6 of Publication 225, Farmer's Tax Guide. Free state income tax return Intangible Assets Intangible assets include goodwill, patents, copyrights, trademarks, trade names, and franchises. Free state income tax return The basis of an intangible asset is usually the cost to buy or create it. Free state income tax return If you acquire multiple assets, for example a going business for a lump sum, see Allocating the Basis below to figure the basis of the individual assets. Free state income tax return The basis of certain intangibles can be amortized. Free state income tax return See chapter 8 of Publication 535 for information on the amortization of these costs. Free state income tax return Patents. Free state income tax return   The basis of a patent you get for an invention is the cost of development, such as research and experimental expenditures, drawings, working models, and attorneys' and governmental fees. Free state income tax return If you deduct the research and experimental expenditures as current business expenses, you cannot include them in the basis of the patent. Free state income tax return The value of the inventor's time spent on an invention is not part of the basis. Free state income tax return Copyrights. Free state income tax return   If you are an author, the basis of a copyright will usually be the cost of getting the copyright plus copyright fees, attorneys' fees, clerical assistance, and the cost of plates that remain in your possession. Free state income tax return Do not include the value of your time as the author, or any other person's time you did not pay for. Free state income tax return Franchises, trademarks, and trade names. Free state income tax return   If you buy a franchise, trademark, or trade name, the basis is its cost, unless you can deduct your payments as a business expense. Free state income tax return Allocating the Basis If you buy multiple assets for a lump sum, allocate the amount you pay among the assets you receive. Free state income tax return You must make this allocation to figure your basis for depreciation and gain or loss on a later disposition of any of these assets. Free state income tax return See Trade or Business Acquired below. Free state income tax return Group of Assets Acquired If you buy multiple assets for a lump sum, you and the seller may agree to a specific allocation of the purchase price among the assets in the sales contract. Free state income tax return If this allocation is based on the value of each asset and you and the seller have adverse tax interests, the allocation generally will be accepted. Free state income tax return However, see Trade or Business Acquired, next. Free state income tax return Trade or Business Acquired If you acquire a trade or business, allocate the consideration paid to the various assets acquired. Free state income tax return Generally, reduce the consideration paid by any cash and general deposit accounts (including checking and savings accounts) received. Free state income tax return Allocate the remaining consideration to the other business assets received in proportion to (but not more than) their fair market value in the following order. Free state income tax return Certificates of deposit, U. Free state income tax return S. Free state income tax return Government securities, foreign currency, and actively traded personal property, including stock and securities. Free state income tax return Accounts receivable, other debt instruments, and assets you mark to market at least annually for federal income tax purposes. Free state income tax return Property of a kind that would properly be included in inventory if on hand at the end of the tax year or property held primarily for sale to customers in the ordinary course of business. Free state income tax return All other assets except section 197 intangibles, goodwill, and going concern value. Free state income tax return Section 197 intangibles except goodwill and going concern value. Free state income tax return Goodwill and going concern value (whether or not they qualify as section 197 intangibles). Free state income tax return Agreement. Free state income tax return   The buyer and seller may enter into a written agreement as to the allocation of any consideration or the fair market value (FMV) of any of the assets. Free state income tax return This agreement is binding on both parties unless the IRS determines the amounts are not appropriate. Free state income tax return Reporting requirement. Free state income tax return   Both the buyer and seller involved in the sale of business assets must report to the IRS the allocation of the sales price among section 197 intangibles and the other business assets. Free state income tax return Use Form 8594 to provide this information. Free state income tax return The buyer and seller should each attach Form 8594 to their federal income tax return for the year in which the sale occurred. Free state income tax return More information. Free state income tax return   See Sale of a Business in chapter 2 of Publication 544 for more information. Free state income tax return Land and Buildings If you buy buildings and the land on which they stand for a lump sum, allocate the basis of the property among the land and the buildings so you can figure the depreciation allowable on the buildings. Free state income tax return Figure the basis of each asset by multiplying the lump sum by a fraction. Free state income tax return The numerator is the FMV of that asset and the denominator is the FMV of the whole property at the time of purchase. Free state income tax return If you are not certain of the FMV of the land and buildings, you can allocate the basis based on their assessed values for real estate tax purposes. Free state income tax return Demolition of building. Free state income tax return   Add demolition costs and other losses incurred for the demolition of any building to the basis of the land on which the demolished building was located. Free state income tax return Do not claim the costs as a current deduction. Free state income tax return Modification of building. Free state income tax return   A modification of a building will not be treated as a demolition if the following conditions are satisfied. Free state income tax return 75 percent or more of the existing external walls of the building are retained in place as internal or external walls, and 75 percent or more of the existing internal structural framework of the building is retained in place. Free state income tax return   If the building is a certified historic structure, the modification must also be part of a certified rehabilitation. Free state income tax return   If these conditions are met, add the costs of the modifications to the basis of the building. Free state income tax return Subdivided lots. Free state income tax return   If you buy a tract of land and subdivide it, you must determine the basis of each lot. Free state income tax return This is necessary because you must figure the gain or loss on the sale of each individual lot. Free state income tax return As a result, you do not recover your entire cost in the tract until you have sold all of the lots. Free state income tax return   To determine the basis of an individual lot, multiply the total cost of the tract by a fraction. Free state income tax return The numerator is the FMV of the lot and the denominator is the FMV of the entire tract. Free state income tax return Future improvement costs. Free state income tax return   If you are a developer and sell subdivided lots before the development work is completed, you can (with IRS consent) include in the basis of the properties sold an allocation of the estimated future cost for common improvements. Free state income tax return See Revenue Procedure 92–29 for more information, including an explanation of the procedures for getting consent from the IRS. Free state income tax return Use of erroneous cost basis. Free state income tax return   If you made a mistake in figuring the cost basis of subdivided lots sold in previous years, you cannot correct the mistake for years for which the statute of limitations (generally 3 tax years) has expired. Free state income tax return Figure the basis of any remaining lots by allocating the correct original cost basis of the entire tract among the original lots. Free state income tax return Example. Free state income tax return You bought a tract of land to which you assigned a cost of $15,000. Free state income