Fed Tax Outline HSMe

CHAPTER 2. GROSS INCOME: THE SCOPE OF SECTION 61 ................................................................................................ 3 1. Gross Income ...................................................................................................................... 3 i. Cesarini v. U.S .................................................................................................................. 3 ii. Commissioner v. Glenshaw Glass Co. (1955) ................................................................. 4 iii. Old Colony Trust Co. v. Commissioner ......................................................................... 5 2. Defining Fair Market Value ................................................................................................ 6 3. Income Without Receipt of Cash or Property ..................................................................... 6 ii. Dean v. Commissioner .................................................................................................... 7 CHAPTER 3. THE EXCLUSION OF GIFTS AND INHERITANCES ............................................................................................. 8 B. G IFTS ...................................................................................................................................... 8 CHAPTER 4. EMPLOYEE BENEFITS .................................................................................................................................. 11 B. E XCLUSIONS FOR M EALS AND L ODGING ............................................................................. 16 i. Hatt v. Commissioner ..................................................................................................... 18 CHAPTER 5. AWARDS .................................................................................................................................................... 20 A. P RIZES .................................................................................................................................. 20 CHAPTER 6. GAIN FROM DEALINGS IN PROPERTY ........................................................................................................ 22 B. D ETERMINATION OF B ASIS ................................................................................................... 22 i. Philadelphia Park Amusement Co. v. U.S ...................................................................... 23 2. Property Acquired by Gift ................................................................................................. 26 i. Taft v. Bowers (1929) ..................................................................................................... 29 ii. Farid-Es-Sultaneh v. Commissioner (1947) .................................................................. 29 3. Property Acquired Between Spouses or Incident to Divorce-IRC § 1041  REGS: § 1.1041-1T(a) & (d) ................................................................................................................ 30 4. Property Acquired from a Decedent - IRC § 1014(a), (b)(1) and (6), (e). REGS: § 1.1014-3(a); 20.2031-1(b) .................................................................................................... 32 C. A MOUNT R EALIZED - IRC § 1001( B ). REGS: § 1.1001-1( A ), -2( A ), ( B ), ( C ) E X . (1) AND (2). .................................................................................................................................................. 33 i. International Freighting Corp. v. Commissioner (1943) ................................................ 33 ii. Crane v. Commissioner ................................................................................................. 33 iii. Commissioner v. Tufts ................................................................................................. 34 CHAPTER 8. - DISCHARGE OF INDEBTEDNESS (DOI) ....................................................................................................... 39 i. United States v. Kirby Lumber Co. (1931) .................................................................... 39 CHAPTER 9. – DAMAGES AND RELATED RECEIPTS ......................................................................................................... 42 i. Raytheon Production Corporation v. Commissioner ...................................................... 43 B. O VERVIEW OF G OODWILL : ................................................................................................... 44 C. D AMAGES AND O THER R ECOVERIES FOR P ERSONAL I NJURY .............................................. 45 i. Revenue Ruling 79-313 .................................................................................................. 48 CHAPTER 14 – BUSINESS DEDUCTIONS .......................................................................................................................... 49 B. T HE A NATOMY OF THE B USINESS D EDUCTION W ORKHORSE : S ECTION 162 ....................... 49 i. Welch v. Helvering ......................................................................................................... 50 ii. Tizard Case .................................................................................................................... 51 iii. Hundley ........................................................................................................................ 52 1

