In Era of Credit Cards & ATMs, There's an Old Way to Get What You Want

FLOYD, Va. (AP) - They came to Floyd to get back to the land, to be alone, to find community, or to make music. They fit in here because they didn't quite fit in anywhere else.

The two lifestyles had something in common, lack of money. The locals wanted it but didn't have it. The newcomers with the tie-dyed shirts didn't care much about the dollar - some despised it - but, like everyone else, they had to pay the bills.

So together they took something ancient and made it new. It worked, and still does, like this: I'll do this for you if you give that to me. The practice is bartering, defined as trading goods or services with no money involved.

At Dr. Susan Osborne's Barter Clinic, people have brought in firewood, meat and soap to trade for her medical services.

A man dropped by the Harvest Moon natural foods and exotic gifts store, worked for 15 minutes on the grounds, and claimed a few croissants as payment the next day. "He'll show up for our smoothie test run," said Tom Ryan, who runs the two-story, cedar-planked store with its founder, his wife, Margie.

And when Erika Johnson and her husband wanted to open a restaurant and music place downtown, they got the space by offering the seller a $2,000 worth of food and drink at their place, Oddfellas. Payment in full.

I think technically this is very likely taxable income.

"...a gain derived by the employee from his labor and is in consideration of the services rendered by the employee, and is therefore taxable against the employee as income." ...Old Colony Trust Company v. Commissioner, (1929)

If "in consideration of the services rendered"..."therefore taxible....as income."

Hey, I'm not a lawyer!

More:
** Revenue Ruling 79-24 (Non-Cash Benefits), (1979)

2. Facts: Situation 1: In return for legal services, a painter paints the lawyer's house.

Situation 2: An artist paid 6 months rent with a painting.

3. Statutes/Regulations: I.R.C. 61(a) and Regs. 1.61-2(d)

4. Issue: Are bartered services included in gross income?

5. Holding: Yes. If services are paid for other than in money, the fair market value of the property or services taken in payment must be included as income.

6. Notes:

A. Other examples: Dean v. Comm., shareholder realized dividend income from rent-free use of house owned by corporation; Strong v. Comm., lessor of a cattle breeding herd realized rental income when calves born were added to the herd which remained in lessee's possession.

B. Barter Exchange Clubs - even where the services are not contemporaneous, and instead "trade units" or credit is given (like money), the value received is still included in the year of receipt as income.

The famous Rooney.........

** Rooney v. Commissioner, (1987)

2. Facts: An accounting partnership regularly conducted business by receiving goods and services from their clients as payment for their services. This method was called "cross-accounting". Four of their clients became delinquent in their accounts, and so the accountants chose to patronize their businesses, receiving goods and services in lieu of cash as partial payment of the client's delinquent accounts.

However, when reporting this income, the partnership discounted" the value of the goods and services, claiming that although they were charged retail prices for the goods and services, the actual value to them was much less because they were "forced" to take payment in kind to avoid not being able to collect at all from the clients, who were on the brink of going out of business. The partners never told the clients that they were discounting.

3. Statutes/Regulations: IRC 61(a) and Regs 1.61-2(d).

4. Issue: May an accounting partnership discount the value of goods or services received according to the partner's subjective valuation of the goods or services when computing income?

5. Holding: No. The proper measure for the value of ompensation made in other than cash terms is the objectively determined fair market value of those goods or services.

6. Reasoning: The court reasoned that if any subjective valuation was used, then the tax system would be unworkable because the IRS can not be concerned with the subjective state of mind of the taxpayer.

Furthermore, they rejected the argument that the partners were under economic duress because, although the partners claim they would not have paid as much for the services, other customers regularly paid that much.

7. Notes:

A. Fair Market Value is defined in the Estate Tax Regs as "the price at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or sell and both having a reasonable knowledge of relevant facts." Regs. 20.2031-1(b).

However, in Turner v. Comm., the tax court held the value
of non-transferable steamship tickets won by the taxpayer at 2/3 their value because they would not have purchased them for themselves.

B. Bargains - a taxpayer is required to pay tax only on the actual "price" value of the services he obtains, even if they are less than the market value. For example, in Pellar v. Comm., a taxpayer who received intentionally discounted services from a contractor because of a preferential business relationship did not recognize gross income on the
difference between the discount price and the regular price the contractor charged. [Pellar can be reconciled with Rooney only if the test is whether the service provider charged less for his services, or the taxpayer discounted the value of the services independently. In the former, the market differential is not includable as income, while the
latter is.] However, when the service provider intends the discount to be compensation to the taxpayer in return for the taxpayer's goods or services, then the market differential value is includable as income to the taxpayer.

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