tax return You subdivided the land into 15 building lots of equal size and equitably divided your basis so that each lot had a basis of $1,000. Free state income tax return You treated the sale of each lot as a separate transaction and figured gain or loss separately on each sale. Free state income tax return Several years later you determine that your original basis in the tract was $22,500 and not $15,000. Free state income tax return You sold eight lots using $8,000 of basis in years for which the statute of limitations has expired. Free state income tax return You now can take $1,500 of basis into account for figuring gain or loss only on the sale of each of the remaining seven lots ($22,500 basis divided among all 15 lots). Free state income tax return You cannot refigure the basis of the eight lots sold in tax years barred by the statute of limitations. Free state income tax return Adjusted Basis Before figuring gain or loss on a sale, exchange, or other disposition of property or figuring allowable depreciation, depletion, or amortization, you must usually make certain adjustments to the basis of the property. Free state income tax return The result of these adjustments to the basis is the adjusted basis. Free state income tax return Increases to Basis Increase the basis of any property by all items properly added to a capital account. Free state income tax return These include the cost of any improvements having a useful life of more than 1 year. Free state income tax return Rehabilitation expenses also increase basis. Free state income tax return However, you must subtract any rehabilitation credit allowed for these expenses before you add them to your basis. Free state income tax return If you have to recapture any of the credit, increase your basis by the recaptured amount. Free state income tax return If you make additions or improvements to business property, keep separate accounts for them. Free state income tax return Also, you must depreciate the basis of each according to the depreciation rules that would apply to the underlying property if you had placed it in service at the same time you placed the addition or improvement in service. Free state income tax return For more information, see Publication 946. Free state income tax return The following items increase the basis of property. Free state income tax return The cost of extending utility service lines to the property; Impact fees; Legal fees, such as the cost of defending and perfecting title; Legal fees for obtaining a decrease in an assessment levied against property to pay for local improvements; Zoning costs; and The capitalized value of a redeemable ground rent. Free state income tax return Assessments for Local Improvements Increase the basis of property by assessments for items such as paving roads and building ditches that increase the value of the property assessed. Free state income tax return Do not deduct them as taxes. Free state income tax return However, you can deduct as taxes charges for maintenance, repairs, or interest charges related to the improvements. Free state income tax return Example. Free state income tax return Your city changes the street in front of your store into an enclosed pedestrian mall and assesses you and other affected landowners for the cost of the conversion. Free state income tax return Add the assessment to your property's basis. Free state income tax return In this example, the assessment is a depreciable asset. Free state income tax return Deducting vs. Free state income tax return Capitalizing Costs Do not add to your basis costs you can deduct as current expenses. Free state income tax return For example, amounts paid for incidental repairs or maintenance that are deductible as business expenses cannot be added to basis. Free state income tax return However, you can choose either to deduct or to capitalize certain other costs. Free state income tax return If you capitalize these costs, include them in your basis. Free state income tax return If you deduct them, do not include them in your basis. Free state income tax return See Uniform Capitalization Rules earlier. Free state income tax return The costs you can choose to deduct or to capitalize include the following. Free state income tax return Carrying charges, such as interest and taxes, that you pay to own property, except carrying charges that must be capitalized under the uniform capitalization rules; Research and experimentation costs; Intangible drilling and development costs for oil, gas, and geothermal wells; Exploration costs for new mineral deposits; Mining development costs for a new mineral deposit; Costs of establishing, maintaining, or increasing the circulation of a newspaper or other periodical; and Costs of removing architectural and transportation barriers to people with disabilities and the elderly. Free state income tax return If you claim the disabled access credit, you must reduce the amount you deduct or capitalize by the amount of the credit. Free state income tax return For more information about deducting or capitalizing costs, see chapter 7 in Publication 535. Free state income tax return Table 1. Free state income tax return Examples of Increases and Decreases to Basis Increases to Basis Decreases to Basis Capital improvements:   Putting an addition on your home   Replacing an entire roof  Paving your driveway  Installing central air conditioning Rewiring your home Exclusion from income of subsidies for energy conservation measures  Casualty or theft loss deductions and insurance reimbursements  Vehicle credits Assessments for local improvements: Water connections Sidewalks Roads Section 179 deduction  Casualty losses: Restoring damaged property Depreciation  Nontaxable corporate distributions Legal fees:  Cost of defending and perfecting a title   Zoning costs   Decreases to Basis The following are some items that reduce the basis of property. Free state income tax return Section 179 deduction; Nontaxable corporate distributions; Deductions previously allowed (or allowable) for amortization, depreciation, and depletion; Exclusion of subsidies for energy conservation measures; Vehicle credits; Residential energy credits; Postponed gain from sale of home; Investment credit (part or all) taken; Casualty and theft losses and insurance reimbursement; Certain canceled debt excluded from income; Rebates from a manufacturer or seller; Easements; Gas-guzzler tax; Adoption tax benefits; and Credit for employer-provided child care. Free state income tax return Some of these items are discussed next. Free state income tax return Casualties and Thefts If you have a casualty or theft loss, decrease the basis in your property by any insurance or other reimbursement and by any deductible loss not covered by insurance. Free state income tax return You must increase your basis in the property by the amount you spend on repairs that substantially prolong the life of the property, increase its value, or adapt it to a different use. Free state income tax return To make this determination, compare the repaired property to the property before the casualty. Free state income tax return For more information on casualty and theft losses, see Publication 547, Casualties, Disasters, and Thefts. Free state income tax return Easements The amount you receive for granting an easement is generally considered to be a sale of an interest in real property. Free state income tax return It reduces the basis of the affected part of the property. Free state income tax return If the amount received is more than the basis of the part of the property affected by the easement, reduce your basis in that part to zero and treat the excess as a recognized gain. Free state income tax return Vehicle Credits Unless you elect not to claim the qualified plug-in electric vehicle credit, the alternative motor vehicle credit, or the qualified plug-in electric drive motor vehicle credit, you may have to reduce the basis of each qualified vehicle by certain amounts reported. Free state income tax return For more information, see Form 8834, Qualified Plug-in Electric and Electric Vehicle Credit; Form 8910, Alternative Motor Vehicle Credit; Form 8936, Qualified Plug-in Electric Drive Motor Vehicle Credit;and the related instructions. Free state income tax return Gas-Guzzler Tax Decrease the basis in your car by the gas-guzzler (fuel economy) tax if you begin using the car within 1 year of the date of its first sale for ultimate use. Free state income tax return This rule also