the taxpayer must include in income the value of the insurance protection in excess of the premiums paid by him in Situation 1 or his wife in Situation 2. Further, in Situation 2, the value of the life insurance protection provided by the corporation which is included in the income of the taxpayer is deemed to be transferred by the taxpayer to his wife for purposes of section 2511 of the Code, and subject to the gift tax imposed by section 2501. See Rev. Rul. 76-490, 1976-2 C.B. 300. EFFECT ON OTHER REVENUE RULINGS Rev. Rul. 64-328, Rev. Rul. 66-110, and Rev. Rul. 67-154 are amplified. 26 CFR 1.61-1: Gross income. (Also Sections 3121, 3306, 3402; 31.3121 (a)-1, 31.3306(b)-1, 31.3402(a)-1.) Allowances; Navy physician and medical personnel assigned to U.S. Capitol. Allowances paid under the Legislative Branch Appropriations Acts to the Attending Physician in the U.S. Capitol and medical personnel assigned to assist that individual, all of whom are members of the U.S. Navy who are receiving regular Navy pay, are includible in their gross incomes under section 61 of the Code and subject to income tax withholding. The allowances are excepted from employment for FUTA purposes. Whether the allowances are wages subject to FICA is to be determined by the head of the Department of Navy. Rev. Rul. 78-432 Advice has been requested concerning the federal income and employment tax treatment of the allowances paid under the Legislative Branch Appropriations Acts that are received by the Attending Physician and medical personnel assigned to assist the Attending Physician in the United States Capitol. The Attending Physician and the other personnel are mem bers of the United States Navy who are on active duty assigned to perform services at the Capitol. The Legislative Branch Appropriations Act, 1978, Pub. L. No. 95-94, 95th Cong., 1st Sess. (August 5, 1977), provides, in part, for the payment of allowances of specified dollar amounts per month to the Attending Physician and other medical officers and assistants while on duty in the Attending Physician's office. The allowances are paid by the House Finance Officer to the Attending Physician and medical personnel assigned to assist the Attending Physician and are in addition to their basic Navy pay. These allowances are not paid as a reimbursement for any business expenses. There are no restrictions on the use of the allowances. Section 61 (a) of the Internal Revenue Code of 1954 and the Income Tax Regulations thereunder provide that, except as otherwise provided by law, gross income means all income from whatever source derived. There is no provision of law permitting any portion of these allowances to be excluded from gross income. Accordingly, the allowances paid to the Attending Physician and the medical personnel assigned to assist that individual in the United States Capitol are includible in their gross incomes. Chapters 21, 23, and 24 of subtitle C of the Code charge employers with the duty of withholding federal income tax and collecting and paying federal employment taxes with respect to wages paid to their employees. These provisions are found in section 3402 of the Code, relating to the collection of income tax at source on wages; sections 3102 and 3111 of the Federal Insurance Contributions Act (FICA) relating to the deduction and payment of FICA taxes; and section 3301 of the Federal Unemployment Tax Act (FUTA), relating to the payment of FUTA tax. For purposes of the collection of income tax at source on wages, the term "wages" is defined, with exceptions not here material, as all remuneration for services performed by an employee for an employer. Section 3401(a) of the Code. The term “employer" is defined in section 3401(d) as meaning the person for whom the individual performs the services, or, if the person for whom the individual performs the services does not have control of the payment of the wages for such services, the person having control of the payment of such wages. In the instant case, where the Attending Physician and the medical personnel assigned to assist that individual in the United States Capitol receive regular Navy pay from the Department of the Navy and allowance payments from the House Finance Office, the Department of the Navy is the "employer" with respect to the officers' regular Navy pay, while the Legislative Branch of the United States Government is the "employer," for purposes of the collection of income tax at source on wages with respect to the allowance payments. Accordingly, the allowances paid are subject to the collection of income tax at source on wages by the pay officer making payment of the allow ances. For purposes of deducting and paying FICA taxes, the