1
CAUSE NO. __________________
WINSTEAD PC
§
IN THE DISTRICT COURT OF
Plaintiff,
§
§
v.
§
TRAVIS COUNTY, TEXAS
§
SUSAN COMBS, COMPTROLLER OF
§
PUBLIC ACCOUNTS OF THE STATE
§
OF TEXAS, and GREG ABBOTT,
§
ATTORNEY GENERAL OF TEXAS,
§
Defendants.
§
_____ JUDICIAL DISTRICT
PLAINTIFF'S ORIGINAL PETITION
COMES NOW Plaintiff Winstead PC complaining of and against Susan Combs, the
Comptroller of Public Accounts of the State of Texas, and Greg Abbott, the Attorney General of
the State of Texas (“Defendants”), and for its causes of action would show the Court the
following:
I.
DISCOVERY CONTROL PLAN
1.
Plaintiff intends to conduct discovery under Level 1 of Texas Rule of Civil
Procedure 190.2 because it seeks monetary relief aggregating $50,000 or less, excluding costs,
prejudgment interest, and attorney’s fees.
II.
PARTIES AND SERVICE OF PROCESS
2.
Plaintiff is a professional corporation of licensed attorneys organized under the
laws of the State of Texas. Plaintiff’s home office is located at 5400 Renaissance Tower, 1201
Elm Street, Dallas, Texas 75270.
3.
Defendants Susan Combs, the Comptroller of Public Accounts of the State of
Texas (the “Comptroller”), and Greg Abbott, the Attorney General of the State of Texas, are
Filed 12 January 19 P12:40 Amalia Rodriguez-Mendoza District Clerk Travis District D-1-GN-12-000141
2
sued in their respective official capacities and service of process may be had on Defendants in
Travis County, Texas. The Comptroller may be served at Lyndon B. Johnson State Office
Building, 111 E. 17th Street, Austin, Texas 78774. The Attorney General may be served at 300
W. 15th Street, Austin, Texas 78701.
III.
JURISDICTION AND VENUE
4.
This suit is brought pursuant to the terms, provisions, and requirements of Texas
Tax Code Section 112.051 et seq. to recover from Defendants in their official capacities taxes
that Plaintiff has paid under protest. The protest payments represent Texas franchise taxes that
were paid by Plaintiff for report years 2008 and 2009. The payments under protest were
accompanied by letters (“Letters of Protest”) explaining the basis for the protest, as required by
Texas Tax Code Section 112.051. File stamped copies of the Letters of Protest are attached as
Exhibits A and B. The Original Petition is being filed within ninety (90) days of the date that
Plaintiff filed the Letters of Protest accompanied by the payments under protest. The district
courts of Travis County have exclusive, original jurisdiction of a taxpayer suit brought under
chapter 112 of the Tax Code. T
EX. T
AX. C
ODEA
NN. § 112.001 (West 2008).
5.
Plaintiff also seeks a declaratory judgment under Section 2001.038 of the Texas
Government Code to determine the validity of 43 Texas Administrative Code Section
3.589(e)(2)(D), a rule adopted by the Comptroller which interferes with and impairs plaintiff’s
legal rights. The district courts of Travis County have exclusive jurisdiction of a declaratory
judgment action brought under this section of the Government Code. T
EX. G
OV’
TC
ODEA
NN.
§ 2001.038(b) (West 2008).
3
IV.
FACTS
7.
Plaintiff is a professional corporation of licensed attorneys practicing law in
multiple states, including Texas. As a taxable entity doing business in Texas, Plaintiff is subject
to the Texas franchise tax. See T
EX. T
AXC
ODEA
NN. § 171.001(a).
8.
The tax base of the Texas franchise tax is initially calculated by subtracting one of
the following amounts from the taxpayer’s total revenue: cost of goods sold, compensation, or
30% of total revenue. Id. § 171.101(a)(1). If a taxpayer elects to deduct compensation for
purposes of calculating its franchise tax base, the taxpayer may include in the compensation
deduction “the cost of all benefits, to the extent deductible for federal income tax purposes, the
taxable entity provides to its officers, directors, owners, partners, and employees.” Id.
§ 171.1013(b)(2).
9.
Plaintiff timely paid and filed Texas franchise taxes for report years 2008 and
2009. For these years, Plaintiff elected to deduct compensation from total revenue for purposes
of calculating its tax base. Plaintiff included parking expenses, attorney occupation taxes, and
continuing education expenses that it paid on behalf of its employees (the “Employee Benefits”)
in the compensation deduction. These Employee Benefits totaled $1,133,389.00 and
$1,318,747.00, respectively. Plaintiff also properly deducted these Employee Benefits on its
federal income tax returns for report years 2008 and 2009.
10.
The Comptroller conducted an audit of Plaintiff’s franchise tax for report years
2008 and 2009. At the conclusion of the audit, the Comptroller issued a Texas Notification of
Audit Results for each report year dated May 23, 2011 (the “Assessments”). The Assessments,
attached hereto as Exhibits C and D, indicated franchise tax due of $11,231.88 and $13,021.31,
respectively, plus interest. According to the Comptroller’s Audit Reports, which are attached
hereto as Exhibits E and F, these amounts reflected the amounts deducted by Plaintiff for the
4
Employee Benefits. As the basis for the audit adjustments, the Comptroller’s auditor cited a rule
of the Comptroller which states that the compensation deduction does not include “working
condition amounts provided so employees can perform their jobs.” 43 T
EX. A
DMIN. C
ODE§ 3.589(e)(2)(D) (2011).
11.
On October 21, 2011, Plaintiff submitted two payments to the Comptroller as
timely and complete payment of the Assessments. See Exhibit G. Along with the payments,
Plaintiff submitted Letters of Protest stating its disagreement with the Assessments and setting
forth the reasons for its disagreement. The protest payments totaled $28,974.15.
V.
CAUSES OF ACTION
Tax Refund
12.
For purposes of calculating franchise tax, the Tax Code permits a taxpayer to
deduct as compensation “the cost of all benefits, to the extent deductible for federal income tax
purposes, the taxable entity provides to its officers, directors, owners, partners, and employees.”
T
EX. T
AXC
ODEA
NN. § 171.1013(b)(2). For federal income tax purposes, a taxpayer may deduct
all the ordinary and necessary expenses paid or incurred during a taxable year in carrying on any
trade or business, including “a reasonable allowance for salaries or other compensation for
personal services actually rendered.” I.R.C. § 162(a)(1) (2011) (emphasis added). The test of
deductibility in the case of compensation payments is whether they are reasonable and are in fact
payments purely for services. 26 C.F.R. § 1.162-7(a) (2011). In other words, the payments must
be reasonable and have a compensatory purpose. Label-Graphics, Inc. v. Comm’r, 221 F.3d
1091, 1095 (9th Cir. 2000). The Employee Benefits were reasonable amounts included in the
compensation of Plaintiff’s employeescompensation which was purely in exchange for the
employees’ services. As such, Plaintiff’s Employee Benefits are fully deductible for federal
5
income tax purposes. And, Plaintiff did, in fact, deduct these Employee Benefits from its federal
income tax for report years 2008 and 2009.