applies to someone who later buys the car and begins using it not more than 1 year after the original sale for ultimate use. Free state income tax return If the car is imported, the one-year period begins on the date of entry or withdrawal of the car from the warehouse if that date is later than the date of the first sale for ultimate use. Free state income tax return Section 179 Deduction If you take the section 179 deduction for all or part of the cost of qualifying business property, decrease the basis of the property by the deduction. Free state income tax return For more information about the section 179 deduction, see Publication 946. Free state income tax return Exclusion of Subsidies for Energy Conservation Measures You can exclude from gross income any subsidy you received from a public utility company for the purchase or installation of any energy conservation measure for a dwelling unit. Free state income tax return Reduce the basis of the property for which you received the subsidy by the excluded amount. Free state income tax return For more information on this subsidy, see Publication 525. Free state income tax return Depreciation Decrease the basis of property by the depreciation you deducted, or could have deducted, on your tax returns under the method of depreciation you chose. Free state income tax return If you took less depreciation than you could have under the method chosen, decrease the basis by the amount you could have taken under that method. Free state income tax return If you did not take a depreciation deduction, reduce the basis by the full amount of the depreciation you could have taken. Free state income tax return Unless a timely election is made not to deduct the special depreciation allowance for property placed in service after September 10, 2001, decrease the property's basis by the special depreciation allowance you deducted or could have deducted. Free state income tax return If you deducted more depreciation than you should have, decrease your basis by the amount equal to the depreciation you should have deducted plus the part of the excess depreciation you deducted that actually reduced your tax liability for the year. Free state income tax return In decreasing your basis for depreciation, take into account the amount deducted on your tax returns as depreciation and any depreciation capitalized under the uniform capitalization rules. Free state income tax return For information on figuring depreciation, see Publication 946. Free state income tax return If you are claiming depreciation on a business vehicle, see Publication 463. Free state income tax return If the car is not used more than 50% for business during the tax year, you may have to recapture excess depreciation. Free state income tax return Include the excess depreciation in your gross income and add it to your basis in the property. Free state income tax return For information on the computation of excess depreciation, see chapter 4 in Publication 463. Free state income tax return Canceled Debt Excluded From Income If a debt you owe is canceled or forgiven, other than as a gift or bequest, you generally must include the canceled amount in your gross income for tax purposes. Free state income tax return A debt includes any indebtedness for which you are liable or which attaches to property you hold. Free state income tax return You can exclude canceled debt from income in the following situations. Free state income tax return Debt canceled in a bankruptcy case or when you are insolvent, Qualified farm debt, and Qualified real property business debt (provided you are not a C corporation). Free state income tax return If you exclude from income canceled debt under situation (1) or (2), you may have to reduce the basis of your depreciable and nondepreciable property. Free state income tax return However, in situation (3), you must reduce the basis of your depreciable property by the excluded amount. Free state income tax return For more information about canceled debt in a bankruptcy case or during insolvency, see Publication 908, Bankruptcy Tax Guide. Free state income tax return For more information about canceled debt that is qualified farm debt, see chapter 3 in Publication 225. Free state income tax return For more information about qualified real property business debt, see chapter 5 in Publication 334, Tax Guide for Small Business. Free state income tax return Postponed Gain From Sale of Home If you postponed gain from the sale of your main home before May 7, 1997, you must reduce the basis of your new home by the postponed gain. Free state income tax return For more information on the rules for the sale of a home, see Publication 523. Free state income tax return Adoption Tax Benefits If you claim an adoption credit for the cost of improvements you added to the basis of your home, decrease the basis of your home by the credit allowed. Free state income tax return This also applies to amounts you received under an employer's adoption assistance program and excluded from income. Free state income tax return For more information Form 8839, Qualified Adoption Expenses. Free state income tax return Employer-Provided Child Care If you are an employer, you can claim the employer-provided child care credit on amounts you paid or incurred to acquire, construct, rehabilitate, or expand property used as part of your qualified child care facility. Free state income tax return You must reduce your basis in that property by the credit claimed. Free state income tax return For more information, see Form 8882, Credit for Employer-Provided Child Care Facilities and Services. Free state income tax return Adjustments to Basis Example In January 2005, you paid $80,000 for real property to be used as a factory. Free state income tax return You also paid commissions of $2,000 and title search and legal fees of $600. Free state income tax return You allocated the total cost of $82,600 between the land and the building—$10,325 for the land and $72,275 for the building. Free state income tax return Immediately you spent $20,000 in remodeling the building before you placed it in service. Free state income tax return You were allowed depreciation of $14,526 for the years 2005 through 2009. Free state income tax return In 2008 you had a $5,000 casualty loss from a that was not covered by insurance on the building. Free state income tax return You claimed a deduction for this loss. Free state income tax return You spent $5,500 to repair the damages and extend the useful life of the building. Free state income tax return The adjusted basis of the building on January 1, 2010, is figured as follows: Original cost of building including fees and commissions $72,275 Adjustments to basis:     Add:         Improvements 20,000   Repair of damages 5,500       $97,775 Subtract:       Depreciation $14,526     Deducted casualty loss 5,000 19,526 Adjusted basis on January 1, 2010 $78,249 The basis of the land, $10,325, remains unchanged. Free state income tax return It is not affected by any of the above adjustments. Free state income tax return Basis Other Than Cost There are many times when you cannot use cost as basis. Free state income tax return In these cases, the fair market value or the adjusted basis of property may be used. Free state income tax return Adjusted basis is discussed earlier. Free state income tax return Fair market value (FMV). Free state income tax return   FMV is the price at which property would change hands between a buyer and a seller, neither having to buy or sell, and both having reasonable knowledge of all necessary facts. Free state income tax return Sales of similar property on or about the same date may be helpful in figuring the property's FMV. Free state income tax return Property Received for Services If you receive property for services, include the property's FMV in income. Free state income tax return The amount you include in income becomes your basis. Free state income tax return If the services were performed for a price agreed on beforehand, it will be accepted as the FMV of the property if there is no evidence to the contrary. Free state income tax return Bargain Purchases A bargain purchase is a purchase of an item for less than its FMV. Free state income tax return If, as compensation for services, you purchase goods or other property at less than FMV, include the difference between the purchase price and the property's FMV in your income. Free state income tax return Your basis in the property is its FMV (your