2. “Expenses” ....................................................................................................................... 54 3. The Regulations ................................................................................................................. 55 A. A MOUNTS P AID TO A CQUIRE /P RODUCE T ANGIBLE P ROPERTY – R EG . §1.263( A )-2 ........... 55 i. Commissioner v. Idaho Power Co .................................................................................. 55 B. R EPAIRS V ERSUS I MPROVEMENTS ....................................................................................... 55 i. Midland Empire Packing Co. v. Commissioner ............................................................. 56 ii. Mt. Morris Drive-In Theatre Co. v. Commissioner ....................................................... 56 C. A MOUNTS P AID TO A CQUIRE OR C REATE I NTANGIBLE P ROPERTY ..................................... 58 D. D EPRECIATION ..................................................................................................................... 60 2. Accelerated Cost Recovery System (ACRS) ...................................................................... 61 i. Reg. § 1.1016-382 .......................................................................................................... 65 D. M ISCELLANEOUS B USINESS D EDUCTIONS ........................................................................... 66 1. Business Losses: IRC §§ 165(c)(1); 280B ........................................................................ 66 E. S PECIFIC B USINESS D EDUCTION ( PG . 369) ........................................................................... 67 i. Exacto Springs Corp. v. Commissioner .......................................................................... 67 ii. Harolds Club v. Commissioner ..................................................................................... 68 2. Travel “Away From Home” .............................................................................................. 72 i. Reg. § 1.162-2(e) Traveling expenses (Pg. 973 Tax/Reg. Book) ................................... 72 ii. Reg. 1.62-2: Traveling Expenses ................................................................................... 72 i. Rosenspan v. United States (1971) ................................................................................. 78 ii. Andrews v. Commissioner (1991) ................................................................................. 79 iii. Revenue Ruling 99-7 (Pg. 398-401)— ......................................................................... 80 3. Business Meals and Entertainment ................................................................................... 80 CHAPTER 21 – CAPITAL GAINS AND LOSSES ................................................................................................................... 83 1. Capital Gains .................................................................................................................... 83 2. Capital Gains and Capital Losses Illustrated (For Individual) ........................................ 84 B. T HE M EANING OF “C APITAL A SSET ” ................................................................................... 85 i. Malat v. Riddell .............................................................................................................. 87 C. § 1231 (HOTCHPOT) RECHARACTERIZATION ........................................................... 88 CHAPTER 22 – CHARACTERIZATION ON THE SALE OF DEPRECIABLE PROPERTY - §1245 ................................................ 94 C HAPTER 2. G ROSS I NCOME : T HE S COPE OF S ECTION 61 A. Equivocal Receipt of Financial Benefit 2

Concept of Realization: The value of most things fluctuates (goes up and down) and the increase in value of the piano is not realized until it is sold. Note: You only pay tax on the amount it increased in value. If the value of the property had decreased, then you would not be taxed on it at all. Change Facts of Problem (1): What if instead of finding $ in the piano, Cesarini found the original Mona Lisa. Held: Prob. 1 Changed Facts: There are a liquidity and valuation issues, i.e., would have to sell the painting to afford to pay the taxes on it. However, this is different b/c this is not the same item they actually purchased. They purchased a piano and this is the Mona Lisa, something completely different. Therefore, if you find something that is different than what you actually purchased, you have to include that in your gross income and pay taxes on it immediately (not when or if the item is sold ). - When you acquire something that you did not anticipate (painting) it is considered an increase in income and therefore you need to include it in your gross income. ii. Commissioner v. Glenshaw Glass Co. (1955) –“ accession to wealth, clearly realized, over which the taxpayer has a complete dominion” Facts: 1. ∆-taxpayer manufactures glass bottles and containers. 