13.
Thus, pursuant to the Tax Code, Plaintiff was entitled to subtract the Employee
Benefits from its franchise tax base for report years 2008 and 2009. Because the Comptroller
improperly included the Employee Benefits in Plaintiff’s franchise tax base, Plaintiff is now
entitled to a refund of the franchise taxes paid, plus pro rata interest, attributable to the Employee
Benefits. See T
EX. T
AXC
ODEA
NN. § 112.060(a).
Declaratory Judgment
14.
In finding that the Employee Benefits may not be subtracted from Plaintiff’s
franchise tax base, the Comptroller’s auditor relied on Comptroller’s rule 3.589(e)(2)(D) which
states that the compensation deduction does not include “working condition amounts provided so
employees can perform their jobs.” 43 T
EX. A
DMIN. C
ODE§ 3.589(e)(2)(D). To the extent that
this rule prevents a taxpayer from deducting benefits which an employer provides to its
employees and which are deductible for federal income tax purposes, it is void.
15.
As a creation of the legislature, an administrative agency, such as the
Comptroller, has only the powers that are delegated to it by the Legislature. State v. Jackson,
376 S.W.2d 341, 344 (Tex. 1964); Tex. Parks & Wildlife Dep’t v. Callaway, 971 S.W.2d 145,
148 (Tex. App.—Austin 1998, no pet.). The Legislature has delegated to the Comptroller the
authority to “adopt rules that do not conflict with the laws of this state.” T
EX. T
AXC
ODEA
NN.
§ 11.002(a) (emphasis added). Moreover, any rule of an administrative agency is void if it
conflicts with the state’s statutes. Liberty Mut. Ins. Co. v. Griesing, 150 S.W.3d 640, 648 (Tex.
App.—Austin 2004, pet. dism’d w.o.j.); Employees Ret. Sys. v. Jones, 58 S.W.3d 148, 154 (Tex.
App.—Austin, 2001, no pet.).
6
16.
The Tax Code clearly permits a taxpayer who elects to subtract compensation for
the purpose of computing its franchise tax base to subtract the cost of all benefits that it provides
to its officers, directors, owners, partners, and employees and that are deductible for federal
income tax purposes. T
EX. T
AXC
ODEA
NN. § 171.1013(b)(2). Comptroller’s rule 3.589(e)(2)
conflicts with the Tax Code by prohibiting a taxpayer from subtracting benefits that are provided
by the taxpayer to its officers, directors, owners, partners, and employees and that are deductible
for federal income tax purposes. See 43 T
EX. A
DMIN. C
ODE§ 3.589(e)(2)(D). Specifically, the
rule prohibits Plaintiff from deducting the Employee Benefitswhich are provided by Plaintiff
to its officers, directors, owners, partners and employees and are deductible for federal income
tax purposesin direct conflict with the Tax Code. Therefore, this Court should declare
Comptroller’s rule 3.589(e)(2) invalid to the extent it prevents a taxpayer, for purposes of
calculating franchise tax liability, from deducting as compensation the cost of any benefits that
the taxpayer provides to its officers, directors, owners, partners, and employees and that are
deductible for federal income tax purposes. See T
EX. G
OV’
TC
ODEA
NN. § 2001.038.
VI.
REQUEST FOR RELIEF
WHEREFORE, Plaintiff Winstead PC requests that Defendants Susan Combs, the
Comptroller of Public Accounts of the State of Texas, and Greg Abbott, the Attorney General of
the State of Texas, be cited to appear and answer herein and on final hearing Plaintiff have a
judgment:
(i)
for the refund of the $28,974.15 paid under protest, together with interest thereon
as provided by law;
(ii)
declaring that Section 3.589(e)(2)(D), 43 Texas Administrative Code, is invalid to
the extent it prevents a taxpayer, for purposes of calculating franchise tax liability,
from deducting as compensation the cost of any benefits that the taxpayer
provides to its officers, directors, owners, partners, and employees and that are
deductible for federal income tax purposes;
7
(iii)
for court costs; and
(iv)
for such other and further relief to which Plaintiff Winstead PC may be justly
entitled.
Respectfully submitted,
/s/ Peter A. Nolan
Peter A. Nolan
SBN 15062600
Jennifer Patterson Rabb
SBN 00795469
Anna Kana
SBN 24070029
W
INSTEADPC
401 Congress Avenue, Suite 2100
Austin, Texas 78701
[Tel.] (512) 370-2800
[Fax] (512) 370-2850
pnolan@winstead.com
WINSTEAD
Austin Dallas Fort Worth 1 Houston 1 San Antonio I The Woodlands Washington, D.C.Jennifer Patterson Rabb 512.370.2875 DIRECT jrabb@winstead.com 401 Congress Avenue Suite 2100 Austin, texas 78701 512.370.2800 OFFICE 512.370.2850 FAX winstead.com October 21, 2011
Via Hand Delivery
Texas Comptroller of Public Accounts 1711 San Jacinto, Suite 180
Austin, Texas 78701
Re: Winstead PC
Texas Tax ID # 1-75-2404691-3
Protest Payment of Franchise Tax for 2008 Report Year Dear Sir or Madam:
Enclosed please find a check made payable by Winstead PC ("Winstead") to the Texas Comptroller of Public Accounts in the amount of $13,673.70 in payment of Texas Notification of Audit Results dated May 23, 2011 and attached hereto as Exhibit A (the "Assessment"). The basis of the Assessment is the audit report attached hereto as Exhibit B (the "Audit Report").
Statement of Protest
Pursuant to Section 112.051, Tax Code, and Comptroller Rule 3.9(h),1 Winstead pays the enclosed $13,673.70 under protest (the "Protest Payment"). The Protest Payment constitutes timely and complete payment of the Assessment, including interest through today's date.
Background
Winstead included parking expenses, attorney occupation tax, and continuing education expenses paid by Winstead on behalf of its employees (the "Employee Benefits") in the compensation deduction on its 2008 franchise tax report. These Employee Benefits total $11,465,580.00. The Audit Report excludes the Employee Benefits from Winstead's compensation deduction, resulting in an additional franchise tax liability of $11,231.88. The Comptroller's auditor cited Comptroller Rule 3.589(e)(2)(D) as the basis for the audit adjustment, which rule states that the compensation deduction does not include "working condition amounts provided so employees can perform their jobs." We infer that the auditor considers the Employee Benefits to be "working condition amounts."
"Comptroller Rule" references are to the correspondingly-numbered section of Title 34, Texas Administrative Code.
Comptroller of Public Accounts Obtober 21, 2011
Page 2
Reasons for Recovery of Protest Payment
Winstead disagrees with the Assessment and is entitled to a refund of the Protest Payment, with interest allowed by statute, for the following reasons:
1. Pursuant to Section 171.1013(c)(2), Tax Code, Winstead is entitled to include the Employee Benefits in its compensation deduction because these costs are deductible for federal income tax purposes. Section 171.1013(b)(2) permits a taxable entity to deduct as compensation "the cost of all benefits, to the extent deductible for federal income tax purposes." More than being deductible for federal income tax purposes, the Employee Benefits are in fact deducted by Winstead on its federal income tax return.