purchase price plus the amount you include in income). Free state income tax return If the difference between your purchase price and the FMV represents a qualified employee discount, do not include the difference in income. Free state income tax return However, your basis in the property is still its FMV. Free state income tax return See Employee Discounts in Publication 15-B. Free state income tax return Restricted Property If you receive property for your services and the property is subject to certain restrictions, your basis in the property is its FMV when it becomes substantially vested unless you make the election discussed later. Free state income tax return Property becomes substantially vested when your rights in the property or the rights of any person to whom you transfer the property are not subject to a substantial risk of forfeiture. Free state income tax return There is substantial risk of forfeiture when the rights to full enjoyment of the property depend on the future performance of substantial services by any person. Free state income tax return When the property becomes substantially vested, include the FMV, less any amount you paid for the property, in income. Free state income tax return Example. Free state income tax return Your employer gives you stock for services performed under the condition that you will have to return the stock unless you complete 5 years of service. Free state income tax return The stock is under a substantial risk of forfeiture and is not substantially vested when you receive it. Free state income tax return You do not report any income until you have completed the 5 years of service that satisfy the condition. Free state income tax return Fair market value. Free state income tax return   Figure the FMV of property you received without considering any restriction except one that by its terms will never end. Free state income tax return Example. Free state income tax return You received stock from your employer for services you performed. Free state income tax return If you want to sell the stock while you are still employed, you must sell the stock to your employer at book value. Free state income tax return At your retirement or death, you or your estate must offer to sell the stock to your employer at its book value. Free state income tax return This is a restriction that by its terms will never end and you must consider it when you figure the FMV. Free state income tax return Election. Free state income tax return   You can choose to include in your gross income the FMV of the property at the time of transfer, less any amount you paid for it. Free state income tax return If you make this choice, the substantially vested rules do not apply. Free state income tax return Your basis is the amount you paid plus the amount you included in income. Free state income tax return   See the discussion of Restricted Property in Publication 525 for more information. Free state income tax return Taxable Exchanges A taxable exchange is one in which the gain is taxable or the loss is deductible. Free state income tax return A taxable gain or deductible loss is also known as a recognized gain or loss. Free state income tax return If you receive property in exchange for other property in a taxable exchange, the basis of property you receive is usually its FMV at the time of the exchange. Free state income tax return A taxable exchange occurs when you receive cash or property not similar or related in use to the property exchanged. Free state income tax return Example. Free state income tax return You trade a tract of farm land with an adjusted basis of $3,000 for a tractor that has an FMV of $6,000. Free state income tax return You must report a taxable gain of $3,000 for the land. Free state income tax return The tractor has a basis of $6,000. Free state income tax return Involuntary Conversions If you receive property as a result of an involuntary conversion, such as a casualty, theft, or condemnation, you can figure the basis of the replacement property you receive using the basis of the converted property. Free state income tax return Similar or related property. Free state income tax return   If you receive replacement property similar or related in service or use to the converted property, the replacement property's basis is the old property's basis on the date of the conversion. Free state income tax return However, make the following adjustments. Free state income tax return Decrease the basis by the following. Free state income tax return Any loss you recognize on the conversion, and Any money you receive that you do not spend on similar property. Free state income tax return Increase the basis by the following. Free state income tax return Any gain you recognize on the conversion, and Any cost of acquiring the replacement property. Free state income tax return Money or property not similar or related. Free state income tax return   If you receive money or property not similar or related in service or use to the converted property, and you buy replacement property similar or related in service or use to the converted property, the basis of the new property is its cost decreased by the gain not recognized on the conversion. Free state income tax return Example. Free state income tax return The state condemned your property. Free state income tax return The property had an adjusted basis of $26,000 and the state paid you $31,000 for it. Free state income tax return You realized a gain of $5,000 ($31,000 − $26,000). Free state income tax return You bought replacement property similar in use to the converted property for $29,000. Free state income tax return You recognize a gain of $2,000 ($31,000 − $29,000), the unspent part of the payment from the state. Free state income tax return Your gain not recognized is $3,000, the difference between the $5,000 realized gain and the $2,000 recognized gain. Free state income tax return The basis of the new property is figured as follows: Cost of replacement property $29,000 Minus: Gain not recognized 3,000 Basis of the replacement property $26,000 Allocating the basis. Free state income tax return   If you buy more than one piece of replacement property, allocate your basis among the properties based on their respective costs. Free state income tax return Example. Free state income tax return The state in the previous example condemned your unimproved real property and the replacement property you bought was improved real property with both land and buildings. Free state income tax return Allocate the replacement property's $26,000 basis between land and buildings based on their respective costs. Free state income tax return More information. Free state income tax return   For more information about condemnations, see Involuntary Conversions in Publication 544. Free state income tax return For more information about casualty and theft losses, see Publication 547. Free state income tax return Nontaxable Exchanges A nontaxable exchange is an exchange in which you are not taxed on any gain and you cannot deduct any loss. Free state income tax return If you receive property in a nontaxable exchange, its basis is usually the same as the basis of the property you transferred. Free state income tax return A nontaxable gain or loss is also known as an unrecognized gain or loss. Free state income tax return Like-Kind Exchanges The exchange of property for the same kind of property is the most common type of nontaxable exchange. Free state income tax return To qualify as a like-kind exchange, you must hold for business or investment purposes both the property you transfer and the property you receive. Free state income tax return There must also be an exchange of like-kind property. Free state income tax return For more information, see Like-Kind Exchanges in Publication 544. Free state income tax return The basis of the property you receive is the same as the basis of the property you gave up. Free state income tax return Example. Free state income tax return You exchange real estate (adjusted basis $50,000, FMV $80,000) held for investment for other real estate (FMV $80,000) held for investment. Free state income tax return Your basis in the new property is the same as the basis of the old ($50,000). Free state income tax return Exchange expenses. Free state income tax return   Exchange expenses are generally the closing costs you pay. Free state income tax return They include such items as brokerage commissions, attorney fees, deed preparation