- quote -

At a minimum that is not clear cut. In any case, the
information I have indicates that the employer must "Provide
a Surety Bond or an irrevocable Letter of Credit, equal to
one-half of the expected annual contributions of the Plan.
This guarantees the payment of benefits and other
obligations of the Plan should the Employer default on
benefit payments to the employees. The cost of the Bond or
Letter of Credit is paid for directly from Plan funds
(employee contributions)."

I guess the question is: "Are plan funds employee
contributions?"

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- quote -

I must differ with you. If an employer opts out from SDI. they
establish either a self-funded plan or they implement a private
insured plan through one of the disability insurers.
Contributions from the plan are not paid to the state. The only
amount paid to the state is an assessment of 14% of employee
contributions that is used for the following:
A. To provide coverage to a separated employees who becomes
disabled before obtaining re-employment.
B. Pay state administration expenses and
C. Some item that relates to refunds when an employee has
multiple employers or multiple jobs.

I don't believe you can consider that assessment as the same
thing as saying the employee's contributions to the voluntary
plan are being remitted to the state.

Alan
http://taxtopics.net

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- quote -

As previously noted, funds ARE remitted to the state:

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"Ed Zollars, CPA" <ezollar[at]mindspring.com> wrote:
- quote -

I don't think in this instance that we are dealing with a
"tax equivalency payment" designed to "raise revenue" for
the state. Dealing with employees who are by law not exempt
from SDI, the employer has the choice to let the State cover
them or to provide their own coverage. I just don't see how
RR 71-49 can be expanded to include these voluntary
payments, that do not raise revenue to the State, as
equivalent to an income tax.

Alan
http://taxtopics.net

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A.G. Kalman wrote:

- quote -

While I think that's very probable, I haven't yet found
direct authority for that point. Rev. Rul. 71-49 is kind
of interesting in this regard, since the payments bypassed
the New York General Fund, though it did go to a corporation
that the state established.

Now, that said, I may very well have simply missed the
authority--realize since this issue isn't one I have to
worry about very often (Arizona has no equivalent of SDI,
and certainly no equivalent of VPDI <grin> ) I'm just
thinking out loud on this one. But since "tax equivalents"
are deductible under that ruling, could that still
theoretically be the case if paid to a third party that was
providing the service in lieu of the government?

--
Ed Zollars, CPA
Phoenix, Arizona

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Katiej_1958[at]yahoo.com (Katie Jaques) wrote:
- quote -

I hope everyone hasn't overlooked the fact that for the VPDI
payment to be deductible it would have to be remitted to the
State of CA. As I stated earlier, it's my understanding that
just about all the voluntary plans are either self-funded or an
insurance contract. No funds are remitted to the state. No
deduction for state income taxes would be allowed.

Alan
http://taxtopics.net

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Katie Jaques wrote:

- quote -

In one sense, whenever a taxpayer loses a case the IRS might
argue (and some agents seem to always want to initially
<grin> ) that there is a negligence penalty. Of course, the
IRS doesn't seem to feel the same way about paying costs
when they lose, but I digress <grin> . However, so long as
there is a reasonable position the penalty should not apply.

Now, if the ruling in question is a regulation there would
certainly be a disclosure issue (Form 8275-R as I recall),
as well as having to now argue that the IRS's interpretation
of the underlying statute is in error. But Revenue Ruling
81-194, which was issued following Trujillo to "cave in" on
the state fund SDI issue, while denying the deduction for
voluntary plans also is interestingly silent on citations to
authority when in that part of its analysis.

I read that as meaning that the IRS attempted to cast
Trujillo in as narrow a light as possible in that ruling.
It's also important to note that Mr. Trujillo's position
was, at the time of the case, also in direct opposition to a
published Revenue Ruling--one that the Tax Court did not
find persuasive.

In scanning Trujillo, while the Tax Court clearly was aware
of the option of the third party provided disability
insurance, it didn't indicate that a payment to the state
was a required condition of getting the deduction. Now
clearly it's dangerous to try and expand the decision in
Trujillo to a fact pattern that is different in a
significant way, but it seems clear that the opinion did not
make the *payment* of the amount to the state of California
an explicit factor in finding for Trujillo--rather the court
concentrated on the fact that the state of California
*required* that such a program be in place.

So while I do think there are problems with the payment not
going to the state of California, I also think there's
enough authority to justify taking the position it is
deductible with the understanding that the IRS almost
certainly will not agree on exam. But I also believe the
IRS, if they really believed a taxpayer would take the case
to Tax Court, might also decide *their* risks of litigation
are simply too great to allow it to go there for what would
be a very minor amount in the case in question.

Of course, that small amount also makes it unlikely that a
taxpayer would feel it worthwhile to challenge unless
someone was pushing a test case--which would be all the more
reason for the IRS to cave in earlier in the process and not
let it get to court <grin> .

--
Ed Zollars, CPA
Phoenix, Arizona

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"Ed Zollars, CPA" <ezollar[at]mindspring.com> wrote:
- quote -

I don't know, Ed; since there is a ruling directly on point,
I should think there would be at least some risk of an
accuracy-related (negligence) penalty.

The saving grace is that the amount is so small that even
with the penalty, the exposure would not be great.

Katie in San Diego

The foregoing is intended for educational purposes only and
does not constitute legal or professional advice.

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Katie Jaques wrote:

- quote -

I guess I'd modify that statement only slightly--it may or
may not be deductible, but you are not likely to get the IRS
to agree to explicitly allow this deduction on exam (and
certainly not in a private letter ruling or TAM) unless
someone successfully litigates this matter in court. Given
that the numbers almost certainly would not justify the
expense of a Tax Court challenge, that means that, as a
practical matter, your statement is likely correct.

But, as well, I don't believe it would necessarily be taking
a frivilous position on a return if a taxpayer claimed the
deduction. It just wouldn't likely be worth pursuing the
issue if the IRS challenged the taxpayer on the issue.

--
Ed Zollars, CPA
Phoenix, Arizona

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"Vernon Chatman" <vernonchatmaniii[at]earthlink.net> wrote:

snip
- quote -

True ... but so what? IRS didn't think that made SDI a tax.
The Tax Court disagreed in Trujillo. That doesn't resolve
the VPDI issue.

Katie in San Diego

The foregoing is intended for educational purposes only and
does not constitute legal or professional advice.

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