Discussion:Capital Gain employee discount purchase

Not that there needs to be. Several of us are happy just to chat.

The employer didn't tax her on the discount, but she didn't pay it (therefore she has no basis in the discount amount). Kind of similar to a 401(lk) employer contribution - it isn't taxed (currently) but the employee has no basis in the contribution.

And do remember that this is 28% gain property.

§132 is about fringe benefits, not basis

(it doesn't, even though Pub 551 said it would)

Pub. 551 started saying this sometime between 1992 and the middle of this decade, so somebody either thought that the law was changed or just that the old version needed rewriting.

I'm starting to think I'm losing my mind. This can't be. Has someone said that $10,000 "list price" is the FMV? Can't possibly. Maybe FMV is *less* than the discounted value...

from: http://www.irs.gov/taxtopics/tc703.html

I added the emphasis. For those of you familiar with the code and regulations, is this language similiar to that in more "official" or precedent establishing sources?

Since the qualified employee discount only applies to people who have rendered service, to the seller, I presume the reasoning is that the purchase "price" is the money and service rendered necessary to earn the discount which together make up the FMV.

Is there anyone here who's gonna claim that the $10,000 "list price" is the FMV of whatever it was - I've forgotten now, and don't have time even to look - that the employee got for $9K after a $1,000 "employee discount"? If so, you should be out selling this as a *tax shelter*. Buy for 9, sell for 10, owe no tax. Touchdown.

There's a serious disconnect here somewhere... "Somewhere, Over the Rainbow..." Oz, that's where we are. Next thing you know, we'll be expected to give the employer a deduction for the $10K that the whatever was "worth"...!!!

Somebody at Treasury will get his ears pinned back tomorrow morning. Listening, Timmie?

"Washington, we have a problem" with apologies to Apollo.

accesible by way of:http://www.access.gpo.gov/nara/cfr/waisidx_09/26cfr1b_09.html

"(3) Compensation for services. A fringe benefit provided in connection with the performance of services shall be considered to have been provided as compensation for servcies."

"(6) Effective date. This section is effective from January 1, 1985, to December 31, 1988, with respect to fringe benefits furnished before January 1, 1989. No inference may be drawn from the promulgation or terms of this section concerning the application of law in effect prior to January 1, 1985. (b) Valuation of fringe benefits—(1) In general. An employee must include in gross income the amount by which the fair market value of the fringe benefit exceeds the sum of (i) the amount, if any, paid for the benefit, and (ii) the amount, if any, specifically excluded from gross income by some other section of subtitle A. Therefore, for example, if the employee pays fair market value for what is received, no amount is includible in the gross income of the employee."

http://edocket.access.gpo.gov/cfr_2009/aprqtr/pdf/26cfr1.61-2.pdf

"(2) Property transferred to employee or independent contractor. (i) Except as otherwise provided in section 421 and the regulations thereunder and § 1.61–15 (relating to stock options), and paragraph (d)(6)(i) of this section, if property is transferred by an employer to an employee or if property is transferred to an independent contractor, as compensation for services, for an amount less than its fair market value, 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 fair market value at the time of the transfer is compensation and shall be included in the gross income of the employee or independent contractor. In computing the gain or loss from the subsequent sale of such property, its basis shall be the amount paid for the property increased by the amount of such difference included in gross income"

Now granted, I am just skimming over what you guys wrote here and I skimmed quickly, but is my skimmed grasp correct?

- property of a kind held for investment, and - property not ordinarily sold in the employer's line of business. See 132(c)(4).

So the employer here must be an art dealer. If not, this flunks 132. Assuming it is an art dealer.. I would (if you're feeling aggressive) take the position that this painting is not of a kind that is ordinarily held for investment, and treat it as qualifying under 132(a)(2) (discount is not income to employee).

I agree with the others, the basis rules just seem to good to be true. But if you're ever audited, you can point to IRS Pub. 551. Still can't find a source on this, and there's nothing in the regs. Anyone know why it's FMV?

"If the difference between your purchase price and the FMV represents a qualified employee discount, do not include the difference in income. However, your basis in the property is still its FMV."

If anybody can point to where [the italicized part of] this comes from, please do.

Section 132 was "invented" in 1984...

And using the Pubs to wipe up afterwards is quite the 'highest and best use', as my realtor friends would say.

This trickery with the Publication is obviously a long-standing and sinister plot by the pasty-faced trolls that live and work in the basement of the Treasury building to plant seeds of professional paranoia and intellectual neurosis in all of us sentient and thinking tax professionals out here. I wouldn't usually be worried (for all the usual reasons) but this time .. this time .. this time .. the Xanax isn't working.

Is there anybody here who *doesn't* *reject* the statement in the Publication about the basis of property received with a Section 132 qualified employee discount?

Fine, I will go read and learn <albeit unwillingly>

It's small but its there. I also couldn't find it in the Publ 15-B. As far as I can tell this law was enacted in 1984. Dole and Rostenkowski were the leads on this law. They stipulated publicly that it was to be interpreted liberally. If the IRS policy is to accept the facts as stated in the Publ., so be it!