fees, etc. Free state income tax return Add them to the basis of the like-kind property received. Free state income tax return Property plus cash. Free state income tax return   If you trade property in a like-kind exchange and also pay money, the basis of the property received is the basis of the property you gave up increased by the money you paid. Free state income tax return Example. Free state income tax return You trade in a truck (adjusted basis $3,000) for another truck (FMV $7,500) and pay $4,000. Free state income tax return Your basis in the new truck is $7,000 (the $3,000 basis of the old truck plus the $4,000 paid). Free state income tax return Special rules for related persons. Free state income tax return   If a like-kind exchange takes place directly or indirectly between related persons and either party disposes of the property within 2 years after the exchange, the exchange no longer qualifies for like-kind exchange treatment. Free state income tax return Each person must report any gain or loss not recognized on the original exchange. Free state income tax return Each person reports it on the tax return filed for the year in which the later disposition occurs. Free state income tax return If this rule applies, the basis of the property received in the original exchange will be its fair market value. Free state income tax return   These rules generally do not apply to the following kinds of property dispositions. Free state income tax return Dispositions due to the death of either related person, Involuntary conversions, and Dispositions in which neither the original exchange nor the subsequent disposition had as a main purpose the avoidance of federal income tax. Free state income tax return Related persons. Free state income tax return   Generally, related persons are ancestors, lineal descendants, brothers and sisters (whole or half), and a spouse. Free state income tax return   For other related persons (for example, two corporations, an individual and a corporation, a grantor and fiduciary, etc. Free state income tax return ), see Nondeductible Loss in chapter 2 of Publication 544. Free state income tax return Exchange of business property. Free state income tax return   Exchanging the assets of one business for the assets of another business is a multiple property exchange. Free state income tax return For information on figuring basis, see Multiple Property Exchanges in chapter 1 of Publication 544. Free state income tax return Partially Nontaxable Exchange A partially nontaxable exchange is an exchange in which you receive unlike property or money in addition to like property. Free state income tax return The basis of the property you receive is the same as the basis of the property you gave up, with the following adjustments. Free state income tax return Decrease the basis by the following amounts. Free state income tax return Any money you receive, and Any loss you recognize on the exchange. Free state income tax return Increase the basis by the following amounts. Free state income tax return Any additional costs you incur, and Any gain you recognize on the exchange. Free state income tax return If the other party to the exchange assumes your liabilities, treat the debt assumption as money you received in the exchange. Free state income tax return Example. Free state income tax return You traded a truck (adjusted basis $6,000) for a new truck (FMV $5,200) and $1,000 cash. Free state income tax return You realized a gain of $200 ($6,200 − $6,000). Free state income tax return This is the FMV of the truck received plus the cash minus the adjusted basis of the truck you traded ($5,200 + $1,000 – $6,000). Free state income tax return You include all the gain in income (recognized gain) because the gain is less than the cash received. Free state income tax return Your basis in the new truck is: Adjusted basis of old truck $6,000 Minus: Cash received (adjustment 1(a)) 1,000   $5,000 Plus: Gain recognized (adjustment 2(b)) 200 Basis of new truck $5,200 Allocation of basis. Free state income tax return   Allocate the basis first to the unlike property, other than money, up to its FMV on the date of the exchange. Free state income tax return The rest is the basis of the like property. Free state income tax return Example. Free state income tax return You had an adjusted basis of $15,000 in real estate you held for investment. Free state income tax return You exchanged it for other real estate to be held for investment with an FMV of $12,500, a truck with an FMV of $3,000, and $1,000 cash. Free state income tax return The truck is unlike property. Free state income tax return You realized a gain of $1,500 ($16,500 − $15,000). Free state income tax return This is the FMV of the real estate received plus the FMV of the truck received plus the cash minus the adjusted basis of the real estate you traded ($12,500 + $3,000 + $1,000 – $15,000). Free state income tax return You include in income (recognize) all $1,500 of the gain because it is less than the FMV of the unlike property plus the cash received. Free state income tax return Your basis in the properties you received is figured as follows. Free state income tax return Adjusted basis of real estate transferred $15,000 Minus: Cash received (adjustment 1(a)) 1,000   $14,000 Plus: Gain recognized (adjustment 2(b)) 1,500 Total basis of properties received $15,500 Allocate the total basis of $15,500 first to the unlike property — the truck ($3,000). Free state income tax return This is the truck's FMV. Free state income tax return The rest ($12,500) is the basis of the real estate. Free state income tax return Sale and Purchase If you sell property and buy similar property in two mutually dependent transactions, you may have to treat the sale and purchase as a single nontaxable exchange. Free state income tax return Example. Free state income tax return You are a salesperson and you use one of your cars 100% for business. Free state income tax return You have used this car in your sales activities for 2 years and have depreciated it. Free state income tax return Your adjusted basis in the car is $22,600 and its FMV is $23,100. Free state income tax return You are interested in a new car, which sells for $28,000. Free state income tax return If you trade your old car and pay $4,900 for the new one, your basis for depreciation for the new car would be $27,500 ($4,900 plus the $22,600 basis of your old car). Free state income tax return However, you want a higher basis for depreciating the new car, so you agree to pay the dealer $28,000 for the new car if he will pay you $23,100 for your old car. Free state income tax return Because the two transactions are dependent on each other, you are treated as having exchanged your old car for the new one and paid $4,900 ($28,000 − $23,100). Free state income tax return Your basis for depreciating the new car is $27,500, the same as if you traded the old car. Free state income tax return Partial Business Use of Property If you have property used partly for business and partly for personal use, and you exchange it in a nontaxable exchange for property to be used wholly or partly in your business, the basis of the property you receive is figured as if you had exchanged two properties. Free state income tax return The first is an exchange of like-kind property. Free state income tax return The second is personal-use property on which gain is recognized and loss is not recognized. Free state income tax return First, figure your adjusted basis in the property as if you transferred two separate properties. Free state income tax return Figure the adjusted basis of each part of the property by taking into account any adjustments to basis. Free state income tax return Deduct the depreciation you took or could have taken from the adjusted basis of the business part. Free state income tax return Then figure the amount realized for your property and allocate it to the business and nonbusiness parts of the property. Free state income tax return The business part of the property is permitted to be exchanged tax free. Free state income tax return However, you must recognize any gain from the exchange of the nonbusiness part. Free state income tax return You are deemed to have received, in exchange for the nonbusiness part, an amount equal to its FMV on the date of the exchange. Free state income tax return The basis of the property you acquired is the total basis of the property transferred (adjusted to the date of the exchange), increased