1.

Question 1

A. This is a non-taxable §132 fringe benefit, because it is a No Additional Cost service. The it effectively
costs the hotel chain nothing to provide the benefit (because of the existence of empty rooms), and it is
within the hotel company’s (and employee’s) line of business. This analysis would fail if such benefit
were not extended to all employees under the anti-discrimination rule, but as the employee in question
does not appear to be an executive or anyone receiving special treatment, this shouldn’t be an issue. The
fringe results in no taxable income.
B. §132h extends this benefit to employees’ spouses and dependent children, so this also generates no
income. The non-accompaniment of the employee is a red-herring and is irrelevant.
C. Now it’s probably taxable income, because §132(b)(1) requires that the employee in question perform
services in the course of the line of business the benefit springs from. Because the hotel chain and the
shipping line are distinctly different and seemingly unrelated lines of business, the conglomerate could
extend free shipping services to the employee, but cannot extend free hotel services to the employee.
D. This is a bit trickier. This is a question of qualified employee discount, §132(c), but we appear to have
somewhat unclear information. An employer can only offer that QED non-discriminatorily, as discussed
in part A, and to the extent of the employer’s gross profit percentage on the product being sold at a
discount (§132(c)(1)(A)). While the store only seems to be generating 40% margin overall on its net
business, this product in question may be a high margin product. If the 40% margin is intended to
represent the margin for all products sold by the company, then the discount is only tax free to the 40%
level—$800—and the $1000 discount would include a net taxable income of $200. If, however, this
happens to be a high margin product (like, say, a house brand—Best Buy’s Insignia brand TVs regularly
sell at over 70% margin, and are available to employees at 5% above store cost), then the whole $1000
would be non-taxable as long as it didn’t represent a loss taken by the company.
E. This is a qualified transportation fringe question, under §132(f), and seems to be right at the acceptable
$175 per month line. A corporate officer is probably still an employee, as he does not necessarily have
an ownership stake (although he likely has substantial stock and or stock options; he’s still an
employee). The fact that regular employees pay for their parking is probably fine, because the
antidiscrimination rule does not apply to §132(f) parking.

2. Question 2

A. Mr. Toberich has a convoluted set of tax considerations here. It seems that he has a gambling loss, but
for tax purposes he really doesn’t—the gambling was illegal, unenforceable, and he probably wouldn’t
have been entitled to any winnings because he hadn’t paid for them in the first place. That wouldn’t do
him any good even if it were a gambling loss, because he doesn’t seem to have gambling profits to
offset, and gambling losses are basketted; he couldn’t use them to offset his $40k of ordinary income.
i. It’s a little complicated by the nature of the bearer tickets; if it weren’t known he’d embezzled those
particular tickets we might be treating them as redeemable coupons on bonds. But at the time of this
question, it is known—and the tickets themselves probably no longer would have any value, even
were they in someone else’s hands to redeem.

AGN: 1299152 1 Rothenberg- Personal Tax Fall 2012

 B. This probably doesn’t end up being deductible, despite the general deduction for repayment of
embezzled funds. He’s got no embezzled profits to tax, because he lost on his bets and ended up owing
$50k (that owed money is what he effectively stole); but under Stephens he might be able to deduct
repayment as the cost of doing illegal business, because it’s not under §162 (c) (bribes), (f) (penalties),
or (g) (punitive damages). Just like the Stephens case, this isn’t a fine or penalty he’s paying; he seems
to separately owe New York his money or time, depending on the sentencing. This is a restitution to the
insurance company, which has subrogated recovery rights by way of having reimbursed OTB. Of
course, he doesn’t have a deductible loss at all if he doesn’t actually repay the money, because he hasn’t
actually been worsened. Without significant assets and without lien on his wages (which won’t be from
OTB, as one imagines he’s been fired) he’s probably judgment proof, so he doesn’t even represent a bad
debt to the insurance company. And since he didn’t actually generate any income from his activities that
he should have reported, he’s not subject to IRS lien for unpaid taxes.
C. Because he’s functionally judgment proof, it would also be hard to argue that Toberich has an
appreciable loss to deduct. Further, there’s a very strong argument for extension of Blackman and the
chutzpah doctrine that, even were he to fully repay his embezzlement, he shouldn’t be able to gain a tax
benefit from that—unlike the Stephens defendant, he didn’t pay any taxes on his embezzled money,
because he never really had it; he wagered and lost. My gut, although I can’t give citation for this, is that
criminal losses should be basketted from ordinary income, and only usable to offset criminal gains—
otherwise criminal losses would be a plausible tax shelter! That’s chutzpah 101. It also helps that these
are gambling related, and, were it a legal gambling loss, he wouldn’t be able to offset.
D. In summary, Mr. Toberich is paying his usual income taxes on his $40k of ordinary income, and is
probably never going to actually pay the judgment against him. To the extent that he eventually did, it’s
unlikely he could deduct it at that point because it would be granting him a wholly unjust enrichment.

