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.

Regarding a separate point; Regs for 132 state: 1.132-3(b)(1)(ii) The price at which the property or service is provided by the employer to an employee for use by the employee. A transfer of property by an employee without consideration is treated as use by the employee for purposes of this section. Thus, for example, if an employee receives a discount on property offered for sale by his employer to customers and the employee makes a gift of the property to his parent, the property will be considered to be provided for use by the employee; thus, the discount will be eligible for exclusion as a qualified employee discount.

So it seems an employee need not directly use the property (as a consumer of the property) to take advantage of Section 132.

The IRS has taken a few pro taxpayer positions that ignore the law, especially for administrative purposes. Though they did recently get in trouble for the relaxation of NOL rules in connection with the financial crisis.

So could the "mistake" in the Pub be merely the IRS position on the issue. Especially if the IRS assumes that quaified discounts to employees will not amount to a substantial amount of money? And resales of employee purchased products would be infrequent?

So/yet, I probably should not tell a furniture store client in a sales tax free state to sell all inventory to their sales people; who would then resell it to the public.

My point was that the employee who turns around and resells the discounted stuff at a profit gets taxed on the discount. I find the idea that a gift to one's parent's is a "use" in this context very reassuring. The guys who wrote the regs musta understood what Section 132 was trying to do.

"So/yet, I probably should not tell a furniture store client in a sales tax free state to sell all inventory to their sales people; who would then resell it to the public." You do seem to be catching on...

The statement that they lose the benefit if they later sell is not supported by the statute, that clearly excludes the discount from income. To sell all the inventory violates the deminimis rule of the statute.

So if you're comfortable without the benefit of the publication that you can conclude that basis is fair market value, then go ahead and take that position. But that should mean that you would be just as willing to take that position if the publication said the opposite.

In this case, you have to either believe (1) that the general principle explicitly stated in the sec. 61 regulations and underlying so many of the specific provisions of the code, that basis received equals basis surrendered plus investment plus income recognized, is abrogated in this relatively obscure situation sub silencio; or (2) that the benefit of an exclusion for property "provided by the employer to an employee for use by such employee" will be forfeited if the employee resells the property. Personally I find (1) much less plausible.

I can cite Code Sections or Regulations to that fact if you want, but I know you don't need them.

Having established that fair market value is used to determine the value of items exchanged, it follows that the basis of an item received is also its fair market value.

If, I receive non-taxable income interest from say a municipal bond in a partnership I still get to increase my basis in the partnership by such amount.

The same principal applies, I have employee discount income, it is excluded from taxation.

And, yes I know about the not below cost, 20% etc., rules.

Exclude the discount when the property is received, and then sell it at its fair market value.  What are you taxed on?  Right!

See how neatly that works?!!  If you sell it, you lose the benefit.  If you use it, you get to keep the benefit.   Considering this is the tax law, and not a mathematical proof, I don't know if I'm allowed to describe it as *elegant* but I will.  This is an *elegant* solution.  It separates the *users* from the *sellers* without having to describe them, enumerate them, find and close loopholes, etc., etc.  All we need to do is apply the law the way the Code and Regs are written.  The Pub is wrong. 

Q.E.D. Period. End of story. Case closed.

Roy, are you taking into account the effect of Section 132, the topic of the thread?

PBRs all around, on me.

2. The examples provided show that basis can be, and is increased for excluded income.

If there were some clue in the legislative history as to what Congress thought about this, that would be worth something, but the committee report does not mention the issue. What somebody thought about when they testified before a committee doesn't mean much.

Just so we're all clear here: if my employer sells me equipment worth $100,000 for $20,000, which I use in a trade or business, I get to depreciate $100,000? Can I deduct the full $100,000 under sec. 179? (Is sec. 132 worthless if the answers to those are no?)

The probability that 132 would apply to the full 80,000 discount as you describe are slim and none, so the example is not very usefull in forwarding the conversation, since a portion of the 80,000 would clearly be included in taxable income.

For your example to be a reasonable section 132 example, in order for the 80,000 discount to qualify for Qualified Employee Discount exclusion from income, you would be claiming that your employer regularly sells to the public for 100,000 equipment whose average gross profit margin is 80,000. Not a reasonable premise. What would be more likely, is that some of the 80,000 would qualify for the exclusion, and the remainder would be included in income to you, and subject to taxation as compensation. The ridiculousness you suggest by possing the example comes from the ridculousness of suggesting that you would qualify for an 80,0000 qualified employee discount on equipment worth 100,000, not from any depreciation benefit from a reasonably legitimate 132 exclusion.

