Revenue Ruling 68-232
Transcript Revenue Ruling 68-232
William owns a building that is leased to Lester’s Machine Shop. Lester requests that
William rewire the building for new equipment Lester plans to purchase. The wiring
would cost about $4,000, but would not increase the value of the building because
its only use is in connection with the specialized equipment. Rather than lose Lester
as a lessee, William agrees to forgo one month’s rent of $1,000 if Lester will pay for
the wiring. Because Lester does not want to move, he agrees. What amount, if any,
must William include in gross income?
William has a lessee, Lester, with the desire to rewire the building in order to accommodate
new equipment. William agrees to allow Lester to rewire the building as long as he pays the
cost in lieu of one month’s rent. In this occasion of William forgoing one month’s rent, it has
to be decided what amount he is to include in gross income. From reviewing federal cases
and codes, it appears that William is to include $1,000 as gross income.
In the case of Commissioner v. Cunningham an agreement was made stating that there will
be no payments of rent, but the lessee will be responsible for the payment of taxes on the
land. The Commissioner argues that the erection of a building as an improvement
constituted rent, but because the building was not erected on a basis that it was to be in
lieu of rent, the Tax Court found that the intent was not determinative. In the case M. E.
Blatt Co. v. United States rent is “a fixed sum, or property amounting to a fixed sum, to be
paid at stated times for the use of property.” It goes on to say that “improvements by lessee
will not be deemed rent unless intention that they shall be is plainly disclosed.” This last
statement confirms that William is to include $1,000 in gross income.
From reviewing knowledge derived from our 2011 Federal Income Tax textbook and the
code sections and cases online, I have reached the conclusion that William is to include
$1,000 for gross income. William made the agreement with Lester that one month’s rent
will be forgone for the payment of the rewiring. This agreement allows Lester to substitute
payment of $1,000 for rent in order to rewire the building. This agreement constitutes
William including $1,000 for gross income.
Jack, a tenured university professor, has been a malcontent for many years at
Rockport University. The university has recently offered to pay $200,000 to Jack if
he will relinquish his tenure position and resign. Jack is of the opinion that tenure is
an intangible capital asset and the $200,000 received for release of the tenure
should be a long-term capital gain. Explain why you agree or disagree.
Jack is in the opinion that having tenure is an intangible capital asset. With this thinking he
believes that the $200,000 the university is offering him as relinquishment of his tenure
position and resignation should be treated as a long-term capital gain. Upon reviewing my
findings of basic concepts, I disagree with Jack that the $200,000 is to be treated as a longterm capital gain. In reviewing supplemental Federal cases, the $200,000 Jack is to receive is
to be treated as a long-term capital gain.
As supplemental information for this problem, I used the tax court memorandum decisions
for Harry M. Flower and Estelle Goldman. While reviewing both decisions I came across a
principle of law stating “that consideration received for the transfer of a contract right to
receive income for the performance of personal services, is taxable as ordinary income.”
Although Jack is under the impression that being a tenured university professor should be
considered an intangible capital asset, my findings declare otherwise. Jack delivers personal
services of teaching as conditions of his employment at the university, and payments
received from the university are treated as ordinary income, as determined by his contract.
The $200,000 option the university is giving Jack is to be treated as ordinary income, which is
similar to how other payments are treated.
Overall, I disagree with Jack’s decision to treat the $200,000 as a long-term capital gain.
Jack’s tenure at the university is not an intangible asset based on his right to receive income
from his personal services. His salary is income from delivering personal services of teaching,
so the payment he is to receive for release is to be treated as ordinary income as well.
Web Baker was hired three years ago by Berry Corporation to serve as CEO for the
company. As part of his employment contract, the corporation had agreed to
purchase his residence at FMV in the event the company decided to fire him. Last
year, Berry, unsatisfied with Web’s performance, fired him and purchased the
residence for $350,000. Berry immediately listed the house with a real estate agency.
Soon after the purchase, the real estate market in the area experienced a serious
decline, especially in higher-priced homes. Berry sold the house this year for
$270,000 and paid selling expenses of $12,000. How should the Berry Corporation
treat the $92,000 loss?
Upon firing an employee from Berry Corporation, Berry had to purchase Web Baker’s
residence, as agreed upon as part of the employment contract. After purchasing the residence
for $350,000 Berry sold the house for $270,000 and paid selling expenses of $12,000.
Altogether Berry incurred a $92,000 loss. The residence is classified as a capital asset under
Section 1221. With the residence classified as a capital asset, Berry Corporation may only
deduct the loss “only to the extent of the capital gain” as per the Internal Revenue Code
In reviewing the Revenue Ruling 82-204, Internal Revenue Code Section 165(f) is referenced
stating “losses from the sale or exchange of capital assets are allowed only to the extent
allowed by sections 1211 and 1212.” The Federal Case Azar Nut Co. v. CIR argues that the loss
resulting from the sale of a residence as per employee contract is fully deductible under the
Internal Revenue Code section 162(a). Azar’s loss would have been deductible had it been an
expense, but since the sale of the residence was not an expense he was unable to deduct the
full amount. In relating Berry Corporation’s current dilemma with Azar’s, the $12,000 selling
expenses is the only thing fully deductible under I.R.C. section 162(a).
