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Re: Maria Batel
Maria Batel currently lives in employer-provided housing. She incurred $66,000 to add an extra room to store her personal collectibles. The company refunded 60% out of the total number. This extra room is useful for both entertainment and business conduction for Infranet clients. She received a check worth $5,000 as a sign of gratitude from an old acquaintance but immediately endorsed it to her former University. She published a book incurring $12,933 for travel, $6,223 for publishing, and $1,220 for promotion. Book sales totaled $4,769 for the year 2015. Indira’s husband Devid earned a certificate for $12,300 for required courses, books, and other materials.
Firstly, the issue of excluding the employer-provided housing from Maria’s taxable income needs to be determined. The matter that requires consideration is whether the house is on the business premise, whether it is on the loan of the employer, and whether it was provided on the grounds of enabling her to conduct the employee job requirements. Besides, the question of deductibility of the cost of home addition, or the application of a 40% capitalization needs determination as well. The question of whether the expenses will be treated as personal also needs addressing. There is an urgency to define whether the $5,000 check from Hector is a gift or an income. Furthermore, there are questions regarding Maria’s possession of a cash receipt of the $5,000 gift and her entitlement to a charitable contribution. The issue of whether she is in trade or business of being an author has certain implications, especially in determining the foundation cost associated with such authorship. Finally, the question of Devid’s ability to deduct his $12,300 education expenses needs to be addressed. The above-mentioned matters require thorough consideration to provide a defensible position concerning the deductions and non-deductions for both Maria and her husband.
Can Maria Exclude Employer-Provided House?
Internal Revenue Code, §§ 119 provides conditions for exclusion for an accommodation provided to an employee. The three conditions are as follows: (1) the housing must be furnished for the convenience of the employer; (2) the housing should be on the business premises of the employer; and (3) the employee is needed to accept such housing as a condition of employment. The dispute presented in this case is whether the housing was in the company’s premises, and the evidence shows that there was a business activity taking place on the premises. However, the fact that the house was in a fashionable part of the town implies the violation of the second condition which fails in the first in IRC §§ 119. In the case of Benninghoff v. Commissioner [71 T.C 216] (1978), it was held that a given property had to be an integral part of the business to be considered to be within the “company’s premise.” However, in the current case, the property may not be considered as an integral part of Infranet due to its location and because the company itself does not consider it as their property for doing business. Thus, it is not deductible.
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Is the Cost of Home Addition Deductible or Must Be Capitalized?
Under IRC §§263, no deductions are allowed for the cost of acquisition, construction, improvement, or renovation of a given asset, which is highly expected to last more than one year. The fact that capital expenditures may be the subject of amortization, depletion, or depreciation over the useful life of the property makes them non-deductible expenditures. Thus, Maria’s cost for the extra room should be capitalized, exactly as in the case of the United States v. Gilmore [372 U.S. 39] (1963), in which it was stated that community property expenditures were capitalized and therefore are not deductible.
On the other hand, the company reimbursed her 60% of the $66,000 she spent. Therefore, under §§ 61 (a) the compensation she received from the company is included under her gross income and is deducted accordingly. In Commissioner v. LoBue [351 US 243] (1956), an employee received compensation for personal service and did not report the money as gains. The argument on whether the gains were the compensation or "a proprietary interest in the business" ensued. The court applied Section 22 and concluded that the amount of stock received by LoBue was indeed a taxable event. For the case of Maria, there is no mention of the “propriety interest.” The amounts constitute the compensation for her service. Furthermore, the amount cannot be perceived as a gift too. IRC §§ 102 (a) provides that gross income excludes the value of the property acquired by gift. However, §§ 102 (c) does not exclude from gross income the amounts that an employer has transferred to benefit the employee. Maria did not receive the 60% compensation as a gift from the company. Besides, the fact that the company did not commission the construction of the extra house for its business purposes makes it a personal property of Maria. Thus, the amount should be included in the gross income and deducted accordingly.
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- Is the 5,000 check from Hector a gift or an income?