2. Comptroller Rule 3.589(e)(2)(D) is an invalid exercise of the comptroller's rulemaking authority to the extent that it denies a compensation deduction for the Employee Benefits, which are deductible for federal income tax purposes. Section 111.002(a), Tax Code, authorizes the Comptroller to adopt rules "that do not conflict with the laws of this state...for the enforcement of the provisions of this title and the collection of taxes and other revenues under this title." Because Comptroller Rule 3.589(e)(2)(D) would disallow a compensation deduction that is allowed under Section 171.1013(c)(2), Tax Code, the rule conflicts with a law of this State and does not enforce a provision of Title 2 of the Tax Code. To the extent that Comptroller Rule 3.589(e)(2)(D) increases the margin tax by limiting the compensation deduction allowed by Section 171.1013(b)(2), the rule does not collect a tax imposed under Title 2 of the Tax Code. Accordingly, Comptroller Rule 3.589(e)(2)(D) may not be applied to deny Winstead a deduction for the Employee Benefits.
3. In the alternative to 2, the Employee Benefits are not "working condition amounts." Presumably the term "working condition amount" is synonymous with the term "working condition benefit" used in federal income tax parlance. Under Section 132(d) of the Internal Revenue Code, an expense incurred on behalf of an employee is not a working condition benefit to the extent the employee could deduct the cost as an ordinary and necessary business expense. According to Internal Revenue Service Publication 15-B, Employer's Tax Guide to Fringe Benefits For
Benefits Provided in 2007 (attached hereto as Exhibit C), page 19, an employee benefit is not a working condition benefit to the extent the employee could deduct the cost as an expense of a trade or business other than the employer's trade or business. Parking expenses, attorney occupation taxes, and continuing education expenses could be deducted by Winstead employees in relation to any other trade or business carried on by the employees. Thus, the Employee Benefits are not working condition benefits or "working condition amounts" and are not excluded from Winstead's compensation deduction by Comptroller Rule 3.589(e)(2)(D).
Printed
Signature
Date:
0
21
I
I
Comptroller of Public Accoulits October 21, 2011
Page 2
By your signature at the bottom of this letter, you acknowledge receipt of this written statement of protest of Winstead.
Thank you very much for your assistance. Sincerely,
Jennifer Patterson Rabb
RECEIVED:
"a14-1-
CerrA
00-240
TEkAs NOTIFICATION OF AUDI tESULTS
(TEX.TAX CODE ANN.SEC.111.008)
Taxpayer Name
WINSTEAD PC
Type of TAX
FRANCHISE TAX
STATEMENT DATE
May 23, 2011
Taxpayer Number
1-75-2404691-3
Audit Period
2008 thru 2008
TOTAL
TAX
$
11,231.88
PENALTY
0.00
INTEREST THRU STATEMENT DATE
1,120.82
AMOUNT DUE AS OF STATEMENT DATE
$
12,352.70
IF PAID AFTER 05-23-2011, ADD INTEREST OF $
INTEREST RATE NOTE ON BACK.)
IF PAID AFTER 07-05-2011, ADD AN ADDITIONAL 10% PENALTY OF $
(TEX. TAX CODE ANN.SEC. 111.0081).
THIS NOTIFICATION BECOMES FINAL ON 06-22-2011, unless you request a redetermination hearing by this date. If a hearing is not requested, this determination becomes final on 06-22-2011, and it is due and payable on 07-05-2011. YOUR TAXPAYER RIGHTS ARE ON THE BACK.
The results of this audit do not rescind or replace any previous notices you may have received regarding outstanding balances. You are liable for any amounts still due.
The results of this audit should not be taken as approval of your tax redporting system. Law changes and new rulings might result in different findings in -future au its and you will . be responsible for any taxes found owing and due.
For payment information call 1-800-531-5441, ext. 3-3900 toll-free nationwide, or call 512/463-3900.
Make your check payable to STATE COMPTROLLER and mail to Comptroller of Public Accounts 111 E. 17th Street, Austin, Texas 78774-0100.
(Cut and Return Bottom Portion with Payment)
00-240
TEXAS NOTIFICATION OF AUDIT RESULTS
(TEX.TAX CODE ANN.SEC.111.008)
STATEMENT DATE
May 23, 2011
Amount of Your Payment
Taxpayer Name & Mailing Address
WINSTEAD PC
1201 ELM ST STE 5400
DALLAS, TX 75270-2199
1.31 PER DAY THROUGH DATE OF PAYMENT.* (SEE
1,123.19.
*PMD
*Tcode *Taxpayer Number *Period *Audit
*Amount
*File
13060 17524046913 08
001 12352.70EXHIBIT
A
TEXAS COMPTROLLER
of
PUBLIC ACCOUNTSWWW, WIN DOW. STATE . TX . LIS
May 23, 2011
Herbert Albritton
Executive Director
Winstead PC
1201 Elm St., Suite 5400
Dallas, TX 75270-2199
RE: Taxpayer Number 17524046913
Dear Mr. Albritton:
Our audit, conducted in accordance with the Franchise Tax Statute, is complete. The audit
covered the report year 2008 and resulted in an adjustment in the amount shown on the attached
Texas Notification of Audit Results. We have included a pre-addressed envelope for your
payment convenience, For an explanation of the interest calculations, contact Audit
Headquarters - Audit Processing Section at (800) 531-5441, ext. 3-4479.
We have waived the penalty for periods which were originally filed on time. However, we have
not waived interest. Interest waiver is considered only where written, documented proof exists
that a taxpayer relied to its detriment on misinformation from the State. If you disagree with our
decision, you may request a redetermination hearing.
Audit adjustments are explained on the enclosed Audit Report.
At the exit conference, Glen C. Pryor, Chief Financial Officer, agreed with the audit results. He
was provided with the brochure "Contesting Disagreed Audits" (Form 96-1253) and advised of
his right to meet with an Independent Audit Reviewer (IAR). He was also advised of the
requirements necessary to initiate a formal redetermination hearing.
If you have any questions, please contact me in the Dallas West Audit Office at (972) 888-5300.
Thank you for your cooperation during the audit.
Gem Zhan
Auditor
AUDIT REP ORT
Winstead PC
Taxpayer Number 17524046913
Report Year 2008
This report summarizes the adjustments made in the audit.
1.
A detailed examination was completed for Exam A. Adjustments were made to
compensation.
