Gift Exclusions, Bequests, Devises, Inheritances, Employee Benefits, Scholarships

For GI purposes do you include the value of the property received by gift, devise, bequest or inherintance

No, Section 102(a)

HOWEVER

Income derived from the gift is included in income (ie the fruit)

How does 102(b)(2) differentiate from 102(a)

Under IRC 102(a) the property itself can be excluded from gross income.

BUT under 102(b)(1), if what you receive is income produced by property that income is taxable:

Hypo:

Your grandmother gives you a rental home worth 300k -> 300k is not taxable

Your grandmother keeps the rental home but gives you the right to receive 20k of rent from it -> that must be included in GI

Under 102(c) what is the rule for employer to employee gifts

They are income, there are exceptions but however under 102 they are presumed to be connected to the employment relationship rather than arising from detached generosity

Exceptions:

Employee Achievement Awards - 74(c)

De minimis fringe benefits.

Includible under 102(c) however are not subject to the 274(b)(1) ceiling

What does 274(b)(1) ceiling do

Limits the deductible amount of business gifts to 25 per donee per year

The ceiling is applicable only to non-employee business gifts.

What is assume when a property is transferred to a spouse

It is automatically assumed to be a gift (no need to determine intent) 1041(b)(1)

Duberstein

A gift in the statutory sense is from "a detached and disinterested generosity," "Out of affection, respect, adminration, charity or like impulses

Relationship is the key - it is hard for business relationships to prove that there was a gift b/c the gift is usually made for self-interested purpose

Fact finding is Key

Lyeth

Facts: An heir to decedent challenged the will and received a portion of the estate based on a compromise

Holding:

i. The money received as a compromise was an inheritance

ii. Income received form a formal settlement of a will contest, is not taxable, as long as the income is received by a legal heir

iii. IMPORTANT 102 must be applied uniformly across all states

Wolder

Facts: W entered into agreement that client would bequenth to him 500 CS shares or other security in his will in return for lifetime legal services w/o charge. Client left W 15k and 750 shares.

Holding: The Bequest was income, NOT a true gift/bequest/devise, b/c it was payment for services rendered (compensation)

Reasoning: A service is still being paid for (compensation) SUBSTANCE OVER FORM

Relationship is important Business vs. Personal Relationship

Fringe Benefits

Section 132

A fringe benefit is basically a non-cash benefit your employer gives because of your job.

The starting rule is that the fringe benefits are generally gross income under section 61 unless the IRC specifically excludes them.

Main Exclusions in IRC 132

No additional-cost services: Your employer gives you a service ti already provides customers. Ex: An airline employee gets a free standby seat.

Qualified Employee Discounts: Employees can recieve certain discounts on the employee's goods or services without income, subject to limits.

Working Condition Fringes: Something the employer provides that would have been deductible as a business expense if you paid for it yourself. Ex: An employer-provided laptop used for work.

De minims fringes: Benefits so small or occasional tha tkeeping track of them would be unreasonable. Example: occasional coffee, snacks, or a small holiday gift.

Qualified transportation fringes: Certain transportation benefits may receive special tax treatment, subject to statutory limits

Qualified moving expense reimbursement: This is now narrowly available, primarily for certain military moves.

Qualified retirement planning services: Certain retirement-planning assistance provided by an employer can be excluded.

Non-Discrimination Rule

132(j)

Denies highly compensated Employees an exclusion for fringes unless they are provided on substantially same basis to broad group of employees

Exclusion would still apply to the lower paid employee though trough reg. 1.132-8(a)(2)

Employee Services Fromula for Benefits

No Formula 132(c)(1)(B) - 20% of value

Employe Property Formula for Benefits

Gross Profit % (aggregate sales price - cost)/ aggregate sales price

What is a qualified property or service for benefits

It is in which the Employer sells or provides in its ordinary course of the Employers line of business in which the employee works

What is the definition of employee

132(h)

1. An individual who is currently employed

2. Former Employees who were seperated from service by retirement or disability

3. Spouses and dependants or employers who are retired or disabled

4. Widows and Widowers of individuals who died while employed or while a retired or disabled former EE.

Direct vs Indirect Fringe Benefits

Reg. 1.61

a. Indirect benefit is still income same as direct (Old Colony Trust) - 132(h)

b. Fringe benefit may not be given to employee directly but is still benefiting them indirectly which would allow an exclusion

Compensation Definition and examples of exclusions

Compensation income includes the value of any property or services, or other economic benefit received in exchcange for the performance of services.