2. ∆ was suing another company for fraud and ultimately settled w/ the company for $800,000. 3. Of the $800,000, $324,000 represented payment of punitive damages for fraud. 4. ∆ did not report this as income in their tax return for the year and the Commissioner initiated these proceedings against ∆. Issue: Were the punitive damages includible in the taxpayer’s gross income? Rule: Gross income is defined as “undeniable accessions to wealth, clearly realized, and over which the taxpayers have complete dominion.” (3-PRONG RULE). (Galler adds- regardless of source) Held: Yes. If a taxpayer has: - an accession of wealth; - clearly realized; - the taxpayer has complete control over it; and - no matter its source; it must be included as gross income. Takeaway: 1. Reg. § 1.61-14(a) (pg. 901 Tax/Reg. Book) provides that “punitive damages, such as treble damages under the antitrust laws and exemplary damages for fraud are gross income.” 2. Galler sort of adds a fourth element to the test: “Regardless of the source.” *** THE SOURCE DOES NOT MATTER *** Problem 3 on Page 60 : Employee has worked for Employer’s business for 5 years at a salary of $80,000 per year. Another company is attempting to hire Employee but Employer persuades Employee to agree to stay at least 2 more years by giving Employee 2% of the company’s stock ($100,000), and by buying Employee’s wife a new car ($30,000). Issue: How much income does Employee realize from these transactions? Held: The Employee: (i) realizes $80,000 income for his salary; (ii) realizes $100,000 for the stock; and (iii) realizes $30,000 for the car.* *Who’s taxable on the car?  See Old Colony Trust . “It is immaterial that the taxes were directly paid over to the Government.” (still were in exchange for his services). Employee is taxable on the car. It is taxable to the 4

employee b/c the wife is receiving the car as part of a BARGAIN between the employee and the employer FOR his services. iii. Old Colony Trust Co. v. Commissioner Facts: 1. Wood was the president of the American Woolen Company from 1918-1920. 2. On 8/3/1916, the American Woolen Co. adopted a resolution, which provided that the company would pay “any and all income taxes” due on the salary of Mr. Wood. 3. Pursuant to the resolution, the American Woolen Co. paid the IRS Mr. Wood’s fed. income tax on his salary. Issue 1: Did the employer’s payment of the taxes constitute additional gross income to Mr. Wood? Held 1: Yes. The satisfaction of a taxpayer’s obligation (taxes) by another person constitutes an economic benefit to the taxpayer, which results in income to the taxpayer. Issue 2: Was this a gift? Held 2: No, this was compensatory payment for services, no donative intent, not given from pure generosity. Problems on Page 60: Problem 4  Insurance Adjuster refers clients to an auto repair firm that gives Adjuster a kickback of 10% of billings on all referrals. (a) Does Adjuster have gross income?  Yes. Glenshaw Glass “accession to wealth” and “complete dominion.” (b) Even if the arrangement violates local law?  Yes. James v. U.S. (illegal gain is income). See also Reg. § 1.61-14(a) (Tax/Reg. book pg. 901). Problem 5  Owner agrees to rent Tenant her lake house for the summer for $4,000. (a) How much income does Owner realize if she agrees to charge only $1,000, if Tenant makes $3,000 worth of improvements to the house?  $4,000. See Reg. §1.61-8(c) (pg. 899 Reg. and Tax Book). The Regulation provides that “If a lessee places improvements on real estate which constitute, in whole or in part, a substitute for rent, such improvement constitutes rental income to the lessor.” Note  The $3,000 spent has nothing to do w/ the value of the house going up. Ex: Galler paints her son’s room black, costs $ but decreases value. (b) Is there a difference in result to Owner in (a), if Tenant effects exactly the same improvements but does all the labor himself and incurs only a total cost of $500?  No difference. Still received $4,000 in value regardless of the incurred costs. (c) Are there any tax consequences to Tenant in part (b)?  Tenant has $2,500 worth of income. It’s as if the landlord hired him. Takeaway: Cannot contract around the tax law by doing a non-cash payment. 2. Defining Fair Market Value - What a reasonable person, in the market for a product, would pay for the item. 5