Winstead PC
Dallas, TX
Taxpayer Number 17524046913
INDEX TO WORKING PAPERS
DESCRIPTION
PAGES
Adjustment Report
1
Tax Adjustment Summary
1
DATE: 05/10/2011 STATE OF TEXAS PAGE 1 ,
PGM: T73725 COMPTROLLER OF PUBLIC ACCOUNTS TYPE: 0
USER: VGIB310 ADJUSTMENT REPORT WI 2006147112716
TAX TYPE: FRANCHISE TAX
TAXPAYER NAME: WINSTEAD PC COMBINED REPORTING ENTITY TAXPAYER NUMBER: 1-75-2404691-3
ADDRESS: 1201 ELM ST STE 5400 CALCULATION DATE: 05-10-2011
DALLAS, TX 75270-2199 PERIODS: 08 THRU 08
CR. ADJUST:
'FILING APPLIED/ ADJUSTED ADJUSTED ADJULED BALANCE
PERIOD TAX PENALTY INT/CR.INT TRANSFERRED TAX PENALTY INT/CR.1NT DUE
08 11,231.88 .00 1,103.82 .00 11,231.88 .00 1,103.82 12,335.70
TOTAL 11,231.88 .00 1,103.82 .00 11,231.88 .00 1,103.82 12,335.70
ADDITIONAL INTEREST OF 1.307840 PER DAY ACCRUES ON A TAX BALANCE OF $ 11,231.88 FROM 05-11-2011 THRU PAYMENT DATE
AMOUNT OF PENALTY WAIVED IS 1,123.19
AMOUNT ACCRUING INTEREST AT VARIABLE RATE IS 11,231.88.*
* PER ANNUM INTEREST RATES ARE SUBJECT TO CHANGE ON JANUARY 1ST OF EACH YEAR. FOR INTEREST INFORMATION, REFER TO PUBLICATION 98-304, OR CALL 1-877-447-2834, OR GO TO HTTP://WWW.WINDOW.STATE.TX.US/TAXINFO/INT_RATE.HTML
VINSTEAD PC )ALLAS, TX
'AX ADJUSTMENT SUMMARY
FOR REPORT YEAR:
Original Audit
PAGE 1 OF 1 Preparer/Date: tz 07114/10
TP#: 17524046913 2008
Original Audit Results
A
FROM: Prior Data Per Last Report/Audit/
Refund/FVAR
Adjusted Verification Amounts Results - From: per Verification Col. C or Col. D . .
REPORT TYPE: Annual
. .
Annual -.
REPORT YEAR: 2008-Report- 2008
METHOD ELECTED: 70%/E7JCOGS/COMP: COMP COMP COMP
REVENUE .CCOUNTTNG PE1UOD
COLD & COL.E
FORWARDED FROM 1/1/07-12/31/07 1/1/07-12/31/07
• GROSS RECEIPTS OR SALES Col. C 151,245,884 151,245,884
• DIVIDENDS Col. C 0 0
• INTEREST CoL C 135,650 135,650
. RENTS Col. C 0 0
• ROYALTIES Col. C 13,356 13,356
• GAINS/LOSSES Col. C (1,367,130) (1,367,130)
OTHER INCOME CoL C 751,826 751,826
•TOTAL GROSS REVENUE SUM #1 - #7 150,779,586 150,779,586
DEDUCTIONS FROM GROSS REVENUE Col. C 244,025 244,025
). TOTAL REVENUE #8 - #9 $150,535,561 $150,535,561
10.a. Annualized Total Revenue # of Da s) 365 $150 535 561 $150 535,561 COST OF GOODS SOLD
I . COST OF GOODS SOLD Col. C 0 0
. INDIRECT OR ADMIN COSTS Col. C 0 0
I. OTHER Col. C 0 0
I. TOTAL COST OF GOODS SOLD SUM #11 - #13 $0 $0
COMPENSATION
. WAGES AND CASH COMPENSATION Col. C 90,903,248 90,903,248
. EMPLOYEE BENEFITS Exam A 12,598,969 11,465,580 11,465,580
, OTHER Exam A 0 0
. TOTAL COMPENSATION SUM #15 - #17 $103,502,217 $102 368 828
MARGIN
. REVENUE (#10 X 70%) #10 X 70% N/A 105,374,893
. REVENUE (#10 - COGS) ; #10 - #14 N/A N/A
I. REVENUE (#10 - COMPENSATION) #10 - #18 47,033,344 48,166,733
I . MARGIN LOWEST 19,20,21 _. $47,033,344 $48,166,733
APPORTIONMENT FACTOR
I . GROSS RECEIPTS IN TEXAS Col. C 149,887,788 149,887,788
GROSS RECEIPTS EVERYWHERE Col. C 151,245,884 151,245,884
. APPORTIONMENT FACTOR #23 / #24 0.9910 0.9910
TAXABLE MARGIN or EZ REVENUE
. APPORTIONED: MARGIN or EZ Margin: #22 X #25 46,610,044 47,733,232
. ALLOWABLE DEDUCTIONS • Col. C 0 0
. TAXABLE AMOUNT #26 - #27 $46,610,044 $47,733,232
TAX DUE
. TAX RATE (If Rate Changed, See Notb Below.) Col. C 0.01000 0.01000
I. TAX DUE #28 X #29 466,100.44 477,332.32
TAX ADJUSTMENTS
. TAX CREDITS Col. C 0.00 0.00
I. TAX DUE BEFORE DISCOUNT #30 - #31 466,100.44 477,332,32
;. DISCOUNT 0.00 0.00
I, TAX DUE #32-#33 $466,100.44 $477,332.32
:. TAX DUE BASED ON: COMP COMP
LESS TAX REPORTED Tax Reports 466,100.44 466,100.44
'. TAX ADJUSTMENT #34 - #36 S0.00 $ I 1,231.88
.. REFUNDS ISSUED Per Refunds 0.00 0.00
'. FVAR ASGNs (REFUNDS OR ASSESSMENTS) Per FVAR ASGNs 0.00 0.00
.. BART ASGNs (REFUNDS OR ASSESSMENTS) Per BART ASGNs 0.00 0.00
. AUDIT ADJUSTMENTS Per Audit 0.00 0.00
NET TAX ADJUSTMENT #37-#38-#39-#40-#41 $0.00 $I 1,231.88
WINSTEAD PC EXAM A
DALLAS, TX PAGE I OF I
AUDITED
e'en' or
COODS SOLD Coo NSAT, ea hl 17524046913 M . ,••.•_.ACCOUNTING
4444144444,444;4*.i.14,4*.1444.144,4,444,441444%**44 *****44.444444.1440
REPORTED EMPLOYEE BENEFITS $12,598,969
DISALLOWED COSTS
Parking
Attorney Occupation Tax CLE CPE (743,567) (83,529) (303,293) (3,000)
FROM THE FRANCHISE TAX 'REPORTS
AUDITED EMPLOYEE BENEFITS $11,465,580
. -FORWARD TO TAX ADJUSTMENT SUMMARY
********** ************ *********************** **** ***** ********** ** ***** ******** * ******** *** ******* *** ***************** ****** COMMENTS:
o AMOUNTS ARE FROM TRIAL BALANCE SHEETS AND COST OF GOODS SOLD WORKPAPERS.