3. Question 3

A. To begin with, the Judge almost certainly can’t deduct the travel portion of the $3000 overage, to the
extent that it’s a pretty standard commuting expenses, which is a non-deductible personal expense and
not §162(A)(2) travel expense. He’s going to the exact same office he was going to the whole time; he’s
simply been given a seniority bonus now. He does not appear to have a second trade or business that he
operates in in the interim, so he doesn’t have any kind of “triangle travel” where travel from one office
to another would be a deductible expense, and is simply travelling between his normal place of business
and home. There’s nothing exigent about his travel; it’s not a variance that’s part of his business, it is
literally the exact same thing he’s been engaging in the entire time he was working as a non-senior
judge.
B. Nor does he appear to be able to deduct the meal expense. There’s nothing, from what we can tell,
particularly business related about his meals; he’s simply providing for his own sustenance. And despite
conceding that the judge is an employee, his travel and meals aren’t for a business purpose or in pursuit
of trade or business. The judge gets his full salary either way, so he’s performing his senior judicial
services purely for the psychic benefit of continued civil service and the minimal reimbursement.
Further, neither the travel nor the meal expenses are likely to be deductible because his senior judicial
status is basically permanent; travel expenses of this sort must be based on a temporary, limited
engagement
i. To the extent that a court decided this analysis was wrong and allowed the meal deduction, it would
be deductible only at 50%, based on the inherent personal enjoyment/sustenance of eating.

AGN: 1299152 2 Rothenberg- Personal Tax Fall 2012

 C. The judge might be able to deduct his travel and meals at the courthouse in the future were he
maintaining some kind of advisory practice (either academic or legal in character, although god knows
what the conflict rules would be regarding his position on the bench) out of his home. Were he then
maintaining a primary business out of his home, he could make an argument that his senior judgeship
was just a side business, engaged in almost exclusively for the $4000 of fringe reimbursement he
received (and the psychic benefits of staying busy?), since he’s due his entire retired salary either way.
But it’s a weak argument even then, because it would be hard to claim that seeking reimbursement is a
trade or business.
D. In summary, if the judge is considered an employee, these are basically just usual commuting and
sustenance costs. Commuting isn’t excluded as §162(a)(2) temporary travel in the pursuit of business,
and sustenance is a textbook §262 personal living expense.

4. Question 4 – oh yay, like kind exchanges!

Because these are both designated as investment properties, we’re under §1031…
Key: M = Mountainview; L = lakeview
A. Bonnie’s realized gain is $10,000. She received property with FMV of $60k, cash boot of $30k, and
mortgage relief boot of $20k, for a total of $110k received value on her $100k basis. That $10k gain is
also recognized because it is (1) less than or equal to her boot received, and (2) she realized an overall
gain in the transaction. So Bonnie’s realized/recognized gain = M(FMV=60)+ Boot(30cash
+20mortgage relief)-L(adjusted basis=100) = $10k.
B. Will’s realized $20,000 in gain; he received property with a fair market value of $110k, but paid a cash
boot of $30k and a mortgage relief(to Bonnie) boot of $20k, for a total value received of $60k, $20k
more than his $40k basis. However, he doesn’t recognize this gain because he didn’t receive any boot;
he paid it, so this gain remains unrecognized.
C. Bonnie’s basis in Mountainview, because she received boot, is going to be L(basis = 100) – Boot
received(30 cash + 20 mortgage debt relief) + Gain Recognized (10) = $60k.
D. Will’s basis in Lakeview is going to be M(basis = 40) + Boot paid (30 cash + 20 mortgage debt taken
on) = $90k.