2. The real estate in issue was owned by the taxpayer’s wife prior to their marriage. 3. The wife and taxpayer continued to stay at the home after they married and the wife continued making improvements to the property. 4. In 1931, the Nemours Corp. was indebted to a bank for a large sum and the bank insisted that the house be transferred to the corporation. 5. The taxpayer and his wife did so, and continued to live at the house afterwards. Issue: Now that the house is “owned” by the Corporation, and the taxpayer and his wife are still living there, does the fair rental value that they would have to normally pay to live there constitute “gross income” which the taxpayer must realize as income? Reasoning: “We think that the real estate deeded to the corporation would clearly have been held to belong to it had the bank had occasion, which it did not, to take advantage of the corporation’s title to the property.” Held: Yes, we think the fair value of the occupancy of the home owned by the corporation was income to him. Ruling of Tax Court affirmed. Problem 1, pg. 63: Vegy grows vegetables in her garden. Does Vegy have gross income when : (a) Vegy harvests her crops?  No. (b) Vegy and her family consume $100 worth of vegetables?  No, this is imputed income. Imputed income is the value one experiences from performing services for oneself or using one’s own property. Imputed income is not considered income under our tax system. Not selling it, no income coming in (c) Vegy sells her vegetables for $100?  Yes, accession to wealth. (d) Vegy exchanges $100 worth of vegetables for $100 worth of tuna?  Yes, this income b/c you do not need to sell for a realization to occur. She is getting something of value which she otherwise would have to pay for. Problem 2, pg. 66: Doctor needs to have his income tax return prepared. Lawyer would like a general physical check up. Doctor would normally charge $200 for the physical and Lawyer would normally charge $200 for the income tax return preparation. (a) What tax consequences to each if they simply swap services w/out any money exchanging hands?  Barter for services, $200 in income. See Revenue Ruling 79-24. (b) Does Lawyer realize any income when she fills out her own tax return?  No, imputed income, i.e., a taxpayer’s performance of services for his/her personal benefit. C HAPTER 3. T HE E XCLUSION OF G IFTS AND I NHERITANCES A. Rules of Inclusion and Exclusion IRC §102: Gifts and Inheritances 7

(a) General Rule: Gross income does not include the value of property acquired by gift, bequest, devise or inheritance. (b) Income: Subsection (a) shall not exclude from gross income… (1) income from any property referred to in subsection (a); OR (2) where the gift, bequest, devise or inheritance is of income from property, the amount of such income. Where the payment, crediting or distribution of the gift, bequest, devise or inheritance out of income from property is made at intervals it shall be treated as income from property as defined in subsection (b)(2). (c) Employee Gifts: (1) In general: Subsection (a) shall not exclude from gross income any amount transferred by or for an employer to, or for the benefit of an employee. (2) Cross References  Under §132(e), certain traditional retirement gifts are treated as de minimis fringe benefits; and under §74(c) certain employee achievement awards are non-taxable. Example 1: Uncle Harry died and left his securities worth $10,000 to his niece. The niece does not have gross income under §102(a). Example 2: The securities that Uncle Harry left his niece now produce dividends for the niece. The niece has gross income from the dividends under §102(b)(1). Example 3: What if Uncle Harry left her the right only to the income from the securities under a trust in which the securities themselves were retained by a third party but would give the income from the securities to the niece? The niece has gross income under §102(b)(2). B. Gifts 1. The Income Tax Meaning of Gift i. Commissioner v. Duberstein Fact Pattern 1 (Duberstein): 1. Taxpayer was President of the Duberstein Iron & Metal Company. 2. Taxpayer’s company did business w/ Mohawk Metal Corporation. 3. The President of Mohawk Metal Corporation was named Berman. 4. While conducting business, Berman asked the taxpayer if he knew of any potential customers, and the taxpayer provided Berman with a list of customers. 5. Berman called back the taxpayer and said that the list of customers was so helpful that he wanted to give the taxpayer a Cadillac as a gift. 6. The taxpayer testified that he did not think Berman would have sent him the Cadillac if he had not provided Berman with the list of customers. Berman also deducted the cost of the Cadillac as a business expense. (bad fact for taxpayer). Proc. Post.: The taxpayer did not include the value of the Cadillac in gross income for 1951, deeming it a gift. The Commissioner asserted a deficiency for the car’s value against the taxpayer, and the Tax Court affirmed the Commissioner’s determination.6th Circuit reverses. Fact Pattern 2 (Stanton): 1. Taxpayer was employed at Trinity Church as comptroller of the Church and was President of Trinity Operating Company, which the Church had set up as a fully owned subsidiary to manage its real estate holdings. 2. The taxpayer resigned in 1942 and the Church gave the taxpayer $22,000 as “gratuity.” 8