From the common law, the gratitude check would qualify as a gift and not as an income. However, courts usually use the term “gift” in a colloquial sense. Hector voluntarily executed the transfer of the check with no consideration or compensation for his actions. Arguably, the mere absence of a legal or moral obligation on part of Hector does not establish the check as a gift. There is a gratuitous abandonment of ownership of the check-in favor of Maria and there is no consideration whatsoever. CFR § 1.102-1 (d) states that any amount required to be included in the gross income of a beneficiary under §§ 652, 662, or 668 should be treated as a gift of income from the property. Thus, the $5,000 gift from Hector is includable in Maria’s gross income and taxed accordingly.
The other issue is to consider whether a charitable contribution is an allowed deduction. IRS §§ 501 (c) (3) states that contributions to domestic organizations are deductible as federal charitable contributions on the donor’s federal income tax return. Firstly, the donee, in this case, the University of St. Thomas, was considered eligible under Section 170 of the Internal Revenue Code of 1954. Secondly, the donor had no intention of receiving something in return for her contribution. The case of Hernandez V. Commissioner of Internal [490 U. S. 680] (1989) is applicable because the facts are almost similar. Thus, the $5,000 contribution is deductible.
Is She in Trade or Business of Author; and is Her Objective that of Profit-Making?
The first thing to consider is whether Maria is in trade or business. The answer is negative because Maria is an employee of Infranet and is not in the business of being an author. The second thing to consider is whether book writing is a hobby. IRC § 183 limits deductions for activities one is engaged in and which are not intended for profit. Besides, IRC § 183 applies to partnerships such as that of Maria and her sister. For the expenses to be deducted under IRC §§ 162 or 212, the expenses must relate to the activities, and the objective of profit-making should be present as in the case of Hendricks v. Commissioner [32 F.3d 94] (1994). In the case of a partnership, Rev. Rul. 77-320 holds that IRC § 183 is extendable to partnerships. Also, Treas. Reg. § 1.183-2 (b) provides the nine non-exclusive factors that are used to determine whether someone is engaged in a profit-making business. For the case of Maria, she has not been engaged in the book writing activity for the last three years, but IRC § 183 (e) still allows her to postpone the determination. Thus, under § 162, Maria may claim her expenses as ‘ordinary and necessary. Whether they were ‘reasonable and necessary’ for her and whether the traveling expenses were incurred ‘while away from home’ are not sufficient to exclude them. In Commissioner of Internal Revenue v. Flowers [326 U.S. 465] (1946), it was ruled that expenses on personal interests should be treated as ‘living and personal expenses rather than ‘traveling expenses.’ Thus, Maria has the burden of proving that the book writing activity was for profit-making for her expenses to be excluded.
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Can Devid Deduct His 12,300 Education Expenses?
Devid’s expenses are treated under deductions of educational expenses. CFR 1.162-5 (a) (1) states that expenditures for maintenance or improvement of an individual’s skills to fulfill their employment or other trade or business needs are excludable. IRC § 162 permits employees to deduct expenses incurred as ordinary and business expenses. Devid incurred the expenses to maintain or improve his existing skills in his present position. Even though Tres. Reg. §1.162-5 places conditions for deductibility, evidently Devid has fulfilled these conditions. Reisinger v. Commissioner [71 TC 568] (1979) is a case involving qualifications of expenditures related to education. Reisinger has not been in nursing trade or business for the last five years as argued by the commissioner, yet claimed that her educational expenditures would qualify as ordinary business expenses. It was held that educational expenditures qualified her for the “new” trade or business thus were non-deductible. Besides, the American Opportunity Tax Credit allows additional expenses on the course materials as well as tuition and other required fees. Devid will record these expenses on Form 1098, Tuition Statement. Thus, for the case of Devid, the expenses are deductible.
It appears based on the information provided that the cost of the extra room needs to be capitalized. The housing is not deductible either. Furthermore, the $5,000 check Maria received from Hector must be included in her gross salary and taxed accordingly. The case of expenses related to the books is treated under the profit-making activity, even though she has the burden of proof. Finally, Devid’s educational expenses are deductible.
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