Level 9

Claim of Right Repayment Credit - Help for Section 1341 5(B) clarification

Forum|Forum|4 years ago
October 19, 2021
3 replies
18 views

TP is a professor with W2 and Sch C income. Employment contract limits his moonlighting income.

In 2021, Employer exercises the claw-back provisions and claims $300K of back payment from TP for 2012 thru 2020.

Tax law allows either a Sch A misc deduction OR a credit (based on the year-to-year differences between As-filed-and-paid and What-if).

Section 1341:

(5)(B)......[related to the credit computation]

For purposes of paragraph (5)(B), the corresponding provisions of the Internal Revenue Code of 1939 shall be chapter 1 of such code (other than subchapter E, relating to self-employment income) and subchapter E of chapter 2 of such code.

I'm old but not old enough to remember IRC of 1939. The clause seemed to exclude certain elements related to Self Employment Income (Chapter 1, subchapter E) and include Chapter 2 and Subchapter E, whatever it is.

Regs 1-1341 parrots the two sections without explaining it. "Self-employment income" or "SE tax" is NOT found in the text.

I downloaded

UNITED STATES
STATUTES AT LARGE
CONTAINING THE
LAWS AND CONCURRENT RESOLUTIONS
ENACTED DURING THE FIRST SESSION OF THE
SEVENTY-SIXTH CONGRESS OF THE UNITED STATES OF AMERICA
1939

from the internet.

The IRC on there had Chapter 1 Subchapter A thru C; and Chapter 2 Subchapter A thru D.

NO idea what "Internal Revenue Code of 1939, chapter 1 (other than subchapter E, relating to self-employment income) and subchapter E of chapter 2 of such code" are.

Help....Community Ideas

1. For the Claim of Right Repayment Credit under Section 1341, can the TP claim the credit for the excess Self Employment Tax on the repaid income?

2. Do you know what "Internal Revenue Code of 1939 chapter 1, subchapter E (relating to self-employment income) and subchapter E of chapter 2 of such code" are?

(The instructions on Pub 525 and other materials discuss "Tax" without addressing the applicability to Self Employment Tax in this regard.)

Lacerte Tax

This topic has been closed for replies.

BobKamman

Level 15

You're leaving out a subparagraph header. The citation should be:

Section 1341(a)(5)(B)

Most of the time federal statutes are number, letter, number, letter. First ulc, then caps. Then I think they get into Roman numerals, but I would have to look for one to be sure.

The reference to the 1939 Code is in artifact from 1954 (and then 1986) in case you had any years that go back that far. Ignore it.

joshuabarksatlcsAuthor

Level 9

Yes, it's Section 1341(a)(5)(B). the (a) Got deleted during editing. Mea Culpa.

Yet, the reference is to the 1939 Act, which has no such Subchapters.

The 1954 Act then 1986 Act 's Subchapter 1, Subchapter E has to do with "Accounting Method" etc. , and Chapter 2 has NO specific subchapters.

I thought the reference in the the current Code 1341(a)(5)(B) has to do with a version of the "1939 Act" between 1939 and 1954. Still this would not help me for my question:

1. For the Claim of Right Repayment Credit under Section 1341, can the TP claim the credit for the excess Self Employment Tax on the repaid income?

I come here for kudos and IRonMaN's jokes.

BobKamman

Level 15

The 1939 Code did have such a subchapter by the time it was replaced in 1954. You won't find it in an online edition that was published in 1939. But you don't need it, because you just need to use the 1986 Code for tax years beginning in 2012.

qbteachmt

Level 15

I don't see how this applies to SE tax: "Employer exercises the claw-back provisions and claims $300K of back payment from TP for 2012 thru 2020."

The employer cannot claw back Self-employment income. The Employer can "dock wages" per the contract. That means the employee's share of SS and Medicare would be refunded from the Employer, the same as a cancelled, claw back bonus. The claw back is the Wage earnings, not the Sched C earnings, isn't it?

Read these scenarios for comparison: https://ttlc.intuit.com/community/taxes/discussion/re-the-repayment-must-be-more-than-3000-the-amount-of-the/01/1273894/highlight/true

Don't yell at us; we're volunteers

qbteachmt

Level 15

For affecting SE tax or not, I found this:

The repayment is deducted, in general, on the same form or schedule on which it was previously included. If it had been included as self-employment income on Schedule C, Profit or Loss from Business, it is deducted on Schedule C. If it had been included as capital gain on Schedule D, Capital Gains and Losses, it is deducted on Schedule D. If it was reported as wages, taxable unemployment compensation, or other non-business ordinary income, it is deducted on Schedule A, Itemized Deductions.

Here: https://www.irs.gov/irm/part21/irm_21-006-006r

Don't yell at us; we're volunteers

joshuabarksatlcsAuthor

Level 9

RE: I don't see how this applies to SE tax

This was in my original post:

"Employment contract limits his moonlighting income.

In 2021, Employer exercises the claw-back provisions and claims $300K of back payment from TP for 2012 thru 2020. "

Per the employment contract, when the moonlighting income exceeds certain level, he has to split the moonlighting income with the employer. The claw-back was on the moonlighting income, i.e. the SE income.

The employer did not dock the wages. It was not like he lost money from the cash register...

I come here for kudos and IRonMaN's jokes.

BobKamman

Level 15

What does the employment contract say?

"For every dollar of outside income, your salary is reduced", or

"We will always pay your full salary, but you have to turn over every dollar of outside income." ?

If he gets to keep the Schedule C income but his salary is reduced, it's a simple problem. He qualifies for a refund of FICA and Medicare taxes paid on the salary.

Were there any years where outside income exceeded salary? Would he have had to pay back more than his W-2 compensation?

First step would be to read the employment contract.

joshuabarksatlcsAuthor

Level 9

All that was done. The claim was on the moonlighting income. The W2 was intact.

The moonlighting income over a certain has to be split. All about the Sch C income.

I come here for kudos and IRonMaN's jokes.

BobKamman

Level 15

It occurred to me that this may be a school whose employees don't have Social Security coverage. He should still be paying Medicare taxes, though, and that may have already been refunded, or figured into the calculation of how much he has to turn over. I doubt they would be required to amend W-2 forms. What's interesting is that if this were a straight compensation case -- repayment of a sign-on bonus, for example -- he could have already started collecting SS benefits based on the higher income, and those may not be clawed back.

Still sounds like a salary reduction to me, rather than a partnership agreement involving outside income. But IRS may not take too close a look at it. There were a lot of Section 1341 fraudulent claims a while back that made it through the system. I haven't heard that they have enough people to tighten up the reviews.

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