00-240
TEkAS NOTIFICATION OF AUDI ZESULTS (TEX.TAX CODE ANN.SEC.111.uu8)
Taxpayer Name WINSTEAD PC STATEMENT DATE May 23, 2011 Taxpayer Number 1-75-2404691-3
Type of TAX Audit Period
FRANCHISE TAX 2008 thru 2008
TOTAL
TAX $ 11,231.88
PENALTY 0.00
INTEREST THRU STATEMENT DATE 1,120.82 AMOUNT DUE AS OF STATEMENT DATE $ 12,352.70
IF PAID AFTER
05-23-2011,
ADD INTEREST OF $ INTEREST RATE NOTE ON BACK.)IF PAID AFTER
07-05-2011,
ADD AN ADDITIONAL 10% PENALTY OF $ (TEX. TAX CODE ANN.SEC. 111.0081).THIS NOTIFICATION BECOMES FINAL ON 06-22-2011, unless you request a redetermination hearing by this date. If a hearing is not requested, this determination becomes final on 06-22-2011, and it is due and payable on 07-05-2011. YOUR TAXPAYER RIGHTS ARE ON THE BACK.
The results of this audit do not rescind or replace any previous notices you may have received regarding outstanding balances. You are liable for any amounts still due.
The results of this audit should not be taken as approval of your tax reporting system. Law changes and new rulings might result in different findings in -future audits and you will . be responsible for any taxes -found owing and due.
For payment information call 1-800-531-5441, ext. 3-3900 toll-free nationwide, or call 512/463-3900.
Make your check payable to STATE COMPTROLLER and mail to Comptroller of Public Accounts 111 E. 17th Street, Austin, Texas 78774-0100.
(Cut and Return Bottom Portion with Payment)
00-240
TEXAS NOTIFICATION OF AUDIT RESULTS (TEX.TAX CODE ANN.SEC.111.008)
STATEMENT DATE May 23, 2011
Amount of Your Payment Taxpayer Name & Mailing Address
WINSTEAD PC
1201 ELM ST STE 5400 DALLAS, TX 75270-2199
*Tcode *Taxpayer Number *Period *Audit *Amount *File 13060 17524046913 08 001 12352.70
1.31 PER DAY THROUGH DATE OF PAYMENT.* (SEE
1,123.19.
Department of the Treasury
Internal Revenue Service
Publication 15-B
(Rev. February 2007) Cat. No. 29744NEmployer's
Tax Guide to
Fringe
Benefits
For Benefits Provided
in 2007
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Contents
What's New 1
Reminders 2
Introduction 2
1. Fringe Benefit Overview 2
Are Fringe Benefits Taxable? 2
Cafeteria Plans 2
2. Fringe Benefit Exclusion Rules 3
Accident and Health Benefits 6
Achievement Awards 7
Adoption Assistance 7
Athletic Facilities 7
De Minimis (Minimal) Benefits 8
Dependent Care Assistance 8
Educational Assistance 9
Employee Discounts 9
Employee Stock Options 10
Group-Term Life Insurance Coverage 10
Health Savings Accounts 13
Lodging on Your Business Premises 13
Meals 14
Moving Expense Reimbursements 16
No-Additional-Cost Services 16
Retirement Planning Services 17
Transportation (Commuting) Benefits 17
Tuition Reduction 18
Working Condition Benefits 18
3. Fringe Benefit Valuation Rules 20
General Valuation Rule 20
Cents-Per-Mile Rule 20
Commuting Rule 21
Lease Value Rule 22
Unsafe Conditions Commuting Rule 24
4. Rules for Withholding, Depositing, and
Reporting 25
How To Get Forms and Publications 26
Index 28
What's New
Cents-per-mile rule. The standard mileage rate you can use under the cents-per-mile rule to value the personal use of a vehicle you provide to an employee in 2007 is 48.5 cents a mile. See Cents-Per-Mile Rule in section 3.
Increase in qualified parking exclusion and commuter transportation benefit. For 2007, the monthly exclusion for qualified parking increases to $215 and the monthly exclusion for commuter highway vehicle transportation and transit passes increases to $110.
EXHIBIT
Reminders
Katrina Emergency Tax Relief Act of 2005. This Act provides tax relief for persons affected by Hurricane Ka-trina. Under the Act, your employees may be entitled to loans and tax-favored withdrawals from retirement plans, recontributions of withdrawals to retirement plans, and other benefits not covered in this publication. For more information, see Publication 4492, Information for Taxpay-ers Affected by Hurricanes Katrina, Rita, and Wilma.
Photographs of missing children. The Internal Reve-nue Service is a proud partner with the National Center for Missing and Exploited Children. Photographs of missing children selected by the Center may appear in this publica-tion on pages that would otherwise be blank. You can help bring these children home by looking at the photographs and calling 1-800-THE-LOST (1-800-843-5678) if you rec-ognize a child.
Introduction
This publication supplements Publication 15, (Circular E), Employer's Tax Guide, and Publication 15-A, Employer's Supplemental Tax Guide. It contains information for em-ployers on the employment tax treatment of fringe benefits.
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may be the provider ,,r the benefit even if it was actually furnished by another person. You are the provider of a fringe benefit your client or customer provides to your employee for services the employee performs for you.
Recipient of benefit. The person who performs services for you is the recipient of a fringe benefit provided for those services. That person may be the recipient even if the benefit is provided to someone who did not perform serv-ices for you. For example, your employee may be the recipient of a fringe benefit you provide to a member of the employee's family.
Are Fringe Benefits Taxable?
Any fringe benefit you provide is taxable and must be included in the recipient's pay unless the law specifically excludes it. Section 2 discusses the exclusions that apply to certain fringe benefits. Any benefit not excluded under the rules discussed in section 2 is taxable.
Including taxable benefits in pay. You must include in a recipient's pay the amount by which the value of a fringe benefit is more than the sum of the following amounts.
• Any amount the law excludes from pay. • Any amount the recipient paid for the benefit.
The rules used to determine the value of a fringe benefit are discussed in section 3.
If the recipient of a taxable fringe benefit is your em-ployee, the benefit is subject to employment taxes and must be reported on Form W-2, Wage and Tax Statement. However, you can use special rules to withhold, deposit, and report the employment taxes. These rules are dis-cussed in section 4.
If the recipient of a taxable fringe benefit is not your employee, the benefit is not subject to employment taxes. However, you may have to report the benefit on one of the following information returns.
If the recipient
receives the benefit as: Use:
An independent contractor Form 1099-MISC
1. Fringe Benefit Overview
A fringe benefit is a form of pay for the performance of services. For example, you provide an employee with a fringe benefit when you allow the employee to use a business vehicle to commute to and from work.
Performance of services. A person who performs serv-ices for you does not have to be your employee. A person may perform services for you as an independent contrac-tor, partner, or director. Also, for fringe benefit purposes, treat a person who agrees not to perform services (such as under a covenant not to compete) as performing services.
Provider of benefit. You are the provider of a fringe benefit if it is provided for services performed for you. You
A partner Schedule K-1 (Form
1065)
For more information, see the instructions for the forms listed above.