After reviewing Code sections, Revenue Rulings, and Federal cases, I have come to the decision
that Berry Corporation is allowed to fully deduct the $12,000 selling expenses incurred with
the sale of the residence. As for the $80,000 loss on the sale of the residence, Berry is only
allowed to deduct a maximum of $3,000 because the loss on the capital asset is to be treated
as a short-term capital loss. The ceiling for deduction in the current tax year for short-term
capital losses is $3,000. In total, Berry Corporation is only allowed to deduct a total of $15,000
from the sale of the residence.
The Morriss Corporation is a very successful and profitable manufacturing corporation. The
corporation just completed construction of new corporate offices, primarily for its top
executives. The president and founder of the corporation, Mr. Timothy Couch, is an avid
collector of artwork and has instructed that the lobby and selected offices be decorated
with rare collections of art. These expensive works of art were purchased by the
corporation in accordance with Couch’s directives. Couch justified the purchase of these
artworks on the premise that (1) they are excellent investments and should increase in
value in the future, (2) they provide an appropriate and impressive office atmosphere
when current and prospective customers visit the corporation’s offices, and (3) the artwork
is depreciable property and the corporation will be able to take sizable write-offs against
income. The Financial Vice President of the corporation has requested your advice as to
whether the works of art are, in fact, depreciable property. Prepare a research
memorandum for the Financial Vice President on this issue.
The Morriss Corporation has purchased expensive works of art as per the president’s
request. Timothy Couch, Morriss Corporation president, believes that these pieces of work
are in fact depreciable property. Couch believes that these art pieces will increase in value
and provide an impressive atmosphere in the office. The previous statement clues one in to
whether or not the artwork will be considered depreciation. Couch believes the work will
increase in value, but if one is to depreciate property it is assumed that with wear and tear,
the property will decrease in value. With that being stated, I inform the Financial VicePresident that the works of art are not depreciable property.
Reviewing Revenue Ruling 68-232, I found that “a valuable and treasured art piece does not
have a determinable useful life,” and therefore “depreciation of works of art generally is not
allowable.” The Tax Court case of Simon v. Comr. mentions depreciation in a way that
supports my answer. In this case it is stated that taxpayers are to use depreciation for assets
“in order to allow them to allocate their expense of using an income-producing asset to the
periods that are benefited by that asset.” The above statements verify that Morriss
Corporation is unable to treat the works of art as depreciable property because it does not
have a determinable useful life, and it is not an income-producing asset.
Overall, I inform the Financial Vice-President that the works of art that are purchased for the
office is not to be treated as depreciable property. The pieces of art do not have a
determinable life, are expected to appreciate in value, and are not income-producing assets.
These art pieces should be treated as a business expense instead of depreciable property.
Charley Long is a truck driver, the 18-wheeler variety. He works for Fishy Co., a seafood
company in Mobile, Alabama, and drives a company truck. Charley’s job entails leaving
Mobile at 4:00 PM each day (five days a week) and delivering fresh fish to restaurants and
wholesale fish distributors in Mississippi and Louisiana. His last stop, in Lafayette, Louisiana,
is generally around 12:00 midnight. It normally takes Charley about five hours to get back
Charley’s routine is varied. Sometimes, he drives straight back to Mobile from Lafayette. On
other occasions, Charley will spend the night in a motel along the road. The Fishy Co. has
no preference as to what Charley does and has given him permission to either drive back or
stay overnight. However, the company does not reimburse him for his food and lodging
When Charley drives straight back to Mobile, Charley will eat one meal. When he sleeps
overnight (either in his cab or in a motel), he will eat two meals, a late dinner and
breakfast. He spends an average of $6.00 for dinner and $4.00 for breakfast. The cost of his
motel averages $50.00 per night. When Charley sleeps in the cab, he generally sleeps about
4-5 hours and then drives on to Mobile.
During the year, Charley incurred the following expense:
Meals incurred on nonstop trips
Meals incurred when: slept in cab
slept in motel
The IRS has disallowed all of the above expenses on the grounds that they are not bona
fide travel expenses but personal expenses. Would you advise Charley to contest this issue?
The IRS has disallowed Charley Long’s meal and lodging expenses that he has incurred due to
his occupation as a truck driver. The expenses Charley incurred are due to layover periods
after completing a day’s work. Unable to complete the 5 hour drive back, he rests for about 4
hours and continues on the road to return home. After reviewing Code sections and Federal
cases, I advise Charley to contest the IRS disallowing his expenses as not being travel
In defense for Charley contesting this issue Internal Revenue Code section 162(a)(2) states
that a deduction is allowed for “all the ordinary and necessary expenses paid or incurred
during the taxable year in carrying on a trade or business,” which includes “traveling expenses
while away from home in the pursuit of a trade or business.” In Federal Case U.S. v. Correll,
the Commissioner of Internal Revenue “has long maintained that a taxpayer traveling on
business may deduct the cost of his meals only if his trip requires him to stop for sleep or
rest.” If Charley Long takes safety as a precaution then resting for 4 hours after midnight is
probable cause for sleep to be required.
Overall, I advise Charley Long to contest the IRS ruling that his expenses were personal and
not business. As a truck driver it is necessary to take all precautions when traveling on the
road at night. With these precautions comes the need to rest before continuing his 5 hour
drive home. In resting he incurs expenses that include meals and lodging. Since he is carrying
on his trade, the above expenses fit as travel expenses that are to be deducted.