Thursday, April 13, 2006

Tax Quiz

Nell and I live in an apartment owned (basically) by my university. The university rents the apartments they own to students, faculty, and staff at a rate below fair market value. In other words, we pay $100-200 less per month than our next door neighbors. So the question is this: are we taxable under the IRC for the difference between what we pay in rent and what the fair market rental rate would be if the university did not provide us a discount?

If the question were should we be taxed on that amount, the answer is simple: of course we should. We experience an increase in wealth by virtue of having more resources available for non-rent purposes. Stated that way, the question seems to be one of imputed income, which is not taxed under the IRC. I think I've discussed imputed income before in a Tax Tuesday post, so I'm not going to rehash it here.

But our rental discount also sounds a lot like employer-provided housing, which can be taxable if it doesn't meet the "convenience of the employer" test outlined in Benglia v. CIR and later codified by Congress. If I were a faculty or staff member, it seems like I would be taxable on the difference. But there is no employer-employee relationship between myself and the school. So what is the result?

First person to correctly answer the question gets a prize (probably a bag of M&Ms), but the winning entry must provide authority for the answer.


Blogger warm fuzzy said...

The answer is "no" you do not have to pay taxes on the difference.

If my dad rents my house to me for $100 less than he would to anyone else, do I have to pay taxes on that. No, and why should I? Its his perogative to rent the house to me for however much he wants. Similarily, the University has the right to rent thier apartments to students for whatever they want.

I have this on the highest authority: manda-logic.

PS- peanut m&ms are my favorite, but I love all kinds.

1:02 PM  
Blogger warm fuzzy said...

no one else is even guessing. I should win for trying if nothing else (not that I'm not confident that my answer is 100% correct).

2:56 PM  
Blogger Fishfrog said...

If no one else proffers an answer, Warm Fuzzy will win by default. That's not to say that WF is wrong, just that it's possible to be more right. Contest closes tomorrow morning when I wake up.

4:46 PM  
Blogger Matt said...

in your para 2 you say that the benefit to you is increase in wealth by virtue of having more resources, making the benefit imputed income "which is not taxed under the IRC."

In your para 3 you say that employer-provided housing is taxable. You are not an employee of the university (among other things they lack a right of control over ya). So you aren't taxed under the employer-provided housing bit.

So you are not taxed, and my authority is your post and my hazy memory of a 1L memo.

5:37 PM  
Blogger Xeno said...

I refuse to participate since I was unfairly judged against in the last contest. That and... I don't know the answer.

6:42 PM  
Blogger warm fuzzy said...

the law school people CLEARLY have an unfair advantage. I was willing to dive in and use logic to come up with an answer. I totally should win.

8:33 PM  
Anonymous c said...

Montana v. Crow Tribe of Indians
523 U.S. 696 says no tax.

9:05 PM  
Blogger Fishfrog said...

I couldn't be more pleased with the participation! So the results:

C was the only one to actually provide a citation. And it is to a tax case. The case though, says nothing about the question I asked and instead addresses taxing mineral rights or some such thing. For directing me to irrelevant precedent, C is disqualified.

WF and Matt tie for the win. Both got the correct answer, but neither provided a compelling explanation.

Interestingly, I couldn't find a case on point. The reason, I think, is two-fold. First, either its considered imputed income and the courts just don't talk about that much because imputed income has never been taxed.

Secondly, and I think more convincingly, is that if no employer/employee relationship exists, the decrease in my rental price cannot be compensation for work. And if it's not that, it's hard to imagine a true arm's-length transaction occurring. Thus, because the parties are at not at arm's length, the discount is probably best characterized as a gift, and as long as it doesn't exceed $10k per year, the gov't isn't going to care.

The gift treatment wouldn't fit if the university deducts the discount as a business expense, though. But because I'm not an employee and I'm performing no work for the school, I can't imagine justifying the deduction.

So in conclusion, it is not taxed, it should be taxed, and Matt and WF both get candy.

6:52 AM  
Blogger warm fuzzy said...

whoo-hoo! Tax is awesome!

8:12 AM  

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