3. Corporations cannot make gifts b/c they are not “real people.” (can give to charity, i.e., Ronald McDonald House for policy reasons). Problem 2 (pg. 76): At the Heads of Eye Casino in Vegas, Lucky Louie gives the maître d’ a $50 tip to assure a good table, and gives the croupier a $50 “toke” after a good night with the cubes. Does either the maître d’ or the croupier have gross income?  Both of the employees at the casino have gross income because these tips are not given through pure generosity. See Olk v. U.S. Problem 1 (pg. 78): Employer gives all her employees, except her son, a case of wine at Christmas, worth $120. She gives Son, also an employee, a case of wine worth $700. Does Son have gross income?  Under Reg. §1.102-1(f)(2) (pg. 931 in Tax/Reg. Book), Son would have to prove that the wine was transferred to him and is substantially attributable to the familial relationship of the parties and not their employment. Factors to consider for Problem 1  (i) what position does the son occupy, i.e., janitor vs. manager; (ii) did it come from Mom’s business or personal account?; (iii) did company take a deduction?; (iv) where/when did he get the wine, i.e., office party or under tree on Xmas? ● Employee Gifts: ○ Anything an employee receives by an employer is includible ○ Employer can take a deduction, so the employee must include C HAPTER 4. E MPLOYEE B ENEFITS A. E XCLUSION FOR F RINGE B ENEFITS 10

- Section 132 of the IRC is typically implicated whenever there is an employer-employee relationship, and the principal question is whether a particular expense qualifies under §132 (or some other fringe benefit exclusion rule). IRC § 132: Certain Fringe Benefits Contains seven categories of fringe benefits (which include employee benefits other than salary) IRC § 132(a) lists them and the subsequent sections define what they are: (1) no-additional-cost service (2) qualified employee discount (3) working condition fringe (4) de minimis fringe (5) qualified transportation fringe (6) qualified moving expense reimbursement (7) qualified retirement planning services ** Remember, IRC § 132 is an example of a Gross Income Statutory EXCLUSION ** Policy: One policy reason to tax fringe benefits is to prevent certain employees from getting away with free things just because they work for a particular employer (ex: Saks fifth employee). Argument not to include benefits in Gross Income is that employers often provide these benefits for business reasons and not a form of compensation to employees. Valid business reasons that benefit for the employer Ex: Saks benefits heavily from having its employees wear its merchandise. ** A Fringe Benefit MUST fit into one of the categories, otherwise it’s likely taxable ** IRC § 132(j)(1)  Non-discrimination rule Only applies to 132(a)(1) & 132(a)(2) (No additional cost & qualified employee discount). Does not allow benefits to be given unless it is offered on substantially the same terms to each member of a group of employees without discrimination Benefit CANNOT only be given to highly compensated employees (defined by § 414(q)), and not other groups. - In the first 2 classifications of fringe benefits under §132(a)(1)-(2) (no-additional-cost services and qualified employee discounts) the definition of an “employee” is expanded to include not only persons currently employed, but also retired and disabled ex-employees, the surviving spouses of employees or retired or disabled ex-employees, as well as spouses and dependent children of employees. See §132(h). §132(a)(1)  No-Additional-Cost Services. - The first type of fringe benefit excluded from an employee’s gross income is services provided to an employee by an employer. - Applicable regulation is Reg. §1.132-2(a). - A no-additional-cost-service is one regularly provided to the public by the employer: (i) The value is excluded from gross income if the services are offered for sale to customers in the same line of business as that in which the employee is performing services. §132(b)(1); (ii) which the employer can provide to the employee w/out incurring substantial additional cost. §132(b) (2); and (iii) in the case of highly compensated employees, the services are provided on a nondiscriminatory basis. §132(j)(1). Factors for determining “substantial” additional cost: (i) amount of revenue an employer loses b/c of providing the service to the employee rather than to a paying customer; and (ii) the amount of time spent by the other employees in providing a service for the employer. 11

