Sometimes one person or company will compensate another for paying the tax payable to the first. An agreement for this agreement is called a tax compensation agreement. For example, Company No. 1 compensates Company No. 2 for taxes levied on Company No. 2. The #1 company could do this because the two companies have business activities together (for example.B one company can sell the other`s products). What is the tax treatment of the #2 company if it is cleared by the #1 company – if it receives a tax offset payment? The e-mail address cannot be subscribed. Please try again.

This website is protected by reCAPTCHA and Google`s privacy policy and terms of use apply. Learn more about FindLaw`s newsletters, including our Terms of Service and Privacy Policy. The general rule for tax compensation payments is that tax payments are borne by a taxpayer, whether direct or indirect, as income to the beneficiary under Treas. Reg. Paragraphs 1.61-14(a) are taxable. However, there are two exceptions. First, this portion of a tax indemnity payment is not included in gross income if the taxpayer pays more federal income tax than he or she should have solely because of the actions of a third party; This is due to the fact that the payment only places the taxpayer in the situation in which he would have operated without the actions of the third party. Second, some refunds are not included in gross income. In particular, if a returnee makes a mistake and reimburses a customer for any resulting additional taxes or penalties paid by the taxpayer, the refund is not included in the gross income. Clark v. Commissioner, 40 BTA 333, 1939.

For planning reasons, it is always advisable that the client first pays the tax and then receives a refund from the returnee to avoid inclusion in income. Because if the returnee first pays the additional taxes or penalties that the customer incurs, then this payment is taxable income for the customer according to Treas. Reg. 1.61-14 (a). See also Ltr. Rul 7749029. . . .