Does anybody remember when Congress passed a law allowing a deduction for qualified longevity or safety awards or something like that but *forgot* to put an exclusion into the law for the income arising from those awards? The oversight was an *embarrassing gaffe* for them and they pretty promptly added something somewhere in the law to make it right. It mighta been Bob Dole's work, actually.

"A bargain purchase is a purchase of an item for less than its FMV. If your employer lets you purchase goods or other property at less than FMV, include the difference between the purchase price and FMV of the property in your income. Your basis in the property is its FMV, that is, your purchase price plus the amount you include in your income.

If the difference between your purchase price and the FMV represents a qualified employee discount, do not include the amount in income."

Now, this is in a publication on basis, not income; technically speaking, the only thing it says about basis is that it will be FMV. It just doesn't make a point about it in the case of a qualified employee discount.

The additional language "However, your basis in the property is still its FMV," was in there in the Dec. 2, 2000 edition. I can't find the editions in between; I doubt it went that long without being revised. The IRS website's "Previous Years" page (http://www.irs.gov/formspubs/article/0,,id=98339,00.html) leaves it out even for several years when I know it was revised.

I will search on.

As Harry said earlier, if this is in fact the law, it's Congressional sanction for getting cash without paying tax. Remember that insurance is considered a "service," qualifying it for a 20% discount regardless of the employer's margins. That means an insurance company can stop paying its executives in cash and start offering to sell them a $10 million contract for $8 million, which they can immediately cash out, ending up with $2 million in their pockets and no tax; the insurance company will still be deducting its net loss on the transaction, just not as compensation; the prohibitions on property typically held for investment and discriminatory plans won't be nearly enough to stop this.

It makes 132(a)(2) pointless if the point of 132(a)(2) were to let employees get cash tax-free -- which it isn't. It's to let employees personally enjoy the products, which works equally well no matter what their basis is.

Sec. 1012 says that basis is cost "except as otherwise provided in this subchapter [O] and subchapters C (relating to corporate distributions and adjustments), K (relating to partners and partnerships), and P (relating to capital gains and losses)." Rules on income exclusion aren't on that list.

Sec. 132 was originally enacted as part of DEFRA '84. You can see the General Explanation on H.R. 4170, P.L. 98-369, JCS-41-84. Fringe benefits in general (including a long exposition on prior law) are discussed at p. 838; the discussion of qualified employee discounts starts at 849.

Footnote 77, explaining the exclusion of investment property, does say: "This limitation is provided primarily because the Congress did not believe that favorable tax treatment should be provided when noncash compensation is provided in the form of property which typically the employee could sell at close to the same price at which the employer sells the property to its nonemployee customers." But that doesn't necessarily mean that Congress was concerned that that cash would be tax-free; you could still interpret that concern to mean either that investment property is sufficiently cash-like that the employee should be treated as having a kind of constructive receipt of cash, or just that it was worried about enforcement.

There's no way that the employee gets a "FMV" basis in the discounted property or services. No way. That law perfesser may have read the Pub but the only thing he's showing is that he doesn't *really understand* income taxes, basis and, well, maybe even double-entry accounting.

Where is the *chorus* of "No Way" that this *heresy* should provoke...?

Section 1012 and its related regulations are general rules of basis.

Section 1.61-2, (d), (2) as quoted above in full (Yes, Harry, I realize that two of the three rules posted above come from the temporary regulations no longer in effect and I included them mostly because at the time I had not yet determined into what they had evolved) and below in relevant part (emphasis added) establishes a specific, and therefore controlling rule for establishing the basis of property provided in part as compensation.

from: http://edocket.access.gpo.gov/cfr_2009/aprqtr/pdf/26cfr1.61-2.pdf

"§ 1.61–2 Compensation for services, including fees, commissions, and similar items... (d) Compensation paid other than in cash—... (2) Property transferred to employee or independent contractor... if property is transferred by an employer to an employee... as compensation for services, for an amount less than its fair market value, then.... the difference between the amount paid for the property and the amount of its fair market value at the time of the transfer is compensation and shall be included in the gross income of the employee.... In computing the gain or loss from the subsequent sale of such property, its basis shall be the amount paid for the property increased by the amount of such difference included in gross income.

A subsequent section of the IRC Sec 132, and its associated regulations, provide a limited exclusion from gross income for discounts conforming to the qualifications listed therein. They do not provide for any adjustment to basis as a result of this "exclusion".

Section 1.1011-1 sets forth the adjusted basis by which the gain or loss is to be measured as the following from: http://edocket.access.gpo.gov/cfr_2009/aprqtr/pdf/26cfr1.1011-1.pdf

"§ 1.1011–1 Adjusted basis. The adjusted basis for determining the gain or loss from the sale or other disposition of property is the cost or other basis prescribed in section 1012 or other applicable provisions of subtitle A of the code, adjusted to the extent provided in sections 1016, 1017, and 1018 or as otherwise specifically provided for under applicable provisions of internal revenue laws."