Group term life insurance for EE 79(a)

COntribution by employer to accident and health plans 106

Combat zone compensation 112

Cafeteria plans.

Requirements of excluding from GI for fringe benefits

1. If the services are provided for sale to customers in the same LOB in which the EE work 132(b)(1)

2. Employer incurs no additionally cost to provide the services to EE AND 132(b)(2)

3. In the case of highgly compensated employees, the services are provided on a non discriminatory basis (132)(j)(1)

Limitation→ 132(c)(4)). Prevents unfair advantage for employees who work for conglomerates. Exception: Excludable if the two companies have a written reciprocal agreement that the services be made available to employees of either subsidiary

132(b)(2) and Reg. 1.132-2(a) → cannot bounce a customer to give an EE room.

Qualified Employee Discounts

132(a)(2)

1. Nondiscriminatory

2. The same line of business limitations apply

3. Exclusion is allowed if free, reduced price, or a partial or total cash rebate. Reg. 1.132-3(a)(4).

For Services: must not be greater than a 20% discournt of the price at which the services are offered by employer to customers 132(c)(1)(B)

For Property: The maximum exclusion in the ER's gross profit % on goods in the employees line of business: This is essentially saying calculate gross profit percent which allows the exclusion as long as it removes the businesses benefit from the sale and nothing more.

Working Condition Fringe

132(a)(3)

Exclusion allowed for property or services provided to an EE which if the EE had paid for himself, it would be deductible as a business expense under 162 or could be depreciated under 167

THERE IS NO DISCRIMINATION LIMITATION

132(j)(3) allows an item as a Working Condition Fringe even thought it would NOT be fully deductible as a business expense if the costs were inucrred by EE

De Minimis Fringe

132(a)(4); Treas Reg. 1.61-21(a)(4)

Think of happy hours, or free coffee, includes traditional retirement gifts.

Frequency is an important factor in which the benefit is given from the ER to the EE. Reg 1.132-6(b)

Bargains at employer-operated eating facilities are excluded as fringe benefits if the eatery is near or on premises

Does not apply to food and other items furnished to spouses and dependant children

Qualified Transportation Fringe

132(a)(5)

The commuter highway vehicle must have capacity for 6 adults plus driver and must be used 80% of the time for commuted or business trips

Includes a transit pass, token, fare card, voucher, or similar item for mass transit

Parking qualifies as well, provided it is on or near the business premises or on or near the location form which EE is picked up by a commuter vehicle

Bicycle is reimbursement is suspended. 132(f)(4)

Discrimination principal is relevant

EE can choose cash option (included in GI), and one of the alts (excluded) 132(f)(4)

If it is a QTF it cannot also be other fringe benefits for the purpose of excluding

MUST BE PAID IN ADDITION TO COMPENSATION, NOT IN LIEU OF COMPENSATION TO MEET THE EXCLUSION

Ex: If ER offered parking pas or cash and EE chose parking pass, that is not a fringe, it is compensation

Qualified Moving Expense

132(a)(6)

Amounts that ER paid for EE and that EE would have been able to deduct under 217 if they were paid by the EE

Athletic Facilities Expense

132(j)(4)

Allows exclusion for gym, pool, golf course, tennis courts, etc.

No non-discrimantory restriction imposed

Other fringe benefits:

No non-discriminatory restriction imposed.

1. Qualified tuition reductions - §117(d).

2. Employer funded educational assistance programs - §127.

3. Employer contributions to employee accident and health plans - §106.

4. Group life term insurance premiums - §79.

5. Compensation received by military personnel for service in combat zone & compensation received while hospitalized as a result of combat zone injuries - §112. 6. Amounts paid by ER for dependent care assistance up to annual max of $5K, $2.5K for MFS - §129.

C. OTHER STATUTORY EXCLUSIONS FOR FRINGE BENEFITS INCOME TAXATION - CAMP FALL 2024

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7. Employer payments of qualified adoption expenses under an adoption assistance program - §137.

8. Addtl. military benefits - §134.

9. Cafeteria plans - §125.

10. Rental value of parsonages - §107.

11. Meals or lodging furnished for the convenience of the employer - §119. (Special fringe!!). a. (a) Meals and lodging furnished to EE, his spouse, and his dependents pursuant to employment. Shall be excluded as long as job requires him to be at work and accept these benefits.

Lodging: Requires nexus to work.

Relationship is key. Facts & circumstances.

Exclusion from gross income if: The lodging is on the business premises of the ER. Commissioner v. Alderson - 119 inapplicable b/c "on call" didn't constitute a significant portion of the taxpayer EE's duties.

