Payments to Third-Parties
Old Colony Trust Co. v. Commissioner
279 U.S. 716 (1929).
Holding
The payment is taxed.
Facts
The president of Old Colony Trust Co. had his income taxes paid by the company. The question is whether this additional payment of taxes counts as income that can be taxed.
Analysis
Note that the income taxes paid by the employer were not withheld from the salary of the President. So, this was additional money made by the employer were derived from the employee’s labor.
McCann v. United States
81–2 USTC 9689 (1981).
Question
Is the trip, paid for by the employer, considered gross income?
Holding
The fair market value of the cost of the trip to the employer is considered gross income.
Facts
Mrs. McCann was an insurance salesperson. In 1973, she performed well and qualified to attend a seminar hosted by the company. Her and her husband attended the seminar in Las Vegas where there were a few business meetings, but the bulk of the activity was spent relaxing, attending shows, and attending bars. This trip was an all-expenses paid trip by the company.
The McCanns did not report the value of the trip as part of their income. The following year, they were audited and the IRS said the trip was considered income. A deficiency notice was made, and the McCanns paid the deficiency. Later, they sought a refund and when the IRS did not oblige, the litigation began.
Analysis
Based on all the activities, not every employee was permitted to participate, and you had to qualify to attend (reach a certain total sales), this was a reward or an award based on performance and counts as income.
Additional Notes
Things that could have caused the trip to be tax free (unlike the result in McCann):
- More work time instead of leizure time
United States v. Gotcher
401 F.2d 118 (5th Cir. 1958).
Rule
The dominant purpose of the trip must be business to not qualify as income.
Holding
The husband’s expenses are not taxible while the wife’s were.
Facts
Mr. and Mrs. Gotchner traveled to Germany on an all-expenses paid trip by Volkswagen. Mr. Gotchner was a dealer and the purpose of the trip was for Volkswagen to convince dealers to sell their vehicles in America. VW was still fairly new and American dealers were skeptical about the product.
While in Germany, Mr. Gotchner toured several facilities and attended several meeting advertising Volkswagen. Mrs. Gotchner on the otherhand was simply in attendance.
Although there were moments of free time for recreation, the bulk of the trip was spent on these tours.
When Mr. Gotchner returned and decided to use VW, VW required the dealership to purchase top-notch facilities (encourage American purchasers to recognize the quality of the vehicles).
Analysis
The primary purpose of the trip was to learn about VW and whether the dealership should invest. This was a big decision and VW had entire control over the schedule and other decisions upon return. All these indicators lead the court to determine Mr. Gotchner’s trip was not income. However, Mrs. Gotchner essentially had an all-expense paid vacation. The value of her trip could be considered income. The concurrance agrees with the result but is still uneasy about the result for Mrs. Gotchner’s expenses.
Room and Board on Employer’s Premises
Focus on 26 USC § 119.
Commissioner v. Kowalski
434 U.S. 77 (1977).
Rule
Section 119 allows an exclusion for income if it is a meal furnished by the employer, for the convenience of the employer, on the businesses premisses of the employer. For lodging, the requirement adds taht the employee is required to accept the lodging as a condition of employment.
Holding
The allowance is taxed.
Facts
State troopers were given an allowance for meals while they are on duty. At one point, there were several locations where meals were provided. However, these checkpoints were inconvenient for the state to maintain so cash allowances were used instead. Officers are given this allowance twice a month to be used during their shift so long as they are in their patrol area.
Analysis
The default rule is that this income unless if it fits under the exclusion of 119. Here, the court says cash allowance is not a furnished meal. That is, to acheive the exclusion, a meal furnished means a meal.
Smith v. Commissioner
T.C. Memo. 2023–6.
Holding
The value of the cost of housing is taxible income.
Facts
Smith was hired to take a job overseas. Housing, maintenance, and trash services were provided by the company. However, these services were provided away from the company’s base. Smith was permitted to conduct minor activities at the home, but the bulk of the work was done on base.
Analysis
The court only examines one part of the test, whether the business was conducted on the premises of the employer. The business premise is determined in part by whther (1) the location was tied to the employer’s property, and (2) how much work is being done from those premises. Here, Smith was doing only minor activities at his home. So, the cost being provided by the employer is taxible income.
Although Smith fails right away, the court likely would have held that he failed to meet the other requirements. For instance, Smith was not required to accept the lodging to be hired for the company.
Statutory Fringe Benefits
Focus on 26 USC §§ 132(a)–(e)(1); f(1)–(5), (7)–(8); (h)–(j)(1); (j)(4). Also focus on Treas. Reg. §§ 1.132–2(a), (c); 3(a)(1)–(4), (e); 4(a)(1)(i), (a)(1)(iv); 5(b)(1); 6(a)–(c); 6(e).
Fringe benefits do not count as gross income. § 132(a) outlines the types of fringe benefits:
- (a)(1) no-additional cost benefits
- (2) qualified employee discounts
- (3) working condition fringe
- (4) de minimis fringe
- (5) qualified transportation fringe
- (6) qualified moving expense reimbursement
- (7) qualified retirement planning services
- (8) qualified military base realignment and closure fringe
Property for Services
Focus on 26 USC § 83(a)–(c).
This is also commonly known as deferred compensation. These are agreements between an employer and an employee agree to be compensated later after services are performed. Some examples of deferred compensation include 401Ks, IRAs, etc. Another example is a non-qualified deferred compensation such as restricted stock awards (RSAs) and stock options.
You have to pay taxes on these plans unless there is a substantial risk of forfeiture. That is, will the plan go away if you leave early? If the answer is no, then you have to pay taxes on it when you receive it.
