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Tax
Penn State School of Law
Kahn, Jeffrey H.

Tax outline:
 
Fringe Benefits and Barters
§§ 61, 119 (omit 119c and d), 132
Treas reg §§ 1.61-2(a)(1), 1.61-2(d)(1) and (2), 1.61-14(a), 1.61, 1.61-21(a)(1)-(4),(b)(1) and (2)
§§ 61:Gross income defined
§ 119: Meals or lodging furnished for the convenience of the employer
–          119(a): meals and lodging furnished to employee, his spouse, and his dependants, pursuant to employment: There shall be excluded from gross income of an employee the value of any meals or lodging furnished to him, his spouse, or any of is dependents by or on behalf of his employer for the convenience of the employer, but only if—
o   In the case of meals, the meals are furnished ON the business premises of the employer, or
o   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
–          119 (b): special rules: (for purposes of subsection a)
o   (1): provisions of employment contract or state statute not to be determinative—in determining whether meals or lodging are furnished for the convenience of the employer, the provisions of an employment K or of a state statute fixing terms of employment shall not be determinative of whether the meals or lodging are intended as compensation
o   (2) certain factors not taken into account with respect to meals—in determining whether meals are furnished for the convenience of the employer, the fact that a charge is made for such meals, and the fact that the employee may accept or decline such meals, shall not be taken into account
o   (3) certain fixed charges for meals:
§ (A)in general-if-
·         (i) an employee is required to pay on a periodic basis a fixed chare for his meals, AND
·         (ii) such meals are furnished by the employer for the convenience of the employer,
§ There shall be excluded from the employee’s gross income an amount equal to such fixed charge
§ (B) application of subparagraph (A) –A shall apply
·         (i) whether the employee pays the fixed charge out of his stated compensation or out of his own funds, and
·         (ii) only if the employee is required to make the payment whether he accepts or declines the meals
o   (4) meals furnished to employee on business premises where meals of most employees are otherwise excludable – all meals furnished on the business premises of an employer to such employer’s employees shall be treated as furnished for the convenience of the employer if, without regard to this paragraph, more than half of the employees to whom such meals are furnished on such premises are furnished such meals for the convenience of the employer
–          REMEMBER: 119:
o   must be on business premises
o    if furnished in kind: no reimbursements
o    and MUST be for the employer’s convenience.
§ For a substantial non-compensatory business reason (come up with a business reason the employer HAS to have the employee on the business premise at that time)
§ lodging also had an additional requirement
§132: certain fringe benefits:
§ 1.61 -2: compensation for services including fees, commissions, and similar items
–          1.61-2(a)(1): In general
o   Wages, salaries, commissions, paid salesmen, compensation for services on the basis of a percentage of profits, commissions on insurance premiums, tips, bonuses (including Xmas bonuses), termination or severance pay, rewards, jury fees, marriage fees and other contributions received by a clergyman for services, pay of persons in the military or naval forces of the US, retired pay of employees, pensions and retirement allowances are income to the recipients unless excluded by law
–          1.61-2(d)(1): compensation paid other than in cash—
o   In general: Exept as otherwise provided in paragraph d6i, of this section (prop after jun 30, 1969), if the services are paid for in property, the FMV of the property taken in payment must be included in income as compensation. If services are paid for in exchange for other services, ,the FMV of such other services taken in payment must be included in income as compensation. If the services are rendered at a stipulated price, such price will be presumed to be the FMV of the compensation received in the absence of the evidence to the contrary.
–          1.61-2(d)(2): property transferred to employee or independent contractor
o   (i): If the property is transferred by an employer to an employee or if property is transferred to an IC as compensation for services, for an amount less tan its FMV, then regardless of whether the transfer is in the form of a sale or exchange, the difference between the amount paid for the property and the amount of its FMV at the time of the transfer is compensation and shall be including the gross income of the employee or IC.
o   (ii)(a): cost of life insurance on the life of the employee: generally, life insurance premiums paid by an employer on the life of his employee where the proceeds of such insurance are payable to the beneficiary of such employee are part of the gross income of the employee. For the special rules relating to the includibility in an employee’s gross income of an amount equal to the cost of certain group term life insurance on the employee’s life which is carried directly or indirectly by his employer, see section 79 and the regulation sthereudner.
–          1.61-14(a): miscellaneous items of gross income
o   In general: in addition to the items enumeration in 61(a), there are many other kinds of gross income. For example, punitive damages such as treble damages under the antitrust laws and exemplary damages for fraud are gross income. Another person’s payment of the taxpayer’s income taxes constitutes gross income to the taxpayer unless excluded by law. Illegal gains constitute gross income. Treasure rove, to the extent of its value in US currency, constitutes gross income for the taxable year in which it is reduced to undisputed possession
–          1.61-21: taxation of fringe benefits
o   (a)(1) : fringe benefits: in general:
–          1.61-21(a)(2): fringe benefits excluded from income
–          1.61-21(a)(3): compensation for services
–          1.61-21(a)(4): person to whom fringe benefit is taxable
o   (i) in general
o   (ii): all persons to whom benefits are taxable referred to as employees
–          1.61-21(b)(1): valuation of fringe benefits:
o   (1) in general
–          1.61-21(b)(2): fair market value:
§1.132-6: de minimis fringes
–          1.132-6 (a): in general
–          1.132-6(b): frequency-
o   (1): employee measured frequency
o   (2): employer measured frequency
–          1.132(c): adminstrability
–          1.132(d): special rules
o   (2) occasional meal money or local transportation fare—(i) general rule
§ (A): occasional basis
§ (B): overtime
§ (C): meal money
§ (ii) Applicability of other exclusions of certain meals and for transportation provided for security concerns.
 