by any gain recognized on the nonbusiness part. Free state income tax return If the nonbusiness part of the property transferred is your main home, you may qualify to exclude from income all or part of the gain on that part. Free state income tax return For more information, see Publication 523. Free state income tax return Trade of car used partly in business. Free state income tax return   If you trade in a car you used partly in your business for another car you will use in your business, your basis for depreciation of the new car is not the same as your basis for figuring a gain or loss on its sale. Free state income tax return   For information on figuring your basis for depreciation, see Publication 463. Free state income tax return Property Transferred From a Spouse The basis of property transferred to you or transferred in trust for your benefit by your spouse (or former spouse if the transfer is incident to divorce), is the same as your spouse's adjusted basis. Free state income tax return However, adjust your basis for any gain recognized by your spouse or former spouse on property transferred in trust. Free state income tax return This rule applies only to a transfer of property in trust in which the liabilities assumed, plus the liabilities to which the property is subject, are more than the adjusted basis of the property transferred. Free state income tax return If the property transferred to you is a series E, series EE, or series I United States savings bond, the transferor must include in income the interest accrued to the date of transfer. Free state income tax return Your basis in the bond immediately after the transfer is equal to the transferor's basis increased by the interest income includible in the transferor's income. Free state income tax return For more information on these bonds, see Publication 550. Free state income tax return At the time of the transfer, the transferor must give you the records necessary to determine the adjusted basis and holding period of the property as of the date of transfer. Free state income tax return For more information, see Publication 504, Divorced or Separated Individuals. Free state income tax return Property Received as a Gift To figure the basis of property you receive as a gift, you must know its adjusted basis (defined earlier) to the donor just before it was given to you, its FMV at the time it was given to you, and any gift tax paid on it. Free state income tax return FMV Less Than Donor's Adjusted Basis If the FMV of the property at the time of the gift is less than the donor's adjusted basis, your basis depends on whether you have a gain or a loss when you dispose of the property. Free state income tax return Your basis for figuring gain is the same as the donor's adjusted basis plus or minus any required adjustment to basis while you held the property. Free state income tax return Your basis for figuring loss is its FMV when you received the gift plus or minus any required adjustment to basis while you held the property (see Adjusted Basis earlier). Free state income tax return If you use the donor's adjusted basis for figuring a gain and get a loss, and then use the FMV for figuring a loss and have a gain, you have neither gain nor loss on the sale or disposition of the property. Free state income tax return Example. Free state income tax return You received an acre of land as a gift. Free state income tax return At the time of the gift, the land had an FMV of $8,000. Free state income tax return The donor's adjusted basis was $10,000. Free state income tax return After you received the land, no events occurred to increase or decrease your basis. Free state income tax return If you sell the land for $12,000, you will have a $2,000 gain because you must use the donor's adjusted basis ($10,000) at the time of the gift as your basis to figure gain. Free state income tax return If you sell the land for $7,000, you will have a $1,000 loss because you must use the FMV ($8,000) at the time of the gift as your basis to figure a loss. Free state income tax return If the sales price is between $8,000 and $10,000, you have neither gain nor loss. Free state income tax return For instance, if the sales price was $9,000 and you tried to figure a gain using the donor's adjusted basis ($10,000), you would get a $1,000 loss. Free state income tax return If you then tried to figure a loss using the FMV ($8,000), you would get a $1,000 gain. Free state income tax return Business property. Free state income tax return   If you hold the gift as business property, your basis for figuring any depreciation, depletion, or amortization deduction is the same as the donor's adjusted basis plus or minus any required adjustments to basis while you hold the property. Free state income tax return FMV Equal to or More Than Donor's Adjusted Basis If the FMV of the property is equal to or greater than the donor's adjusted basis, your basis is the donor's adjusted basis at the time you received the gift. Free state income tax return Increase your basis by all or part of any gift tax paid, depending on the date of the gift. Free state income tax return Also, for figuring gain or loss from a sale or other disposition of the property, or for figuring depreciation, depletion, or amortization deductions on business property, you must increase or decrease your basis by any required adjustments to basis while you held the property. Free state income tax return See Adjusted Basis earlier. Free state income tax return Gift received before 1977. Free state income tax return   If you received a gift before 1977, increase your basis in the gift (the donor's adjusted basis) by any gift tax paid on it. Free state income tax return However, do not increase your basis above the FMV of the gift at the time it was given to you. Free state income tax return Example 1. Free state income tax return You were given a house in 1976 with an FMV of $21,000. Free state income tax return The donor's adjusted basis was $20,000. Free state income tax return The donor paid a gift tax of $500. Free state income tax return Your basis is $20,500, the donor's adjusted basis plus the gift tax paid. Free state income tax return Example 2. Free state income tax return If, in Example 1, the gift tax paid had been $1,500, your basis would be $21,000. Free state income tax return This is the donor's adjusted basis plus the gift tax paid, limited to the FMV of the house at the time you received the gift. Free state income tax return Gift received after 1976. Free state income tax return   If you received a gift after 1976, increase your basis in the gift (the donor's adjusted basis) by the part of the gift tax paid on it that is due to the net increase in value of the gift. Free state income tax return Figure the increase by multiplying the gift tax paid by a fraction. Free state income tax return The numerator of the fraction is the net increase in value of the gift and the denominator is the amount of the gift. Free state income tax return   The net increase in value of the gift is the FMV of the gift less the donor's adjusted basis. Free state income tax return The amount of the gift is its value for gift tax purposes after reduction by any annual exclusion and marital or charitable deduction that applies to the gift. Free state income tax return For information on the gift tax, see Publication 950, Introduction to Estate and Gift Taxes. Free state income tax return Example. Free state income tax return In 2010, you received a gift of property from your mother that had an FMV of $50,000. Free state income tax return Her adjusted basis was $20,000. Free state income tax return The amount of the gift for gift tax purposes was $37,000 ($50,000 minus the $13,000 annual exclusion). Free state income tax return She paid a gift tax of $9,000. Free state income tax return Your basis, $27,290, is figured as follows: Fair market value $50,000 Minus: Adjusted basis 20,000 Net increase in value $30,000 Gift tax paid $9,000 Multiplied by ($30,000 ÷ $37,000) . Free state income tax return 81 Gift tax due to net increase in value $7,290 Adjusted basis of property to your mother 20,000 Your basis in the property $27,290 Inherited Property Special rules apply to property acquired from a decedent who died in 2010. Free state income tax return See Publication 4895, Tax Treatment of Property Acquired From a Decedent Dying in 2010, for details. Free state income tax return If you inherited property from a decedent who died before 