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Tuesday, April 15, 2003

 
Favortism Does Not Convert a Bonus into a Gift

Lisa B. Williams was a radiation therapist who worked for the husband and wife doctor team of Thomas Noell and Maitland Deland. She was an excellent employee and was being groomed for more extensive involvement in the business. In the meantime, she became close personal friends of her bosses, as did her kids and their kids. As she became closer friends with her bosses, her annual bonuses, determined solely by her bosses' discretion, increased dramatically. The process of evaluation and payment of the bonuses for Williams was the same as for all other employees, although her bonuses were dramatically higher than most other employee's. These bonuses had no withholding and were not reported on the W-2's she received. Williams claims that when she asked the business's accountant about this, he said the exclusion was correct. After the doctors fired Williams' sister, the friendship ended. That year, Williams received no bonus, and quit soon after. After she quit, the doctors issued her W-2cs for the years at issue that included the bonuses. Williams did not include these bonuses on her return and referred to them as gifts.

Tax Court ruled against her on the substance, as well as on the accuracy-related penalty. I think Tax Court is right to go against her on the substance. The doctors may have let their business decisions be guided by personal feelings unrelated to business, but they were still business decisions made in a business context and provided business advantages. (Actually, the doctors may have been even more guilty of letting their business unduly influence their decisions about friends than the other way around.) I think it's a closer call regarding the penalty. Bad advice from an employer should not void a penalty, but it is difficult not to sympathize with the way she was mislead. Does anyone out there know if Williams has a potential cause of action in tort against her employer for (a) the penalty and (b) the interest on the amount that should have been withheld but was not (at least until the W-2c was issued)? That is how I believe it should be handled: Impose the penalty, but allow recovery against the employer.

Also:
* Tax Court said that the 6 year statute of limitations on assessment applied because the amounts excluded from the return were in excess of 25% of stated gross income.

*$1300 withdrawn from Williams' husbands' pension account was reclassified by Tax Court from wages to pension, resulting in a $130 early withdrawal tax.



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