Question: 1) Magnus, a high school teacher, enjoys hang gliding in his spare time. Magnus lives near Briarwood Cliffs, a notable geographic feature in his state located in the City of Avalon. Briarwood Cliffs has become such a popular destination for hang gliding enthusiasts that the City of Avalon recently created a special improvements district (the "District") to manage the area. The District has plans to undertake construction of several improvements to the area, including glider launching facilities and related supporting elements (e.g.
parking areas, etc.). All such facilities will be available to the general public. The District plans to issue bonds (authorized under state law) to fund a portion of the planned improvements (the interest and principle payments on the bonds will be funded through a special District property tax assessment along with public admission and user fees). Magnus is intrigued by this bond offering and is considering investing. However, he requires clarification of the tax status of the interest he would earn on this investment.
Primary Issue: Will the interest Magnus earns on any investment in District bonds be exempt from federal income taxation? Hint: Start with IRC §103 and the regulations thereunder.
2) Gaylord is a recently retired major league baseball pitcher. After a long and successful career, Gaylord decided to write his memoirs about his many years in professional baseball. Gaylord really doesn't need the money he expects to make from publishing his memoirs (he has a lush retirement package) and intends to direct any royalties he receives from the book to his favorite qualified charity, the Aardvark Animal Rescue (yes - this is an actual §501(c)(3) organization). In this regard, Gaylord is vaguely aware there may be tax issues associated with the royalty arrangement he is contemplating. While Gaylord is presently in negotiations, when he approaches you for tax advice, he has not signed a book contract with any publishers.
Primary Issue: Can Gaylord avoid taxation on any royalty income he directs to a charity? If not, can he claim some sort of tax deduction? Which would you advise him is a better solution in most circumstances? Hint: Review Helvering v. Horst (61 S. Ct. 144) and Walter J. Moore (TC Memo 1968-110). Also consider Rev. Rul. 71-33, 1971-1 C.B. 30.