(1) “ De minimis fringe” means any property or service the value of which is so small as to make accounting for it unreasonable or impracticable. (2) The operation by an employer of any eating facility for employees shall be treated as a de minimis fringe if: (A) such facility is located on/near the business premise of the employer; AND (B) revenue derived from such facility normally equals/exceeds the direct operating costs of such facility. This section involves a provision of goods or services to the employee with a value so small that the accounting for the benefit would be unreasonable or administratively impractical. §132(e)(1). However, a cash payment cannot be a de minimis fringe benefit regardless of amount. §132(a)(5)  Qualified Transportation Fringe. - This includes employer-provided transit passes, transportation by van from home to office, or parking near the employer’s premises, within specific dollar limits . §132(f)(1). - Qualified Parking is defined as parking provided to an employee on/near the business premises of the employer. §132(f)(5)(c). - A commuter highway vehicle must have a seating capacity of at least 6 adult passengers (not including the driver) and at least 80% of the expected mileage of the vehicle must be incurred in transporting employees to and from work. §132(f)(5)(b). (A taxi or limo with a driver thus is not a commuter highway vehicle). - Qualified bicycle commuting reimbursement means reimbursement of an employee’s reasonable annual expenses to purchase, maintain, or store a bicycle that the employee regularly uses to commute from home to work. §132(f)(5)(F)(i). - §132 caps the exclusion for qualified transportation fringe benefits. If the transportation benefit received by the employee exceeds the exclusion limits, the employee is taxed on the excess. §132(f)(2), (f)(5)(F)(ii). §132(j)(4)  On-premises athletic facilities. - The value of the facility to the employee may be excluded if it is on the business premises of the employer, is operated by the employer, and is used mostly be employees. §132(j)(4). §132(l)  Indicates that if another Code section provides an exclusion for a type of benefit, Section 132 is generally inapplicable to that type of benefit; an ad hoc provision prevails over the general rules of Section 132. Problem 1 – pg. 99-100 : (a) Employee of a national hotel chain stays in one of the chain’s hotels in another town rent-free while on vacation. The hotel has several empty rooms. Excludable? -This is a no additional cost service under §132(a)(1). Under §132(b), the room is a service provided by the employer and it’s in the same line of business in which they work. Also, the employer has not incurred a substantial additional cost b/c there are extra rooms. (b) Same as (a), above, except that the desk clerk bounces a paying guest so Employee can stay rent-free. -This does not constitute a no additional cost service. Under §132(b)(2), this is now a substantial cost that the 13

Employer is incurring. Under Reg. §1.132-2(a)(5) (pg. 954 Tax/Reg. Book), the hotel is incurring a substantial additional cost by forgoing revenue when they remove the guest from their hotel room to host the employee. (c) Same as (a), above, except that Employee pays the bill and receives a cash rebate from the chain. -Same outcome as in (a). Under Reg. §1.132-2(a)(3) (pg. 954 Tax/Reg. Book), the “exclusion also applies if the benefit is provided through a partial or total cash rebate of an amount paid for the service. (d) Same as (a), above, except that Employee’s spouse and dependent children travelling without Employee use the room on their vacation. -Same outcome here as in (a) b/c under §132(h)(2), spouses and dependent children are treated as employees for purposes of §132(a)(1) and are thus included in the “no additional cost” fringe benefit exclusion. (e) Same as (a), above, except that Employee stays in the hotel of a rival chain under a written reciprocal agreement under which employees pay 50% of the normal rent. -Same outcome here as in (a) b/c under §132(i), all the rules of §132(b) apply AND there needs to be a written agreement b/twn the 2 employers. Also, see Reg. §1.132-2(b)(1-3): (1) the service provided to such employee by the unrelated employer is the same type of service generally provided to nonemployee customers by both businesses; (2) both employers are parties to a written reciprocal agreement; and (3) neither employer incurred any substantial additional cost. (pg. 955 Tax/Reg. Book). (f) Same as (a), above, except that Employee is an officer in the hotel chain and rent-free use is provided only to officers of the chain and all other employees pay 60% of the normal rent. -Under §132(j)(1), no additional cost services provided to “highly compensated” employees of a company must be provided on substantially equal terms to other employees. Under Reg. §1.132-8(a)(2)(i ), the employee must include the entire value of renting the room in his gross income. (pg. 964 Tax/Reg. Book). NOTE  Being an officer does not necessarily mean you are a “highly compensated” employee. (e.g., banks have so many vice presidents, that does not make them “highly compensated”). (g) Hotel chain is owned by a conglomerate which also owns a shipping line. The facts are the same in (a) above, except that Employee works for the shipping line. -The cost of the employee’s stay in the hotel is includible in their gross income. This does not satisfy the “same line of business” standard in §132(b)(1), so it does not qualify as a “no additional cost” fringe benefit. (h) Same as (g), above, except that Employee is comptroller of the conglomerate. -Under Reg. §1.132-4(a)(1)(iv), the employee may exclude this rent-free stay from his gross income b/c he performs “substantial services that directly benefit more than one line of business.” (pg. 958 Tax/Reg. Book). (i) Employee sells insurance and employer Insurance company allows Employee 20% off of the $1,000 cost of the policy. -Employee may exclude this from their gross income as a “qualified employee discount” under §132(a)(2) b/c it’s a service that the employer regularly provides and is not in excess of 20% of their policy rate. See §132(c). 14

