Understanding tax laws and fringe benefits – Albuquerque Journal

Understanding tax laws and fringe benefits

The 1980 movie “Airplane!” featured a troubled former fighter pilot, Ted Striker, forced to step into the cockpit to land a commercial airliner.

This was a comedic take on older movies where panicked passengers are asked if anyone on board knows how to land the plane.

A more common theatric plea for expertise, “Is there a doctor in the house?” was always met with the handy doc who attended to the emergency.

Most people have no idea how to land a commercial airliner or to attend to the needs of a patient suffering from a medical emergency far from a health care facility. But I think we can all appreciate the significance of the problem.

Experts clearly know more about their areas of expertise than does a layperson. This extends to plumbers, cable TV service people, automotive service technicians and tax consultants. This does not mean the layperson cannot sense that something is wrong.

The tax law provides that “gross income” include income from whatever source derived. In the late 1970s, the IRS grew increasingly concerned that employers were developing their own “rules” for when fringe benefits were taxable.

Airlines offerings free or discounted travel, hotels offering free or discounted rooms, retail stores offering discounts and others decided for themselves whether or to what extent a benefit was taxable income to the recipient employee.

In 1984, Congress acted to clean up the taxation of fringe benefits. First, the law made clear that any benefit was taxable unless the law said it was not. Second, the law expanded the list of items excluded from income by statute.

The purpose of the 1984 changes was to make clear to tax consultants what was taxable income. Some confusion remains, but for minor dollar amounts.

How many free meals can be offered before the employer needs to report income? How significant can a Christmas gift be before it is taxable? Limited confusion remains for such items.

I have no personal knowledge of what the Trump organization did with its fringe benefit program.

If the facts reported in a recent indictment are true, the tax law was violated. Not maybe. Not, “Well, tax laws are too complicated.”

That doctor in the house may later say that the patient suffered a ST segment elevation myocardial infarction. The regular folk just saw that something was wrong with his heart.

The tax consultant might toss around “code sections” to explain the taxability of benefits. The regular folk should at least notice something odd with the company’s arrangement.

A man lies unconscious on the floor of a restaurant. A passenger notices the plane’s engine is on fire. Do we need to understand the cause of either emergency to know there is a problem?

Many say this is a political hit. If the facts in the indictment are true, that conclusion holds only if the fraud evident is too small to prosecute. A media blitz claims this is all about use of a company car.

It’s not. There are two company cars. A luxury apartment with furnishings and paid utilities. Private school tuition. Income paid as an independent contractor to support retirement contributions. Hiding income from city and state income taxes.

Let’s say you land a great job paying $300,000 per year. The employer gives both you and your spouse cars. They pay for your mortgage, taxes, insurance and utilities. For your kids’ private school tuition.

A schedule is prepared showing that the various personal expenses total $123,000. The employer “reduces” your pay to $177,000. Your W-2 form reports $177,000 of pay. You pay tax on $177,000. The employer deducts $300,000.

You’re not a tax expert. But do you see a flaming engine? An unconscious body on the floor? Should the authorities view the problem as too small to elicit a reaction?

There is a history of going after well-known people for tax evasion. Leona Helmsley. Wesley Snipes. Yes, even “The Situation” from Jersey Shore. No political hits. Just an efficient way to throw a scare into the regular folk.

You can agree or disagree with my take on this. Just not because the tax issue is too complicated. When is a body or a fire too small to respond to?

James R. Hamill is director of Tax Practice at Reynolds, Hix & Co. in Albuquerque. He can be reached at jimhamill@rhcocpa.com.


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