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5500 Preparer's Manual for 2012 Plan Years
The premier resource in the field of Form 5500 preparation, 5500 Preparer's Manual will help you handle the required annual Form 5500 filings for both pension benefits and welfare benefit plans.
The contributions an individual made to a simplified employee plan (SEP) from earnings he received providing consulting services to a foreign government were nondeductible excess contributions, the U.S. Tax Court (TC) has ruled Rosenfeld v. Commissioner. He was a common law employee of the foreign employer and therefore could not qualify as his own employer for purposes of making a SEP contribution.
The taxpayer maintained his own business as a corporate communications consultant. He signed a letter of appointment with a foreign government to provide communications services to its U.S. consulate. The letter categorized the taxpayer as "self-employed for tax purposes," and the consulate did not withhold taxes from his payments. As he had in years past, the taxpayer timely filed his Form 1040, reporting his income from the foreign employer on Schedule C. He also made a contribution to his SEP based upon these earnings.
Self-employed individuals and sole proprietors are treated as their own employers and employees for purposes of SEP plan deductions. To be treated as an employer for SEP purposes, an individual must, under Code Sec. 401(c)(4), "own the entire interest in an unincorporated trade or business."
Far from owning "the entire interest" in the foreign employer, the individual was in fact a common law employee with respect to earnings received from the consulate. As the court explained, the categorization in the letter of appointment as "self-employed for tax purposes" did not reflect the consulate's understanding of the individual's employment status. Instead, it reflected the tax consequences under Code Sec. 3121(b)(11) for a U.S. citizen employed by a foreign government. (The IRS may not levy FICA taxes on a foreign government. Instead, the U.S. citizen is treated as self-employed for this purpose.) Relevant factors (e.g., degree of control over work performed, payment of fixed salary, etc.) demonstrated that the consultant was the consulate's employee.
In addition to disallowing the individual's deduction for the excess SEP contribution, the court agreed that the individual must pay the appropriate excise tax. However, the court concluded that the individual did not owe the 20% accuracy-related penalty. He acted in good faith when he relied upon his tax preparer's opinion as to the validity of the SEP contribution.
For more information, visit http://www.wolterskluwerlb.com/rbcs.
For more information on this and related topics, consult the CCH Pension Plan Guide, CCH Employee Benefits Management, and Spencer's Benefits Reports.
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