(o) Employer provides Employee w/ $185 worth of vouchers each month for commuting on a public mass transit system. Assume there is no post-2001 inflation. -Employee must include $10 for the year in his gross income b/c under §132(f)(2)(A), the employee cannot exceed $175 per month in transit pass $ from their employer. BUT, if accounting for inflation under §132(f)(6), it would all be excludable b/c $255 is now the limit. (p) Employer puts in a gym at the business facilities for the use of the employees and their families. -Under §132(j)(4)(B)(i)-(iii) , the employees may exclude the value of their use of the gym b/c it is: (i) on the premises of the business; (ii) operated by the employer; and (iii) is substantially used by the employees and their families. Change facts of (p)  Google provides massages to its employees. It’s gross income, but is it excludable? -No. This would not constitute an athletic facility for purposes of §132(j)(4). B. Exclusions for Meals and Lodging IRC § 119(a): Meals or lodging furnished for the convenience of the employer  Meals and lodging furnished to employee, his spouse, and his dependents pursuant to his employment shall be excluded from employee’s gross income but only if: 1. In the case of meals, they are furnished on the business premises of the employer. 2. In the case of lodging, the employee is required to accept such lodging on the business premises of his employer as a condition of his employment. Meals:  IRC § 119 grants an exclusion from gross income of the value of meals furnished to an employee (and family) if: 1. Meals are furnished on the business premises 2. Meals are furnished for the convenience of the employer. Lodging:  IRC § 119 grants an exclusion from gross income of the value of lodging furnished to an employee (and family) if three conditions are met: 1. Lodging is on the business premises of the employer; Ownership is not the test of business premises, the term means either at a place where the employee performs a significant portion of his duties or where the employer performs a significant portion of his business; 2. Employee is “required to accept such lodging as a condition of his employment.” The “condition of his employment” means that the employee must “be required to accept the lodging in order to enable him properly to perform the duties of his employment.” AND 3. Lodging is furnished for the convenience of the employer. Lodging will be regarded as furnished to enable the employee properly to perform the duties of his employment when, for example, the lodging is furnished because the employee is required to be available for duty at all times. Problem 1 – pg. 103 Employer provides Employee and Spouse and Child a residence on Employer’s business premises, having a rental value of $15,000 per year, but charging Employee only $6,000. 16

(a) What result if the nature of Employee’s work does not require Employee to live on the premises as a condition of employment? - Under §119(a)(2), the job must require the employee to accept housing as a condition of employment. Thus, the employee must include this in gross income. (b) What result if Employer and Employee simply agreed to a clause in the employment contract requiring Employee to live in the residence? - Under §119(b)(1), the language of the contract is not determinative. IRS will look at the nature of the job to see if employees are actually required to live on the premises. Thus, Employee must include this in gross income. (c) What result if Employee’s work and contract require Employee to live on the premises and Employer furnishes Employee and family $6,000 worth of groceries during the year? - The lodging is okay under §119(a)(2). However, there is a jurisdictional split as to whether groceries constitute “meals” w/in the meaning of §119(a)(1). (d) What result if Employer transferred the residence to Employee in fee simple in the year that Employee accepted the position and commenced work? Does the value of the residence constitute excluded lodging? - No. §119(a)(2) requires the lodging to be “on the business premises” of the Employer, and the property now belongs to the Employee. Problem 2 – pg. 104 Planner incorporated her motel business and the corporation purchased a piece of residential property adjacent to the motel. The corporation contract “required” Planner to use the residence and also furnished her meals. Planner worked at the motel and was on call 24 hours a day. May Planner exclude the value of the residence or the meals or both from her gross income? First, Planner is an employee, b/c although she incorporated the business, the corporation is now a separate entity for purposes of the law. Second, need to look at why she is being provided with meals and lodging, which is a factual question. 