Select Page

Income Taxation
University of California, Berkeley School of Law
Rakowski, Eric P.

 

Rakowski
Income Tax
Fall 2015

Employer-Provided Meals and Lodging
Statutes
§ 119(a) – excludes from income the value of meals if (i) the employer furnishes meals to an employee, her spouse, or her dependents; (ii) the meals are provided for the convenience of the employer; AND (iii) the meals are provided on the business premises of the employer. Also excludes the value of lodging if (i) it is furnished on the business premises by the employer to an employee, her spouse, or her dependents; (ii) it is provided for the convenience of the employer; AND (iii) the employee is required to accept the lodging as a condition of her employment


Cases
1.       Commissioner v. Kowalski (US 1977) – NJ state trooper who was required to eat his meals at a public eating place. He received meal allowances in an amount equal to approximately 19 percent of his cash wages. H: § 119 does not cover amounts reimbursed for meals and that Mr. Kowalski had to include the meal allowance in income. à “furnished by an employer”
·         Policy: § 119 intended to cover situations in which the employee is constrained in her choice of food or eating places.
2.       Benaglia v. Commissioner (1937) – Manager of luxury hotel in Hawaii was permitted to exclude the value of meals and lodging provided at the hotel because the manager was required to be on duty continuously. H: Meals and lodging were provided so that the manager could perform his duties, not as additional compensation. à “convenience of the employer”

Policy Issues
1.       Alternative à tax employee on his subjective valuation of the room and board.
a.       Issues: Value is impossible to determine.

Employer-Provided Insurance and Health, Accident, and Death Benefits
Statutes
Reg. § 1.61-2(d)(2)(ii)(a) – If an employer buys life insurance for an individual employee and the employee designates the policy beneficiary, the value of the life insurance is income to the employee.

§79 – If the employer buys group term life insurance for its employees, the employees can exclude the value of the insurance from gross income to the extent that the insurance provides death benefits not greater than $50,000. Employer cannot discriminate in favor of highly compensated employees

§101(a) – Life insurance proceeds received by a beneficiary is excluded from gross income.

§ 105 – Excludes from gross income amounts employees received from their employers as reimbursement for medical expenses and the value of service employees receive under an employer-provided health care plan. Employer cannot discriminate in favor of highly compensated employees.

§106 – Excludes from gross income the value of health and accident insurance premiums paid by the employer to cover employees.


Policy
1.      Employees who receive employer-provided medical benefits pay less tax than employees who pay for their own medical care. This encourages employees to take a portion of their salary in the form of in-kind medical benefits.

Miscellaneous Fringe Benefits
Statutes
§132(a) – excludes from gross income the following eight categories of benefits: (i) no-additional-cost services; (ii) qualified employee discounts; (iii) working condition fringe benefits; (iv) de minimis fringe benefits; (v) qualified transportation fringe benefits; (vi) qualified moving expense reimbursements; (vii) qualified retirement planning services; and (viii) qualified military base realignment and closure fringe benefits

§132(b) – No-additional cost service excluded à 2 requirements: (1) the benefit constitutes a service that imposes no substantial additional cost on the employer; (2) the service is offered for sale in the ordinary course of the line of business of the employer in which the employee is performing services

§132(c) – test for excluding an employee discount varies depending on whether the employee is purchasing goods or services at a discount.
·         §132(c)(1)(A) – an employee purchasing goods can exclude a discount up to the employer’s gross profit exchange.
o   Example: If an employer sold goods for an aggregate sale price of $100,000 and the employer’s aggregate cost of the goods is $60,000, the employer’s gross profit percentage is 40 percent, which is $40,000. The employer could offer its employees tax-free discounts of up to 40 percent.
·         §132(c)(1)(B) – An employee purchasing services may exclude a discount up to 20 percent.
·         §132(c)(4) – The exclusion for qualified employee discounts is limited to goods or services sold in the line of business in which the employee is providing services.

§132(e)(1) – de minimis fringe benefit is any property or service the value of which is so small as to make accounting for it unreasonable or administratively impracticable.
·         §132(e)(2) – special rule for eating facilities operated by employers for their employees: the eating facility will be treated as a de mnimis fringe if (i) it is on or near the employer’s business premises and (ii) the revenue from the facility generally equals or exceed

  Implication: The date-of-death basis rule means that the appreciation of the property during the decedent’s lifetime will never be taxed. This encourages individuals to retain appreciated property until their death, but to sell before death any property that has declined in value.
·         Some commenters have described the tax-free step-up in basis of appreciated property at death as the single largest loophole in the income tax.

§102(c) – Transfer from an employer to an employee cannot be a gift.

§1.61-2(a)(1) – Tips that constitute compensation for services must be included in gross income.


Cases
1.       Commissioner v. Duberstein (US 1960) – Court defined a gift as a transfer that stems from the “detached and disinterested” generosity of the donor.

Inter vivos Gift
If a taxpayer sells property that she received as an inter vivos gift (that is, not as a bequest), compute her gain or loss from the sale of the property as follows:
·         First, if at the time she received the gift, the FMV of the property transferred was greater or equal to the donor’s basis, the donee takes the donor’s basis. On a subsequent disposition of the property by the donee, she has gain to the extent that her amount realized on the sale exceeds her basis.
·         On the other hand, if the the property declined in value in the donor’s hands so that the property had a basis greater than its FMV at the time the donee received the gift, on a subsequent disposition of the property by the donee, first apply the “gain rule” and give the donee the same basis as the donor. If that produces a gain to the donee, you have finished your calculations. If that calculation does not produce a gain, apply the “loss rule” and give the donee a basis in the property equal to the FMV at the time of transfer. The donee realizes the amount of loss that results from that calculation

·         If the gain rule does not produce a gain and the loss rule does not produce a loss, the donee realizes neither gain nor loss on the sale.