2010, your basis in property you inherit from a decedent is generally one of the following. Free state income tax return The FMV of the property at the date of the individual's death. Free state income tax return The FMV on the alternate valuation date if the personal representative for the estate chooses to use alternate valuation. Free state income tax return For information on the alternate valuation date, see the Instructions for Form 706. Free state income tax return The value under the special-use valuation method for real property used in farming or a closely held business if chosen for estate tax purposes. Free state income tax return This method is discussed later. Free state income tax return The decedent's adjusted basis in land to the extent of the value excluded from the decedent's taxable estate as a qualified conservation easement. Free state income tax return For information on a qualified conservation easement, see the Instructions for Form 706. Free state income tax return If a federal estate tax return does not have to be filed, your basis in the inherited property is its appraised value at the date of death for state inheritance or transmission taxes. Free state income tax return For more information, see the Instructions for Form 706. Free state income tax return Appreciated property. Free state income tax return   The above rule does not apply to appreciated property you receive from a decedent if you or your spouse originally gave the property to the decedent within 1 year before the decedent's death. Free state income tax return Your basis in this property is the same as the decedent's adjusted basis in the property immediately before his or her death, rather than its FMV. Free state income tax return Appreciated property is any property whose FMV on the day it was given to the decedent is more than its adjusted basis. Free state income tax return Community Property In community property states (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin), husband and wife are each usually considered to own half the community property. Free state income tax return When either spouse dies, the total value of the community property, even the part belonging to the surviving spouse, generally becomes the basis of the entire property. Free state income tax return For this rule to apply, at least half the value of the community property interest must be includable in the decedent's gross estate, whether or not the estate must file a return. Free state income tax return For example, you and your spouse owned community property that had a basis of $80,000. Free state income tax return When your spouse died, half the FMV of the community interest was includible in your spouse's estate. Free state income tax return The FMV of the community interest was $100,000. Free state income tax return The basis of your half of the property after the death of your spouse is $50,000 (half of the $100,000 FMV). Free state income tax return The basis of the other half to your spouse's heirs is also $50,000. Free state income tax return For more information on community property, see Publication 555, Community Property. Free state income tax return Property Held by Surviving Tenant The following example explains the rule for the basis of property held by a surviving tenant in joint tenancy or tenancy by the entirety. Free state income tax return Example. Free state income tax return John and Jim owned, as joint tenants with right of survivorship, business property they purchased for $30,000. Free state income tax return John furnished two-thirds of the purchase price and Jim furnished one-third. Free state income tax return Depreciation deductions allowed before John's death were $12,000. Free state income tax return Under local law, each had a half interest in the income from the property. Free state income tax return At the date of John's death, the property had an FMV of $60,000, two-thirds of which is includable in John's estate. Free state income tax return Jim figures his basis in the property at the date of John's death as follows: Interest Jim bought with his own funds—1/3 of $30,000 cost $10,000   Interest Jim received on John's death—2/3 of $60,000 FMV 40,000 $50,000 Minus: ½ of $12,000 depreciation before John's death 6,000 Jim's basis at the date of John's death $44,000 If Jim had not contributed any part of the purchase price, his basis at the date of John's death would be $54,000. Free state income tax return This is figured by subtracting from the $60,000 FMV, the $6,000 depreciation allocated to Jim's half interest before the date of death. Free state income tax return If under local law Jim had no interest in the income from the property and he contributed no part of the purchase price, his basis at John's death would be $60,000, the FMV of the property. Free state income tax return Qualified Joint Interest Include one-half of the value of a qualified joint interest in the decedent's gross estate. Free state income tax return It does not matter how much each spouse contributed to the purchase price. Free state income tax return Also, it does not matter which spouse dies first. Free state income tax return A qualified joint interest is any interest in property held by husband and wife as either of the following. Free state income tax return Tenants by the entirety, or Joint tenants with right of survivorship if husband and wife are the only joint tenants. Free state income tax return Basis. Free state income tax return   As the surviving spouse, your basis in property you owned with your spouse as a qualified joint interest is the cost of your half of the property with certain adjustments. Free state income tax return Decrease the cost by any deductions allowed to you for depreciation and depletion. Free state income tax return Increase the reduced cost by your basis in the half you inherited. Free state income tax return Farm or Closely Held Business Under certain conditions, when a person dies the executor or personal representative of that person's estate can choose to value the qualified real property on other than its FMV. Free state income tax return If so, the executor or personal representative values the qualified real property based on its use as a farm or its use in a closely held business. Free state income tax return If the executor or personal representative chooses this method of valuation for estate tax purposes, that value is the basis of the property for the heirs. Free state income tax return Qualified heirs should be able to get the necessary value from the executor or personal representative of the estate. Free state income tax return Special-use valuation. Free state income tax return   If you are a qualified heir who received special-use valuation property, your basis in the property is the estate's or trust's basis in that property immediately before the distribution. Free state income tax return Increase your basis by any gain recognized by the estate or trust because of post-death appreciation. Free state income tax return Post-death appreciation is the property's FMV on the date of distribution minus the property's FMV either on the date of the individual's death or the alternate valuation date. Free state income tax return Figure all FMVs without regard to the special-use valuation. Free state income tax return   You can elect to increase your basis in special-use valuation property if it becomes subject to the additional estate tax. Free state income tax return This tax is assessed if, within 10 years after the death of the decedent, you transfer the property to a person who is not a member of your family or the property stops being used as a farm or in a closely held business. Free state income tax return   To increase your basis in the property, you must make an irrevocable election and pay interest on the additional estate tax figured from the date 9 months after the decedent's death until the date of the payment of the additional estate tax. Free state income tax return If you meet these requirements, increase your basis in the property to its FMV on the date of the decedent's death or the alternate valuation date. Free state income tax return The increase in your basis is considered to have occurred immediately before the event that results in the additional estate tax. Free state income tax return   You make the election by filing with Form 706-A a statement that does all of the following. Free state income tax return Contains your name, address, and taxpayer identification