1. On the Business Premises:  Certain facts could likely establish that even though the residence is adjacent to the motel, it is still on the business premises. We would need to examine all of the facts to ascertain whether business activity occurs on that adjacent residence. Could be customary in the industry. 2. Convenience of the Employer?  If employee owns 100% of the stock and she incorporated the business, then who is convenience for? See Hatt case (custom of industry again). If she needs to be on call 24 hours/day, then could be for convenience of employer 3. Condition of Employment?  This element is met, as illustrated in the facts. i. Hatt v. Commissioner Facts: 17

1. Under Reg. §1.119-1(a)(2)(i) (Tax. & Reg. Book pg. 939), meals furnished by an employer will be regarded as furnished for the convenience of the employer if such meals are furnished for a “substantial non- compensatory business reason.” 2. Under Reg. §1.119-1(a)(2)(ii), meals will be regarded as furnished for a “substantial non- compensatory business reason” of the employer when the meals are furnished to the employee during his working hours to have the employee available for emergency call during his meal period. 3. Court in this case ruled that the meal allowances (essentially cash payments) don’t count as meals under the statute. Problem 4 – pg. 104 Facts: 1. Doodle, a high-tech firm in Silicon Valley, hires Jacques and his staff from an exclusive restaurant to provide gourmet meals at its offices around the clock to its employees. 2. Doodle believes the meals will incentivize employees to work longer hours, shorten the time for meal breaks, attract new employees, and help it remain competitive with other Silicon Valley high-tech firms. Issue: Are the employees’ meals excluded under §119(a)(1)? - Issue here is to determine if this is for the convenience of the employer? Held: Under Reg. §1.119-1(a)(2)(iii), this is not excludable b/c “meals will be regarded as furnished for a compensatory business reason of the employer when the meals are furnished to the employee to promote the morale or goodwill of the employee, or to attract prospective employees.” Here, the facts show the employer clearly did this to promote morale. 19

C HAPTER 5. A WARDS A. Prizes IRC § 74: Prizes and Awards IRC § 74(a) General Rule: - Gross income includes amounts received as prizes and awards. IRC § 74(b) Exception for certain prizes and awards transferred to charities: - Gross income does not include amounts received as prizes and awards made primarily in recognition of religious, charitable, scientific, educational, artistic, literary, or civic achievement but only if… (1) Recipient was selected without any action on his part to enter the contest or proceeding; (2) Recipient is not required to render substantial future services as a condition to receiving the prize or award; AND (3) Prize or award is transferred by payor to a governmental unit described in (1) or (2) of section 170(c) pursuant to a designation made by recipient. ** Prizes/Awards usually not considered gifts because no detached & disinterested generosity ** Galler Hypos from Class: If an Olympic Athlete wins the Gold Medal and additionally receives $25,000 for winning the gold, is it included in his Gross Income? Under §61(a), the general rule, its gross income. But is it excluded under IRC §74(b)?  Sports is not listed as an achievement under IRC §74(b). An argument could be made that the award is made in recognition of a civic achievement, BUT , IRC §74(b)(1) would NOT ALLOW the Olympic athlete to exclude the winnings from Gross Income because there is clearly an action on the athlete’s part to enter the contest. TAKEAWAY  Under IRC §74(d), “gross income shall not include any award, or any prize money won in the Olympics.” 2. President Obama won the Nobel Peace Prize and was also given $1.4 million. Obama donated the prize/money to an approved charity, which he designated, so he was excluded from including the award/prize in his Gross Income pursuant to IRC §74(b). If Obama kept the money, he would have had to include the $1.4 million in his Gross Income. The only way the winner can escape an inclusion in gross income is never to receive award. However, the designation of the recipient can be made before or after the taxpayer is aware of being the recipient of the award. Problem 1 –pg. 110 Facts: 1. Each year national sportswriters get together and select the single most outstanding amateur athlete in the country and award that person a check for $5,000. 2. Michael, a talented swimmer, has been selected for this year’s award. 3. The award is given with the stipulation that the winner deliver a 15 minute “acceptance speech” at an awards banquet. 4. Michael, essentially giving an acceptable rejection “acceptance speech,” designates the Special Olympics, a charity under §170, to receive the $5,000 award. 5. The sportswriters send the check to the Special Olympics. 20