term "wages" is defined as all remuneration for employment, subject to certain specific exceptions. Section 3121 (a) of the FICA and section 31.3121 (a)-1 of the Employment Tax Regulations. The term "wages," in the case of an individual performing service as a member of the uniformed service on active duty after 1956 includes as such individual's remuneration for such service only the basic pay of the individual as described in section 102 (10) of the Servicemen's and Veterans' Survivor Benefits Act. Section 3121 (i) (2) of the FICA. It is the opinion of the Internal Revenue Service that the allowances paid to the Attending Physician and the medical personnel assigned to assist that individual in the United States Capitol do not constitute "wages" for purposes of the FICA. However, with respect to services performed in the employ of the United States, the determination whether the individual has performed services that are "employment" and the determination of the amount of remuneration for such services that is "wages" is made by the head of the Federal agency having control of such service or the agent or agents designated by that person. Section 3122 of the FICA. A determination made by the head of the agency is final for purposes of the FICA. Therefore, the head of the Department of the Navy, the Federal agency having control of the service in the instant case, has the responsibility for determining whether the allowances paid are "wages" within the meaning of section 3121(i) (2) of the FICA. For purposes of paying FUTA tax, the term "wages" is defined as all remuneration for employment, subject to certain specific exceptions. Section 3306(b) of the FUTA and section 31.3306(b)-1 of the Employment Tax Regulations. However, section 3306 (c) (6) of the FUTA excepts from the term "employment" services performed in the employ of the United States. Accordingly, the allowances paid are not subject to the tax imposed by the FUTA. 26 CFR 1.61-1: Gross income. Whether a taxpayer may utilize a reserve method of accounting under which deposits on nonrefillable containers are credited to a "container deposit reserve" account rather than included in gross income. See Rev. Rul. 78-273, page 163. 26 CFR 1.61-1: Gross income. Effect of the decision of the Supreme Court of the United States in Nash v. United States, 398 U.S. 1 (1970), 1970-1 C.B. 72, on the transferor in situations describing the transfer of accounts receivable, subject to a reserve for bad debts, in the course of a complete liquidation pursuant to sections 332, 334(b) (2), and 336 of the Code. See Rev. Rul. 78-278, page 134. Procedures for certain farmers, nurserymen, and florists to change their method of accounting to the cash receipts and disbursements method of accounting. See Rev. Proc. 78-22, page 499. 26 CFR 1.61-4: Gross income of farmers. Whether the taxpayer sold certain animals to investors involved in a breeding and raising operation. See Rev. Rul. 78411, page 112. 26 CFR 1.61-6: Gains derived from dealings in property. Whether gain or loss is recognized by the beneficial holder of escrowed shares issued in a reorganization under section 368(a) of the Code when those shares are returned to the acquiring corporation to indemnify it for liabilities of the acquired corporation. See Rev. Rul. 78-376, page 149. 26 CFR 1.61-7: Interest. Whether interest paid on obligations of a political subdivision of a state is exempt from tax. See Rev. Rul. 78-260, page 99. Section 71.—Alimony and Separate Maintenance Payments 26 CFR 1.71-1: Alimony and separate maintenance payments; income to wife or former wife. Alimony; lump-sum payment for present value of unpaid installments. A lump-sum payment, representing the present value of the unpaid installments due on a specified principal sum of alimony payable under a divorce decree, that the taxpayer elected to receive after the expiration of 10 years from the date of the first of the installment payments, which qualified as periodic payments by reason of section 71(c)(2) of the Code, is includible in the taxpayer's income in the year received to the extent of 10 percent of the principal sum. Rev. Rul. 78-415 Is any portion of a lump-sum payment of the present value of the remaining installment payments under a decree of divorce includible in income in the year received under the circumstances described below? FACTS Under an agreement incorporated in a decree of divorce, a taxpayer was to receive 900x dollars in alimony in 90 quarterly installments from a former spouse. Under the agreement, the quarterly payments were not subject to contingencies such as the remarriage of the taxpayer, or the death or change in the economic status of either spouse. In