number and those of the estate; Identifies the election as an election under section 1016(c) of the Internal Revenue Code; Specifies the property for which the election is made; and Provides any additional information required by the Instructions for Form 706-A. Free state income tax return   For more information, see the Instructions for Form 706 and the Instructions for Form 706-A. Free state income tax return Property Changed to Business or Rental Use If you hold property for personal use and then change it to business use or use it to produce rent, you must figure its basis for depreciation. Free state income tax return An example of changing property held for personal use to business use would be renting out your former main home. Free state income tax return Basis for depreciation. Free state income tax return   The basis for depreciation is the lesser of the following amounts. Free state income tax return The FMV of the property on the date of the change, or Your adjusted basis on the date of the change. Free state income tax return Example. Free state income tax return Several years ago you paid $160,000 to have your home built on a lot that cost $25,000. Free state income tax return You paid $20,000 for permanent improvements to the house and claimed a $2,000 casualty loss deduction for damage to the house before changing the property to rental use last year. Free state income tax return Because land is not depreciable, you include only the cost of the house when figuring the basis for depreciation. Free state income tax return Your adjusted basis in the house when you changed its use was $178,000 ($160,000 + $20,000 − $2,000). Free state income tax return On the same date, your property had an FMV of $180,000, of which $15,000 was for the land and $165,000 was for the house. Free state income tax return The basis for figuring depreciation on the house is its FMV on the date of change ($165,000) because it is less than your adjusted basis ($178,000). Free state income tax return Sale of property. Free state income tax return   If you later sell or dispose of property changed to business or rental use, the basis of the property you use will depend on whether you are figuring gain or loss. Free state income tax return Gain. Free state income tax return   The basis for figuring a gain is your adjusted basis when you sell the property. Free state income tax return Example. Free state income tax return Assume the same facts as in the previous example except that you sell the property at a gain after being allowed depreciation deductions of $37,500. Free state income tax return Your adjusted basis for figuring gain is $165,500 ($178,000 + $25,000 (land) − $37,500). Free state income tax return Loss. Free state income tax return   Figure the basis for a loss starting with the smaller of your adjusted basis or the FMV of the property at the time of the change to business or rental use. Free state income tax return Then adjust this amount for the period after the change in the property's use, as discussed earlier under Adjusted Basis, to arrive at a basis for loss. Free state income tax return Example. Free state income tax return Assume the same facts as in the previous example, except that you sell the property at a loss after being allowed depreciation deductions of $37,500. Free state income tax return In this case, you would start with the FMV on the date of the change to rental use ($180,000) because it is less than the adjusted basis of $203,000 ($178,000 + $25,000) on that date. Free state income tax return Reduce that amount ($180,000) by the depreciation deductions to arrive at a basis for loss of $142,500 ($180,000 − $37,500). Free state income tax return How To Get Tax Help You can get help with unresolved tax issues, order free publications and forms, ask tax questions, and get more information from the IRS in several ways. Free state income tax return By selecting the method that is best for you, you will have quick and easy access to tax help. Free state income tax return Contacting your Taxpayer Advocate. Free state income tax return   The Taxpayer Advocate Service (TAS) is an independent organization within the IRS. Free state income tax return We help taxpayers who are experiencing economic harm, such as not being able to provide necessities like housing, transportation, or food; taxpayers who are seeking help in resolving tax problems with the IRS; and those who believe that an IRS system or procedure is not working as it should. Free state income tax return Here are seven things every taxpayer should know about TAS. Free state income tax return TAS is your voice at the IRS. Free state income tax return Our service is free, confidential, and tailored to meet your needs. Free state income tax return You may be eligible for our help if you have tried to resolve your tax problem through normal IRS channels and have gotten nowhere, or you believe an IRS procedure just isn't working as it should. Free state income tax return We help taxpayers whose problems are causing financial difficulty or significant cost, including the cost of professional representation. Free state income tax return This includes businesses as well as individuals. Free state income tax return Our employees know the IRS and how to navigate it. Free state income tax return If you qualify for our help, we'll assign your case to an advocate who will listen to your problem, help you understand what needs to be done to resolve it, and stay with you every step of the way until your problem is resolved. Free state income tax return We have at least one local taxpayer advocate in every state, the District of Columbia, and Puerto Rico. Free state income tax return You can call your local advocate, whose number is in your phone book, in Publication 1546, Taxpayer Advocate Service—Your Voice at the IRS, and on our website at www. Free state income tax return irs. Free state income tax return gov/advocate. Free state income tax return You can also call our toll-free line at 1-877-777-4778 or TTY/TDD 1-800-829-4059. Free state income tax return You can learn about your rights and responsibilities as a taxpayer by visiting our online tax toolkit at www. Free state income tax return taxtoolkit. Free state income tax return irs. Free state income tax return gov. Free state income tax return You can get updates on hot tax topics by visiting our YouTube channel at www. Free state income tax return youtube. Free state income tax return com/tasnta and our Facebook page at www. Free state income tax return facebook. Free state income tax return com/YourVoiceAtIRS, or by following our tweets at www. Free state income tax return twitter. Free state income tax return com/YourVoiceAtIRS. Free state income tax return Low Income Taxpayer Clinics (LITCs). Free state income tax return   The Low Income Taxpayer Clinic program serves individuals who have a problem with the IRS and whose income is below a certain level. Free state income tax return LITCs are independent from the IRS. Free state income tax return Most LITCs can provide representation before the IRS or in court on audits, tax collection disputes, and other issues for free or a small fee. Free state income tax return If an individual's native language is not English, some clinics can provide multilingual information about taxpayer rights and responsibilities. Free state income tax return For more information, see Publication 4134, Low Income Taxpayer Clinic List. Free state income tax return This publication is available at IRS. Free state income tax return gov, by calling 1-800-TAX-FORM (1-800-829-3676), or at your local IRS office. Free state income tax return Free tax services. Free state income tax return   Publication 910, IRS Guide to Free Tax Services, is your guide to IRS services and resources. Free state income tax return Learn about free tax information from the IRS, including publications, services, and education and assistance programs. Free state income tax return The publication also has an index of over 100 TeleTax topics (recorded tax information) you can listen to on the telephone. Free state income tax return The majority of the information and services listed in this publication are available to you free of charge. Free state income tax return If there is a fee associated with a resource or service, it is listed in the publication. Free state income tax return   Accessible versions of IRS published products are available on request in a variety of alternative formats for people with d