Cafeteria Plans
A cafeteria plan, including a flexible spending arrange-ment, is a written plan that allows your employees to choose between receiving cash or taxable benefits instead of certain qualified benefits for which the law provides an exclusion from wages. If an employee chooses to receive a qualified benefit under the plan, the fact that the employee could have received cash or a taxable benefit instead will not make the qualified benefit taxable.
Generally, a cafeteria plan does include any plan that offers, a benefit that defers pay. However, a cafeteria plan can include a qualified 401(k) plan as a benefit. Also, certain life insurance plans maintained by educational in-stitutions can be offered as a benefit even though they defer pay.
Qualified benefits. Qualified benefits include the follow-ing benefits discussed in section 2.
• Accident and health benefits (but not Archer medical savings accounts (Archer MSAs) or long-term care insurance).
• Adoption assistance. • Dependent care assistance.
• Group-term life insurance coverage (including costs that cannot be excluded from wages).
• Health savings accounts (HSAs). Distributions from an HSA may be used to pay eligible long-term care insurance premiums or qualified long-term care serv-ices.
Benefits not allowed. A cafeteria plan cannot include the following benefits discussed in section 2.
• Archer MSAs. (See Accident and Health Benefits.) • Athletic facilities.
• De minimis (minimal) benefits. • Educational assistance. • Employee discounts.
• Lodging on your business premises. • Meals.
• Moving expense reimbursements. • No-additional-cost services.
• Transportation (commuting) benefits. • Tuition reduction.
• Working condition benefits.
It also cannot include scholarships or fellowships (dis-cussed in Publication 970, Tax Benefits for Education).
Employee. For these plans, treat the following individuals as employees.
• A current common-law employee (see section 2 in Publication 15, (Circular E), for more information). • A full-time life insurance agent who is a current
stat-utory employee.
• A leased employee who has provided services to you on a substantially full-time basis for at least a year if the services are performed under your pri-mary direction or control.
Exception for S ...orporation shareholders. Do not treat a 2% shareholder of an S corporation as an employee of the corporation for this purpose. A 2% shareholder for this purpose is someone who directly or indirectly owns (at any time during the year) more than 2% of the corpora-tion's stock or stock with more than 2% of the voting power.
Plans that favor highly compensated employees. If your plan favors highly compensated employees as to eligibility to participate, contributions, or benefits, you must include in their wages the value of taxable benefits they could have selected. A plan you maintain under a collec-tive bargaining agreement does not favor highly compen-sated employees.
A highly compensated employee for this purpose is any of the following employees.
1. An officer.
2. A shareholder who owns more than 5% of the voting power or value of all classes of the employer's stock. 3. An employee who is highly compensated based on
the facts and circumstances.
4. A spouse or dependent of a person described in (1), (2), or (3).
Plans that favor key employees. If your plan favors key employees, you must include in their wages the value of taxable benefits they could have selected. A plan favors key employees if more than 25% of the total of the nontax-able benefits you provide for all employees under the plan go to key employees. However, a plan you maintain under a collective bargaining agreement does not favor key em-ployees.
A key employee during 2007 is generally an employee who is either of the following.
1. An officer having annual pay of more than $145,000. 2. An employee who for 2007 was either of the
follow-ing.
a. A 5% owner of your business.
b. A 1% owner of your business whose annual pay was more than $150,000.
More information. For more information about cafeteria plans, see section 125 of the Internal Revenue Code and its regulations.
2. Fringe Benefit Exclusion
Rules
This section discusses the exclusion rules that apply to fringe benefits. These rules exclude all or part of the value of certain benefits from the recipient's pay.
The excluded benefits are not subject to federal income tax withholding. Also, in most cases, they are not subject to
social security, Medicare, or fedb.-1 unemployment • Group-term life 1. -urance coverage. (FUTA) tax and are not reported on Form W-2.
• Health savings accounts (HSAs). This section discusses the exclusion rules for the follow-
ing fringe benefits. • Lodging on your business premises.
• Accident and health benefits. • Meals.
• Achievement awards. • Moving expense reimbursements.
• Adoption assistance. • No-additional-cost services.
• Athletic facilities. • Retirement planning services.
• De minirnis (minimal) benefits. • Transportation (commuting) benefits.
• Dependent care assistance. • Tuition reduction.
• Educational assistance. • Working condition benefits.
• Employee discounts.
See Table 2-1 for an overview of the employment tax
Table 2-1. Special Rules for ..trious Types of Fringe Benefits
(For more information, see the full discussion in this section.)
Treatment Under Employment Taxes
Type of Fringe Benefit Income Tax Withholding Social Security and Medicare Federal Unemployment (FUTA)
Accident and health benefits
Exempt 1,2 , except for certain long-term care benefits
Exempt, except for certain payments to S corporation employees who are 2% shareholders.
Exempt
Achievement awards Exempt 1 up to $1,600 ($400 for nonqualified awards).
Adoption assistance Exempt 1 Taxable Taxable
Athletic facilities Exempt if substantially all use during the calendar year is by employees, their spouses, and their dependent children.
De minimis (minimal) benefits Exempt Exempt Exempt
Dependent care assistance Exempt3 up to certain limits, $5,000 ($2,500 for married employee filing separate return). Educational assistance Exempt up to $5,250 of benefits each year. (See Educational Assistance, later.) Employee discounts Exempt' up to certain limits. (See Employee Discounts, later.)
Employee stock options See Employee Stock Options, later.
Grou p -term life coverage
insuran ce Exempt Exempt1 .6 up to cost of $50,000 of coverage. (Special rules apply to former employees.)
Exempt
Health savings accounts (HSAs) Exempt for qualified individuals up to the HSA contribution limits. (See Health Savings Accounts, later.) Lodging on your business
premises
Exempt 1 if furnished for your convenience as a condition of employment.
Meals Exempt if furnished on your business premises for your convenience. Exempt if de minimis.
Moving expense reimbursements Exempt1 if expenses would be deductible if the employee had paid them.
No-additional cost services Exempt4 Exempt4 Exempt4
Retirement planning services
Exempt6 Exempt 6 Exempt 6
Transportation (commuting) benefits
Exempt' up to certain limits if for rides in a commuter highway vehicle and/or transit passes ($110), or qualified parking ($215). (See Transportation (Commuting Benefits), later.)
Exempt if de minimis.
Tuition reduction Exempt4 if for undergraduate education (or graduate education if the employee performs teaching or research activities).
Working condition benefits Exempt Exempt Exempt
I Exemption does not apply to S corporation employees who are 2% shareholders..
2 Exemption does not apply to certain highly compensated employees under a self-insured plan that favors those employees. 3 Exemption does not apply to certain highly compensated employees under a program that favors those employees. 4 Exemption does not apply to certain highly compensated employees.
5 Exemption does not apply to certain key employees under a plan that favors those employees.
Accident and Health Ben,.,its
This exclusion applies to contributions you make to an accident or health plan for an employee, including the following.
• Contributions to the cost of accident or health insur-ance.
• Contributions to a separate trust or fund that directly or through insurance provides accident or health benefits.
• Contributions to Archer MSAs or health savings ac-counts (discussed in Publication 969, Health Sav-ings Accounts and Other Tax-Favored Health Plans).