The employee is required to accept such lodging as a condition of his employment.

The lodging is furnished for the convenience of the employer. Hatt v. Commissioner - Requirements 2 and 3 at issue.

Meals: Requires nexus to work. i. Reg. 1.119-1(a).

Substantial noncompensatory business reason for the meal.

If to keep on premises, so they are more efficient → excludable fringe.

Groceries Courts are split.

Meal $$$ Not excluded.

Prizes and Awards General Rule

74

Expressly INCLUDES amounts received as prizes or awards in GI, unless otherwise provided in this section or section 117

INCLUSION IS INTERPRETEd BROADLY, EXCLUSION IS INTERPRETED NARROWLY Schlier

Hot Potato Exception for Prizes

1. Hot Potato Exception - 74(b) Exception for certain prizes and awards transferred to charities ("get rid of proceeds as fast as you can")

a. Needs to be the right type of award: recognition of religious, charitable, scientific, educational, artistic, literary, or civic achievement

b. You did not apply for or enter a competition

c. You are not required to perform substantial future services in exchange for the award

d. You direct the payer to transfer the award directly to a qualifying government unit or charity

THE MORE CONTROL THE RECIPIENT HAS THE LESS LIKELY THE EXCLUSION WILl APPLY

Employee Achievement Awards Exception

74(c)

Read carefully if another statute excludes; 74 is all or nothing

Excluded if it:

i. Relates to the length of service or to safety

ii. It must be in the form of tangible personal property

iii. must be awarded as part of a meaningful ceremony, and

iv. Not be merely disguised as compensation

AMOUNT OF AWARD GIVEN TO THE EMPLOYEE SHALL NOT EXCEED THE AMOUNT WHICH THE COMPANY CAN CLAIM AS A DEDUCTION FOR THE AWARD

If the award EXCEEDS employer's allowable deduction, then the TP's GI is the greater of:

The COST of the award paid by the employer in excess of the deduction, or

The Value of the award in excess of the deduction allowable to the employer

Must be tangible personal property - See examples in §1.132-6

*Gift Certificates are NOT Tangible personal property

Prizes and Awards basic Inclusion or Exclusion

74(a): General Rules - Included

74(b): Exceptions - Narrow

>Hot potato - immediately donate to charity

>Employee Achievement Awards

>>Reg 1.132-6(e) also talks about employee achievement awards but 74 controls because of 132(1)

74(d): Olympics are special

> Normal Olympians can deduct -- the rich Olympians cannot

McDonnell

Facts: Salesman for his company were rewarded with a trip to Hawaii. McDonnell's name was thrown in a hat to see who HAD to go to baby sit the salesman and make sure that they did not represent the company poorly. Wife was expected to go

Holding: The trip was NOT income. The nature of the trip was for business purposes, therefore none of the expenses related tot eh trip are included as gross income for the Husband or Wife.

Qualified Scholarships

"Scholarships for tuition, fees, books, supplies, and equipemnt are excluded from GI"

Look for Quid Pro Quo (Something for Something) - But realize that money earned from a Quid Pro Quo Arrangement can be designated to Cover Room and Board Expanses (REG. 1.117-6(a)

LIVING EXPENSES, FOOD, LODGING, AND TRAVEL ARE NOT AUTHORIZED AS ACCEPTABLE EXPENDITURES FOR A QUALIFIED SCHOLARSHIP

Cannot be conditioned on performing services

Included in GI to extent that the proportion represents a payment for teaching, research, or other services by the student req as a condition for receiving the otherwise excludable amount

Tuition reduction as fringe benefit

Use of 132(h) def. of EE

a. Scholarship as payment for teaching and research are not excluded from Gross Income

b. However, Qualified Tuition Reductions (excluded from income)

170(b)(1)(A)(ii)

Athletic Scholarships

Excluded from Gross income (Rev. Rul. 77-263).

a. University expects, but does not require students to participate in particular sport;

b. Requires no particular activity in lieu of participation, and

c. Cannot terminate scholarship if the student cannot participate (injury)

Process for determining scholarship:

Read 74 to figure out what to do if receive scholarship as gift.

Inclusion or Exclusion?

a. 117(a) - general rule: excluded

b. 117(b) - exception: Outgo must be "qualified"

c. 117(c) - limitations: Income must be qualified (not disguised compensation)

d. 117(d) - special case: tuition reduction as a fringe benefit

Note use of 132(h) definition of EE

9. Reg.§1.117-6(b), (c)(1)-(4), (d)(1)-(3) → proposed regulation