What Is A Tax Indemnification Agreement

Sometimes a person or company is compensated for the payment of the tax debt of the former. An agreement for this agreement is called a tax compensation agreement. For example, the company compensates #1 #2 for taxes collected against the company`s #2. Companies #1 could do this because the two companies are active together (for example. B, one company can sell the other`s products). How is the company treated tax #2 if it is compensated by the #1 of the company – if it receives tax compensation? First, this portion of a tax allowance is not included in gross income if the taxpayer pays more tax on federal income than he should have because of the actions of a third party only; This is because the payment only puts the taxpayer back in position if he had surrendered if this had not been the case for the acts of the third party. Second, some gross income repayments are not excluded. In particular, if a returnee makes an error and reimburses a client for the resulting additional taxes or penalties paid by the taxpayer, the refund is not excluded in the gross income. Clark v. Commissioner, 40 BTA 333, 1939.

Planning is always advised that the client first pays the tax and is then reimbursed by the returnee in order to avoid incorporation into the income. Indeed, if the returnee first pays the additional taxes or penalties incurred by the client, then this payment is the taxable income of the client in Treas. Reg. 1.61-14 (a). See also Ltr. Rul 7749029. The general rule of payment of tax compensation is that payments of a taxpayer`s tax debt, directly or indirectly, are taxable as income for the recipient at treas. But there are two exceptions. The email address cannot be subscribed. Please, do it again. Learn more about FindLaw`s newsletter, including our terms of use and privacy policies.

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