This exclusion also applies to payments you directly or indirectly make to an employee under an accident or health plan for employees that are either of the following.
• Payments or reimbursements of medical expenses. • Payments for specific injuries or illnesses (such as
the loss of the use of an arm or leg). The payments must be figured without regard to any period of ab-sence from work.
Accident or health plan. This is an arrangement that provides benefits for your employees, their spouses, and their dependents in the event of personal injury or sick-ness. The plan may be insured or noninsured and does not need to be in writing.
Employee. For this exclusion, treat the following individu-als as employees.
• A current common-law employee.
• A full-time life insurance agent who is a current stat-utory employee.
• A retired employee.
• A former employee you maintain coverage for based on the employment relationship.
• A widow or widower of an individual who died while an employee.
• A widow or widower of a retired employee.
• For the exclusion of contributions to an accident or health plan, a leased employee who has provided services to you on a substantially full-time basis for at least a year if the services are performed under your primary direction or control.
Exception for S corporation shareholders. Do not
treat a 2% shareholder of an S corporation as an employee of the corporation for this purpose. A 2% shareholder is someone who directly or indirectly owns (at any time dur-ing the year) more than 2% of the corporation's stock or stock with more than 2% of the voting power.
Exclusion from wk. s. You can generally exclude the value of accident or health benefits you provide to an employee from the employee's wages.
Exception for certain long-term care benefits. You
cannot exclude contributions to the cost of long-term care insurance from an employee's wages subject to federal income tax withholding if the coverage is provided through a flexible spending or similar arrangement. This is a benefit program that reimburses specified expenses up to a maxi-mum amount that is reasonably available to the employee and is less than five times the total cost of the insurance. However, you can exclude these contributions from the employee's wages subject to social security, Medicare, and federal unemployment (FUTA) taxes.
S corporation shareholders. Because you cannot
treat a 2% shareholder of an S corporation as an employee for this exclusion, you must include the value of accident or health benefits you provide to the employee in the em-ployee's wages subject to federal income tax withholding. However, you can exclude the value of these benefits (other than payments for specific injuries or illnesses) from the employee's wages subject to social security, Medicare, and FUTA taxes.
Exception for highly compensated employees. If
your plan is a self-insured medical reimbursement plan that favors highly compensated employees, you must in-clude all or part of the amounts you pay to these employ-ees in their wages subject to federal income tax withholding. However, you can exclude these amounts (other than payments for specific injuries or illnesses) from the employee's wages subject to social security, Medicare, and FUTA taxes.
A self-insured plan is a plan that reimburses your em-ployees for medical expenses not covered by an accident or health insurance policy.
A highly compensated employee for this exception is any of the following individuals.
• One of the five highest paid officers.
• An employee who owns (directly or indirectly) more than 10% in value of the employer's stock.
• An employee who is among the highest paid 25% of all employees (other than those who can be ex-cluded from the plan).
For more information on this exception, see section 105(h) of the Internal Revenue Code and its regulations.
COBRA premiums. The exclusion for accident and
health benefits applies to amounts you pay to maintain medical coverage for a former employee under the Com-bined Omnibus Budget Reconciliation Act of 1986 (CO-BRA). The exclusion applies regardless of the length of employment, whether you directly pay the premiums or reimburse the former employee for premiums paid, and whether the employee's separation is permanent or tern-porary.
Achievement Awards
This exclusion applies to the value of any tangible personal property you give to an employee as an award for either length of service or safety achievement. The exclusion does not apply to awards of cash, cash equivalents, gift certificates, or other intangible property such as vacations, meals, lodging, tickets to theater or sporting events, stocks, bonds, and other securities. The award must meet the requirements for employee achievement awards dis-cussed in chapter 2 of Publication 535, Business Ex-penses.
Employee. For this exclusion, treat the following individu-als as employees.
• A current employee.
• A former common-law employee you maintain cover-age for in consideration of or based on an agree-ment relating to prior service as an employee. • A leased employee who has provided services to
you on a substantially full-time basis for at least a year if the services are performed under your pri-mary direction or control.
Exception for S corporation shareholders. Do not
treat a 2% shareholder of an S corporation as an employee of the corporation for this purpose. A 2% shareholder is someone who directly or indirectly owns (at any time dur-ing the year) more than 2% of the corporation's stock or stock with more than 2% of the voting power.
Exclusion from wages. You can generally exclude the value of achievement awards you give to an employee from the employee's wages if their cost is not more than the amount you can deduct as a business expense for the year. The excludable annual amount is $1,600 ($400 for awards that are not "qualified plan awards"). See chapter 2 of Publication 535 for more information about the limit on deductions for employee achievement awards.
To determine for 2007 whether an achievement award is a "qualified plan award" under the
de-CAUTION duction rules described in Publication 535, treat
any employee who received more than $100,000 in pay for 2006 as a highly compensated employee.
If the cost of awards given to an employee is more than your allowable deduction, include in the employee's wages the larger of the following amounts.
• The part of the cost that is more than your allowable deduction (up to the value of the awards).
• The amount by which the value of the awards ex-ceeds your allowable deduction.
Exclude the remaining value of the awards from the em-ployee's wages.
Adoption Assistance
An adoption assistance program is a separate written plan of an employer that meets all of the following requirements.
1. It benefits employees who qualify under rules set up by you, which do not favor highly compensated em-ployees or their dependents. To determine whether your plan meets this test, do not consider employees excluded from your plan who are covered by a col-lective bargaining agreement, if there is evidence that adoption assistance was a subject of good-faith bargaining.
2. It does not pay more than 5% of its payments during the year for shareholders or owners (or their spouses or dependents). A shareholder or owner is someone who owns (on any day of the year) more than 5% of the stock or of the capital or profits interest of your business.
3. You give reasonable notice of the plan to eligible employees.
4. Employees provide reasonable substantiation that payments or reimbursements are for qualifying ex-penses.
You must exclude all payments or reimbursements you make under an adoption assistance program for an em-ployee's qualified adoption expenses from the emem-ployee's wages subject to federal income tax withholding. However, you cannot exclude these payments from wages subject to social security, Medicare, and federal unemployment (FUTA) taxes. For more information, see the Instructions for Form 8839, Qualified Adoption Expenses.
You must report all qualifying adoption expenses you paid or reimbursed under your adoption assistance pro-gram for each employee for the year in box 12 of the employee's Form W-2. Use code `T" to identify this amount.
Employee. For this exclusion, do not treat a 2% share-holder of an S corporation as an employee of the corpora-tion. A 2% shareholder is someone who directly or indirectly owns (at any time during the year) more than 2% of the corporation's stock or stock with more than 2% of the voting power.
Athletic Facilities
You can exclude the value of an employee's use of an on-premises gym or other athletic facility you operate from an employee's wages if substantially all use of the facility during the calendar year is by your employees, their spouses, and their dependent children. For this purpose, an employee's dependent child is a child or stepchild who is the employee's dependent or who, if both parents are deceased, and not attained the age of 25.