If you're unable to bend your mind that far, then assume it was software. If that's your only issue, then I can deduct $100,000, maybe getting a $35,000 tax benefit, by spending $20,000. Right?

The evolution of your code and regulation analysis in this thread includes the following statements (emphasis added):

1-"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."

You then contradict yourself with the following:

2-"There is nothing in section 1.61-2, section 132 or section 1012 on this issue."

Now that it suits your arquement you claim:

3-"In this case, you have to either believe (1) that the general principle explicitly stated in the sec. 61 regulations and underlying so many of the specific provisions of the code, that basis received equals basis surrendered plus investment plus income recognized, is abrogated in this relatively obscure situation sub silencio; or (2) that the benefit of an exclusion for property "provided by the employer to an employee for use by such employee" will be forfeited if the employee resells the property. Personally I find (1) much less plausible"

Of course the regulations under section 61 do not explicitly say that basis received equals basis surrendered plus investment plus income recognized as you say they do. Nor is that an accurate quote of any code or requlation section. It is as you describe a "principle". RoyDale has illustrated a flaw in your principle by pointing out that basis received, not only includes basis surrendered plus investment plus income recognized, but also basis defined by the code or regulations even when no income has been recognized for tax purposes.

My position for the answer to the question posed by the original post is that the basis of the painting with regards to its future sale = "§ 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(doesn't apply) or other basis prescribed in section 1012(doesn't apply) or other applicable provisions of subtitle A of the code(as defined by regulation under section 61-2), adjusted to the extent provided in sections 1016(only posssible either as "receipt" or "other item" in this case), 1017(not applicable), and 1018(section not listed under the regulations) or as otherwise specifically provided for under applicable provisions of internal revenue laws(section 132 makes no such provision for any adjustment to basis)."

It is clear to me that under section 61 the discount, and the amount added to income and the amount added to purchase price to get basis are the same thing resulting in a basis of 10,000. I previously asked a question regarding whether the section 132 exclusion functioned as a "receipt" or "other item" under section 1016 which according to code requires an adjustment to the basis as defined in section 61. To which you responded,

"Adjusting basis for a receipt chargeable to capital account is a direction to DECREASE basis, which isn't going to help the case here."

To get to a 9,000 basis from 10,000 basis a DECREASE is exactly the direction basis would have to go. Personally, I find it harded to believe your fabricated senario from above,

"(2) that the benefit of an exclusion for property "provided by the employer to an employee for use by such employee" will be forfeited if the employee resells the property" is impossible to believe absent specific language in the code or regs which say so. Its a pretty, and interesting, and "elegant" theory which unifies your position, that is all.

When sec. 1016 says to adjust for a "receipt," it's referring to the opposite of an "expenditure." If I own something, and I spend cash on it, and the spending is chargeable to capital account (not deductible), then I increase my basis -- for example, when I contribute capital to a corporation I own. If I own something, and I receive cash from it, and that cash is chargeable to capital account (not taxable), then I decrease my basis -- for example, when my corporation pays me a distribution not out of earnings and profits. I really don't see how that implies that my basis on something I purchase, without paying tax, should be more than my cost.

What is it about my "fabricated scenario" that you find harded to believe? That there exist discounts so large? I have personally purchased property at a company store at a discount of around 85%. I don't know whether it actually satisfied the requirements of sec. 132, but I know that my employer, which was a major company in one of the high-margin industries I mentioned, didn't include the discount in my W-2.

Of course it's hard to believe that I can deduct $100,000 by spending $20,000, but I would suggest that the problem is in the conclusion that my basis is $100,000, not in the fact that the discount is tax-free.

But the initial question is a trick, and is rigged. The FMV of a piece of art is totally subjective, and set by market, whereas in most cases, the value of any discount is erased by transfer and usage. Change the subject slightly by saying Employer permits employee to pay $900 for a computer that sells for $1,000. By the time the computer is out of its box, it is scarcely worth the $900. Same case would imply if a new car is driven out of the showroom.

The piece of art is more akin to employee stock purchases at discount.

I agree with Harry and Lionel.

I would hope that when laws and regulations are written to cover a common occurence like an employee discount, the writers aren't thinking of something that might come along once every ten years.