5. Question 5

First and foremost, let’s get out of the way any issue of whether these gifts are not gifts; they’re within
the family (totally traditional) and seem entirely detached and disinterested. They’re §102 gifts, subject
to possible §1001 gains.
A. Gains
i. Mr. Donait is realizing $15,000 in debt relief on the loan minus a basis of $30,000 on the stock
(1500 shares at $20 cost per share) for a net loss of $15,000. He has no “gain”.
ii. He is realizing $65,000 in relief of his mortgage, but has a basis of only $50,000 on the cottage, so
he actually does have a gain of $15,000 on the cottage for tax purposes.
iii. I believe he can net these two events, as both are capital assets, for zero total gain.
B. For purposes of donation of the stock to a charity, his gain (which ends up being a charitable deduction)
wouldn’t be relative to his basis—it would be relative to the fair market value of his stock, which at this
point is not $30,000, but instead $45,000 (1500 shares at $30 per share). To that extent his gain would
instead be calculated as $15000 relief – $45,000 FMV = $30,000.

AGN: 1299152 3 Rothenberg- Personal Tax Fall 2012

6. Question 6

A. Because Mr. Deale operates on the cash basis, this is going to basically fall under the same policy rules
as the constructive receipt and economic benefit doctrines—but flipped. The question is basically if he
has constructively lost, or suffered the economic harms of the refunds, prior to actually having to pay
them. Because of the general uncertainty in the eventual financial output, given that not all buyers
request refunds, I do not believe he has.
B. Repaid funds owed are, without question, current expenses and not capital expenses—it’s literally
money changing hands, not a purchase of anything or investment. And it’s probably an ordinary
business expense, both because it’s semi-regular (it’s happened before, it’ll happen again) and because
it’s entirely foreseeable based on the conduct of the seller because it’s mandated under the Act. It’s
probably not excluded under any of the illegal conduct rules, even though Mr. Deale seems to know
perfectly well that he’s failing to comply with a statutory requirement subjecting him to potential
mandatory refund, because it’s neither bribe, nor fine/penalty, nor punitive; if anything, it’s legally
mandated restitution to the original payer, and that’s not a prohibited category (Stephens). Further,
there’s nowhere near the level of public policy concern in allowing this deduction, as it’s basically a
regulatory imposed cost of legal business, not inherently illegal conduct.
C. If Mr. Deale is entitled to this deduction, it has to be in the latter year, when the refund was requested—
mostly because it can’t be in the former year, when the sale agreement was commenced. His transaction,
to the extent that it is voidable at the purchaser’s option upon realization that Truth-In-Lending
disclosures weren’t given, is open and uncertain. No expense deduction could be taken in the first year
because, on cash basis accounting, there’s no payment or constructive requirement to pay because it’s
still optional, and it’s not even guaranteed that a payment will ever be required, since the buyer may be
totally content with his purchase. To the extent that any deduction is available, it must be in the year that
cancellation of the contract is requested, not in the year of the original purpose.
D. But more importantly, on the facts in this question, if the cancellation were in the first year, where is the
actual expense incurred? Mr. Deale presumably pays his taxes on the first year, which includes taxes
on the receipt of the payments he will eventually have to refund. Those books are closed. If the
“deduction” were applied in that year it would be a representation that no actual income had been
generated in that year, which was entirely untrue; while a potential loss was still awaiting him there was
no certainty. His right to a deduction in Year 1 would logically come with his right to not pay Year 1
taxes on those receipts, which of course is a right he doesn’t have, because it would mean he would
never pay taxes until the entire transaction was complete and was un-refundable. But he does have a
real business loss when he pays those receipts back in year 2—and that’s when he gets his deduction,
offsetting the gains in that year from his other business.

AGN: 1299152 4 Rothenberg- Personal Tax Fall 2012