On-premises facility. The athletic facility must be located on premises you own or lease. It does not have to be located on your business premises. However, the exclu-sion does not apply to an athletic facility for residential use, such as athletic facilities that are part of a resort.
Employee. For this exclusion, treat the following individu-als as employees.
• A current employee.
• A former employee who retired or left on disability. • 'A widow or widower of an individual who died while
an employee.
• A widow or widower of a former employee who re-tired or left on disability.
• A leased employee who has provided services to you on a substantially full-time basis for at least a year if the services are performed under your pri-mary direction or control.
• A partner who performs services for a partnership.
De Minimis (Minimal) Benefits
You can exclude the value of a de minimis benefit you provide to an employee from the employee's wages. A de minimis benefit is any property or service you provide to an employee that has so little value (taking into account how frequently you provide similar benefits to your employees) that accounting for it would be unreasonable or administra-tively impracticable. Cash and cash equivalent fringe ben-efits (for example, use of gift card, charge card, or credit card), no matter how little, are never excludable as a de minimis benefit, except for occasional meal money or transportation fare.
Examples of de minimis benefits include the following. • Occasional personal use of a company copying ma-chine if you sufficiently control its use so that at least 85% of its use is for business purposes.
• Holiday gifts, other than cash, with a low fair market value.
• Group-term life insurance payable on the death of an employee's spouse or dependent if the face amount is not more than $2,000.
• Meals. See Meals, later.
• Occasional parties or picnics for employees and their guests.
• Occasional tickets for entertainment or sporting events.
• Transportation fare. See Transportation (Commut-ing) Benefits, later.
Employee. For this exclusion, treat any recipient of a de minimis benefit as an employee.
Dependent Care Assistance
This exclusion applies to household and dependent care services you directly or indirectly pay for or provide to an employee under a dependent care assistance program that covers only your employees. The services must be for a qualifying person's care and must be provided to allow the employee to work. These requirements are basically
the same as the tesL , le employee would have to meet to claim the dependent care credit if the employee paid for the services. For more information, see QuaWing Person Test and Work-Related Expense Test in Publication 503, Child and Dependent Care Expenses.
Employee. For this exclusion, treat the following individu-als as employees.
• A current employee.
• A leased employee who has provided services to you on a substantially full-time basis for at least a year if the services are performed under your pri-mary direction or control.
• Yourself (if you are a sole proprietor).
• A partner who performs services for a partnership.
Exclusion from wages. You can exclude the value of benefits you provide to an employee under a dependent care assistance program from the employee's wages if you reasonably believe that the employee can exclude the benefits from gross income.
An employee can generally exclude from gross income up to $5,000 of benefits received under a dependent care assistance program each year. This limit is reduced to $2,500 for married employees filing separate returns.
However, the exclusion cannot be more than the earned income of either:
• The employee, or • The employee's spouse.
Special rules apply to determine the earned income of a spouse who is either a student or not able to care for himself or herself. For more information on the earned income limit, see Publication 503.
Exception for highly compensated employees. You cannot exclude dependent care assistance from the wages of a highly compensated employee unless the ben-efits provided under the program do not favor highly com-pensated employees and the program meets the requirements described in section 129(d) of the Internal Revenue Code.
For this exclusion, a highly compensated employee for 2007 is an employee who meets either of the following tests.
1. The employee was a 5% owner at any time during the year or the preceding year.
2. The employee received more than $100,000 in pay for the preceding year.
You can choose to ignore test (2) if the employee was not also in the top 20% of employees when ranked by pay for the preceding year.
Form W-2. Report the value of all dependent care assis-tance you provide to an employee under a dependent care assistance program in box 10 of the employee's Form W-2. Include any amounts you cannot exclude from the em-ployee's wages in boxes 1, 3, and 5.
Educational Assistance
This exclusion applies to educational assistance you vide"to employees under an educational assistance pro-gram. The exclusion also applies to graduate level courses.
Educational assistance means amounts you pay or in-cur for your employees' education expenses. These ex-penses generally include the cost of books, equipment, fees, supplies, and tuition. However, these expenses do not include the cost of a course or other education involv-ing sports, games, or hobbies, unless the education:
• Has a reasonable relationship to your business, or • Is required as part of a degree program.
Education expenses do not include the cost of tools or supplies (other than textbooks) your employee is allowed to keep at the end of the course. Nor do they include the cost of lodging, meals, or transportation.
Educational assistance program. An educational assis-tance program is a separate written plan that provides educational assistance only to your employees. The pro-gram qualifies only if all of the following tests are met.
• The program benefits employees who qualify under rules set up by you that do not favor highly compen-sated employees. To determine whether your pro-gram meets this test, do not consider employees excluded from your program who are covered by a collective bargaining agreement if there is evidence that educational assistance was a subject of good-faith bargaining.
• The program does not provide more than 5% of its benefits during the year for shareholders or owners. A shareholder or owner is someone who owns (on any day of the year) more than 5% of the stock or of the capital or profits interest of your business. • The program does not allow employees to choose to
receive cash or other benefits that must be included in gross income instead of educational assistance. • You give reasonable notice of the program to eligible
employees.
Your program can cover former employees if their employ-ment is the reason for the coverage.
For this exclusion, a highly compensated employee for 2007 is an employee who meets either of the following tests.
1. The employee was a 5% owner at any time during the year or the preceding year.
2. The employee received more than $100,000 in pay for the preceding year.
You can choose to ignore test (2) if the employee was not also in the top 20% of employees when ranked by pay for the preceding year.
Employee. For this ,„elusion, treat the following individu-als as employees.
• A current employee.
• A former employee who retired, left on disability, or was laid off.
• A leased employee who has provided services to you on a substantially full-time basis for at least a year if the services are performed under your pri-mary direction or control.
• Yourself (if you are a sole proprietor).
• A partner who performs services for a partnership.
Exclusion from wages. You can exclude up to $5,250 of educational assistance you provide to an employee under an educational assistance program from the employee's wages each year.
Assistance over $5,250. If you do not have an educa-tional assistance plan, or you provide an employee with assistance exceeding $5,250, you can exclude the value of these benefits from wages if they are working condition benefits. Property or a service provided is a working condi-tion benefit to the extent that if the employee paid for it, the amount paid would have been deductible as a business or depreciation expense. See Working Condition Benefits,
later.
Employee Discounts
This exclusion applies to a price reduction you give an employee on property or services you offer to customers in the ordinary course of the line of business in which the employee performs substantial services. However, it does not apply to discounts on real property or discounts on personal property of a kind commonly held for investment (such as stocks or bonds).
Employee. For this exclusion, treat the following individu-als as employees.
• A current employee.
• A former employee who retired or left on disability. • A widow or widower of an individual who died while
an employee.
• A widow or widower of an employee who retired or left on disability.
• A leased employee who has provided services to you on a substantially full-time basis for at least a year if the services are performed under your pri-mary direction or control.
• A partner who performs services for a partnership.
Exclusion from wages. You can generally exclude the value of an employee discount you provide an employee from the employee's wages, up to the following limits.