Problem set #1:
 
1.      Jessica is an associate with a large law firm in Chicago. Generally, Jessica’s work period ends at 5:00 PM on weekdays. However, when an assignment needs to be completed within a specified time, and if the assignment cannot be completed within that time if the normal working hours are followed, the firm requires its employees to work as late into the night as is necessary. When that occurs, and it occurs frequently, the firm will reimburse an employee for the amount the employee expended to purchase supper in one of several nearby restaurants. Is the reimbursement that Jessica received for the cost of having supper income to Jessica?
§119 Meals or lodging furnished for the convenience of the employer. If it is compensation for services, fringe benefits are income. We must now look at…unless otherwise provided. Under §119 the employer must furnish the meal, it does not count for reimbursement.
§119(a): the meals are furnished on the business premise. Since there is an argument that §119 will not work (not on business premises), we can now look at §132.
§132: certain fringe benefits: 132(a)(4): De minimis fringe benefits:
                                                              i.      1.132-6(c): except as provided in paragraph (d)(2) of this section, the provision of any cash fringe benefit is never excludable…
1.      section d2, Special rules: must be occasional, allow employee to work overtime, and made so the employee can work overtime.
2.      in this problem, the OCCASSIONAL requirement may pose some difficult. Pro

l pay taxes on it in 2002.
5.      Sarah Thomas hired a domestic maid to clean her house, cook meals, wash, iron, etc. In addition to a regular salary, Sarah provides meals for the maid during the period that she is working at Sarah’s home. Are these meals income to the maid? Would the maid realize taxable income if Sarah provided breakfast for her when she arrived in the morning, before she commenced work?
Are these meals income to the maid?
                                                              i.      119: meals or lodging furnished for the convenience of the employer:
1.      for convenience of the employer:
a.      1.119-2(i) meals furnished by an employer without charge to the employee will be regarded as furnished for the convenience of the employer if such meals are furnished for a substantial non-compensatory business reason of employer
                                                                                                                                      i.      Here, we do not have enough facts to determine whether o rnot this is a substantial non-compensatory business reason of the employer (i.e. is she in a non residential area that she would have to travel far to get food?)
2.      On business premise:
a.      Is this requirement met because she is working on the “business premise”?
                                                                                                                                      i.      1.119-1(c) states it must be at the place of employment of the employee, therefore this requirement is met
3.      furnished in kind (not reimbursed)
                                                            ii.      seems as if the meals will NOT be income to the maid
Would the maid realize taxable income if Sarah provided breakfast for her when she arrived in the morning, before she commenced work?
                                                              i.      1.119-1(a)(2): Generally meals furnished before or after the working hours of the employee will not be regarded as furnished for the convenience of the employer, but see subdivision (ii)(d) and (f) of this subparagraph for some exceptions to this general rule.
1.      (d) meal furnished to a restaurant employee or other food service employee for each meal period…during, immediately before, or immediately after..will be considered to be furnished for a substantial non-compensatory business reason.
a.      We could look at how many meals she prepares
An historical society owns a house in Philadelphia that was once owned and occupied by a former president of the United States. During the day, the house is open to the public. The Society is concerned that if the house is left unoccupied at night, it will be burglarized or vandalized. To prevent that from occurring, the Society employs Ralph to live in the house at night. The Society permits Ralph to live in the house with his wife, but he is required to be there only outside of the visiting hours. Outside of visiting hours, Ralph and his wife can occupy any part of the house they wish, including the kitchen; but during visiting hours, they are limited to a part of the house that is not open to the public. Ralph receives no compensation for his services other than the use of the house. What are the tax consequences to Ralph? To Ralph’s wife?
What are the tax consequences to Ralph?