the event of the former spouse's death, the former spouse's estate was obligated to pay the remaining unpaid installments. The agreement further provided that upon the death of the former spouse and the expiration of at least 10 years from the date of the first installment payment, the taxpayer could elect to receive a lump-sum payment representing the present value of the remaining unpaid installments. The taxpayer, after the death of the former spouse and the expiration of 10 years from the date of the first installment payment, elected to receive a lump-sum payment of 200x dollars, the present value of the unpaid installments. The lump-sum payment was the only alimony payment received by the taxpayer during the year. LAW AND ANALYSIS Section 71(a) (1) of the Internal Revenue Code of 1954 provides that, if a wife is divorced from her husband under a decree of divorce, the wife's gross income includes periodic payments (whether or not made at regular intervals) received after such decree in discharge of a legal obligation which, because of the marital or family relationships, is imposed on or incurred by the husband under the decree or under a written instrument incident to such divorce. Section 71(c) (1) of the Code provides the general rule that, for purposes of section 71(a), installment payments discharging a part of an obligation the principal sum of which is, either in terms of money or property, specified in the decree, instrument, or agreement shall not be treated as periodic payments. However, section 71 (c) (2) provides in part, that if by the terms of the decree, instrument, or agreement, the principal sum referred to in section 71 (c) (1) is to be paid or may be paid over a period ending more than 10 years from the date of such decree, instrument, or agreement, then (notwithstanding section 71(c) (1)) the installment payments shall be treated as periodic payments for purposes of section 71 (a), but (in the case of any one taxable year of the wife) only to the extent of 10 percent of the principal sum. Section 1.71-1(d) (1) of the Income Tax Regulations provides that installment payments discharging a part of an obligation the principal sum of which is, in terms of money or property, specified in the decree, instrument, or agreement, are not considered "periodic payments" and therefore are not to be included under section 71 (a) of the Code in the wife's income. Nevertheless, section 1.71-1(d) (2) excepts from this rule cases where such principal sum, by the terms of the decree, instrument, or agreement, may be or is to be paid over a period ending more than 10 years from the date of the controlling document. In such cases, installment payments are considered periodic payments for the purposes of section 71(a), but only to the extent that the sum of the installment payments received during the wife's taxable year does not exceed 10 percent of the principal sum. This 10-percent limitation applies to installment payments made in advance, but does not apply to delinquent installment payments for a prior taxable year of the wife made during the taxable year. TITLE 26. - INTERNAL REVENUE. CHAPTER I, SUBCHAPTER A, PART 1.-INCOME TAX; TAXABLE YEARS BEGINNING AFTER DECEMBER 31, 1953 Treatment of property transferred of services In the instant case, the alimony pay- in connection with the performance ments are periodic payments within the meaning of section 71(a) (1) of the Code, but only to the extent provided by section 71(c) (2). The elec AGENCY: Internal Revenue Service, Treasury. ACTION: Final regulations. SUMMARY: This document provides final regulations relating to the treatment of property transferred in connection with the performance of services. Changes to the applicable tax law were made by the Tax Reform Act of 1969 [Pub. L. 91-172, 1969-3 C.B. 10]. These regulations provide necessary guidance to the public for compliance with the law, and affect all employers, employees, and independent contractors with respect to certain forms of compensation. DATE: The regulations are effective for the transfer of property after June 30, 1969, except as otherwise provided. On June 3, 1971, the Federal Register published proposed amendments to the Income Tax Regulations (26 CFR Part 1) under sections 61, 83, 162, 402(b), 403 (c), 403 (d), 404 (a) (5), 421 and 721 of the Internal Revenue Code of 1954, 36 FR 10787. On June 12, 1971, the Federal Register published a notice of corrections. to the proposed amendments, 36 FR 11451. The amendments were proposed to conform the regulations to section 321 of the Tax Reform Act of 1969 (83 Stat. 588) [Pub. L. 91172, 1969-3 C.B. 10, 68]. A public hearing was held on November 3, 1971. After consideration