Again, 1012 is a general rule and 61-2 is a specific one so 61-2 should govern as to what basis should be adjusted by 1016, 1017, 1018.

from: http://edocket.access.gpo.gov/cfr_2009/aprqtr/pdf/26cfr1.1016-1.pdf "§ 1.1016–1 Adjustments to basis; scope of section. Section 1016 and §§ 1.1016–2 to 1.1016– 10, inclusive, contain the rules relating to the adjustments to be made to the basis of property to determine the adjusted basis as defined in section 1011."

from: http://edocket.access.gpo.gov/cfr_2009/aprqtr/pdf/26cfr1.1016-2.pdf

"§ 1.1016–2 Items properly chargeable to capital account. (a) The cost or other basis shall be properly adjusted for any expenditure, receipt, loss, or other item, properly chargeable to capital account, including the cost of improvements and betterments made to the property. No adjustment shall be made in respect of any item which, under any applicable provision of law or regulation, is treated as an item not properly chargeable to capital account but is allowable as a deduction in computing net or taxable income for the taxable year."

The question we all should be debating is does the subsequent qualification of the discount under Section 132 for exclusion from gross income constitute either a "receipt", or "other item, properly chargeable to capital account" to adjust the basis as established in 61-2?

I admit that the language of 61-2 "the amount paid for the property increased by the amount of such difference included in gross income" in defining basis creates an ambiguity. From a constructionist standpoint it could be argued that because they did not use FMV in this instance, despite having used it previously in the same regulation they allowed for the possibility that FMV, and basis as sum of cost and difference might be two different things. But one could also argue that FMV contains its own ambiguities in general and the additional language merely serves to reinforce that the effect of the section as a whole is to distinguish as a special basis case bargain purchases as a result of services rendered. However, as has been stated earlier, the IRS has clarified the ambiguity by altering the language of 551 from a near direct quote of the regulations to specifically state: "If the difference between your purchase price and the FMV represents a qualified employee discount, do not include the difference in income. However, your basis in the property is still its FMV." from: publication 551 on basis (revised May 2002) (as downloaded today from irs.gov), page 6 column 3, second paragraph under Bargain Purchases. Completely clear. Given that Jctmstx claims no case law supports a contrary interpretation, I'd say you would have a pretty strong defense for following Pub 551.

PS: Pub. L. 98–369, div. A, title V, § 531(a)(1),July 18, 1984, 98 Stat. 877 Both established Sec 132 and amended section 61 to include fringe benefits. As far as I can tell by reading the amendment notes as presented under Section 132, the original section contained all of the following: (1) no-additional-cost service, (2) qualified employee discount, (3) working condition fringe, (4) de minimis fringe, (5) qualified transportation fringe. The implementation of this public law and others from the same time period relating to taxation were complicated by the either underway or recently completed study of the IRC conducted by congress which resulted in the IRC of 1986 replacing the IRC of 1954: hence the temporary rules cited above with effective dates through 1988.

Given your footnote 77 above. I would say that Congress did not want to provide tax benefit to "investment property" and also real property, but they did want to bestow it on the non excluded property. I'm definitely in the follow 551 camp absent any new law, regulation or case law to contradict it camp.

Maybe there's something out there to support the publication's position, but I haven't found it if there is. The precedential value of the publication is exactly the same as that in Harry's posts. I'm guessing the IRS has no active plan to pursue this argument, so I'd probably find a way to take this position if it was relevant to a return, but I can't conceive of a way to successfully defend that position if I had to, including on penalty issues.

Capisce?

They said they intended to give the employee who *used* the product/service that was bought at less than list price a tax break. And they insisted that they intended *not* to give the employee/purchaser who then *resold* the product/service at a profit any tax benefit. Accordingly, they didn't have to make any changes to how tax basis of the product to the employee/purchaser/user is determined: it's what the employee paid for the discounted product plus any amount that was *included* in his taxable income. Period. There is *no* - and there was intended to be *no* - "tax-free mark-up" of the property's tax basis to FMV.

This is dead on with and supports my contention that The IRS Pub is wrong. Like I said already.

This should give even the folks here who have so far resisted the impeccable logic of a rag-tag band of practicing tax professionals - and followed the heresy of a "tax law professor" - something to chew on.

While you're chewing, I'll be in the kitchen, checking the inventory in the refrigpbrerator

The regulation states: "In computing the gain or loss from the subsequent sale of such property, its basis shall be the amount paid for the property increased by the amount of such difference included in gross income" and that proves what some of us have been saying all along:

The IRS Pub is wrong.

Thank you for digging out the regulation.

Who's gonna tell the IRS and the tax law professor that they're wrong?

Wow! That's *exactly* what happens under Section 132 and the existing basis rules. The Pub is wrong. Oops.