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Unformatted text preview: Tax Problems and Answers 1 Compensation for Services 1. A law student is considering a job offer from a law firm in a small town. The hiring partner tells her: “We can only afford to pay first-year associates $50,000. But to be more competitive with big-city law firms, here’s what we’ll do: Instead of paying $50,000 directly to you, we’ll pay off $50,000 of your student loans. Since you’ll never receive any money, you won’t have to report any income to the IRS. The tax savings will make this equivalent to about $75,000 in straight salary.” Does this work? For this class, we will assume that the flat tax rate is 35% §61(a)(1): compensation for services must be included in gross income. Was the payment compensatory in nature? Yes. 35% x 75000 = 26250 75000 – 26250 = 48750 Payments to third parties on the taxpayer’s behalf is income Gross income also includes compensation for services, and is a fringe benefit (a non-cash benefit that an employer gives to an employee) How broad is a fringe benefit? Does it include paying off third parties? What is compensation for services? Does this mean cash directly or does it include other things as well? “From whatever source derived”: what does this mean? This does support the argument that this is income from the law firm. This payment by the law firm decreased the law student’s liability, and increased his net worth by 50000. Under Grenshaw Glass , this is income. Employee Discounts 2. A commercial airline permits its employees and their families to fly for free on any scheduled flight on a standby (i.e., space-available) basis. Scott, a flight attendant, flies free from New York to Los Angeles. Does Scott have taxable income as a result? Would your answer be different if the airline served a decent free meal and snack on the flight? NO. NO. (§132a1, §132b No-additional-cost service, but only because it is a stand by flight and so no revenue is lost. The meal is also not taxable because although this is an additional cost, Travel Regulation §1.132-2a2 says that flight attendant service and meals are not additional costs) * Does a flight count as gross income in the first place under Glenshaw Glass ? The flight is clearly realized, but it is not added to net worth, and he is not under control (or complete dominion) of the flight since it is only given on standby basis. This flight is not resulting in an asset. There is an argument that this is accession to wealth, that, but for the flight, the employee would be in the negative net worth for the value of the flight (he would have had to buy it if he didn’t get it for free). The employee has gained utility without losing net worth, which would not have occurred if not for the fringe benefit....
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- Fall '07
- The Lottery, Taxation in the United States, law firm