Problem - Rule of Law:

For the this Homework, we will consider the scope of the compensation inclusion under § 61(a)(1). All compensation for services rendered must be included in gross income under § 61(a)(1) unless an express statutory exclusion applies. Though there were a few common law doctrines that developed in the early days of the income tax, which allowed some forms of compensation paid in kind to escape taxation (such as the convenience-of-the-employer doctrine that was eventually codified in § 119 in 1954), Congress made its intent absolutely clear in 1984 when it enacted § 132 that no common law exclusions remain. To exclude compensation from gross income, the payee must satisfy an express statutory exclusion.

We will consider two statutory exclusions provisions, §§ 119 and 132, as well as the rules in § 83 that apply to property paid in kind as compensation that is subject to a substantial risk of forfeiture. If you wish to learn about other compensation exclusions, you can explore the exclusions for the rental value of parsonages (§ 107), certain combat zone compensation of members of the Armed Forces (§ 112), so-called Cafeteria Plans (§ 125), dependent-care assistance programs (§ 129), adoption assistance programs (§ 137), employer-provided life insurance (§ 79) and more.

Questions:

What are the tax consequences for Employee Erin in each of the following?

1. In Year 1, Erin receives shares of corporate stock from her employer-corporation with a FMV of $200 for no consideration (i.e., she pays nothing for the stock shares). No restrictions attach to Erin's receipt and continued ownership of those shares. The stock has a FMV of $300 at the end of Year 3, but she does not sell until Year 5, when she sells for $500.

2. Same as 1., except that the stock certificates are stamped with a legend that states that, should Erin quit or be fired for cause before the end of Year 3, she must forfeit the stock back to her employer-corporation. Erin does not make the § 83(b) election. The stock has a FMV of $300 at the end of Year 3, but she does not sell until Year 5, when she sells for $500.

3. Same as 2., except that Erin decides to make the § 83(b) election. The stock has a FMV of $300 at the end of Year 3, but she does not sell until Year 5, when she sells for $500. What if, instead, the shares lose value and she is able to sell for only $100 in Year 5?

4. Same as 3., except that Erin is fired for cause in Year 2 before the stock vests, and she must forfeit the stock at that time.