of all comments regarding the proposed amendments, those amendments are adopted as revised by this Treasury decision. On September 20, 1977, the Federal Register published additional proposed amendments to the regulations under section 83 of the Internal Revenue Code of 1954, relating to reporting requirements for nonqualified stock posed amendments are not adopted by options (42 FR 47222). Those pro this Treasury decision and remain outstanding on notice. trusts EXPLANATION OF THE REGULATIONS The regulations in this document concern the treatment of property that is transferred in connection with the performance of services. The basic rules are contained in the regulations under section 83 of the Code. Rules concerning the treatment of transfers of property to or from employees' or from employees' annuity plans are found in regulations under sections 402, 403, and 404 of the Code. Special rules announced in the notice of proposed rulemaking concerning the treatment of transfers of partnership interests under section 721 of the Code are not adopted by this Treasury decision, and remain outstanding on notice. Section 83 and the regulations under section 83 provide that if an interest in property is transferred to any person, by reason of the performance of services, the person who performed those services recognizes compensation income. The time of recognition depends on when the transferred property is substantially vested. Property is substantially vested when it is transferable or not subject to a substantial risk of forfeiture. The concept of "substantial vesting" replaces the concept of "complete transfer", which appeared in the 1971 notice of proposed rulemaking. This change was made in response to public comments. The person who performed the services includes the value of the property (less any amount paid for the property) in gross income when the property is substantially vested. The 1971 notice of proposed rule making stated that the transferor of property in connection with the per formance of services was to be regarded as the owner of such property until the property was substantially vested. The notice also stated that any income from such property, or the right to the use of such property, constitutes additional compensation to the person who performed services. when such income is received or such use is made available. The regulations under § 1.83-1 (a) (1) adopt these rules as stated in the notice. To the extent that dividends paid on substantially nonvested stock are treated as compensation under § 1.83-1 (a) (1), the Internal Revenue Service will no longer follow the decisions in Hamilton Manufacturing Co., 3 B.T.A. 1045 (1926) [Acq. vi-1 C.B. 3 (1927)], Kennington Realty Co., 8 B.T.A. 1030 (1927) [Acq. vii-11 C.B. 21, 40 (1928)], Kennington v. Donald, 50 F.2d 894 (5th Cir. 1931), S. C. Toof ở Co., 21 B.T.A. 916 (1930), Commercial Investment Trust Corporation, 28 B.T.A. 143 (1933) [Acq. xiii-2 C.B. 4, 18 (1934)], aff'd per cur., 74 F.2d 1015 (2d Cir. 1935), W. M. Ritter Lumber Company, 30 B.T.A. 231 (1934) [Acq. xiv-2 C.B. 19 (1935)], A. Levy & J. Zentner Company, 31 B.T.A. 386 (1934), and Gardner-Denver Company v. Commissioner, 75 F.2d 38 (7th Cir. 1935) [Ct. D. 989, xiv-2 C.B. 177 (1935)]. Taxpayers may elect, under section 83(b) and the regulations, to treat property as if it were substantially vested at the time of transfer, even though the property is not transferable and is subject to a substantial risk of forfeiture. For purposes of determining the amount of compensation, the fair market value of the property at the time of taxation is determined without regard to any restriction on the property, except a restriction that by its terms will never lapse. Subject to the requirements of sections 162 and 212, a deduction is allowed to the person for whom serv ices were performed, in an amount equal to the amount of compensation includible in the gross income of the person who provided the services, at the time the compensation becomes includible in the gross income of the person who performed the services. This timing rule is a change from the regulations as proposed in 1971, which allowed a deduction at the time an amount was actually included in gross income. This change was suggested by public comments to the regulations as proposed in 1971. The regulations under section 402 (b), 403(c) and 404 (a) (5) provide rules for the treatment of nonexempt employees' trusts and nonqualified employees' annuity plans that are consistent with the treatment of property under section 83. Thus, where an employer contributes cash to a nonexempt employees' trust or a nonqualified employees' annuity plan, an employee is taxable on the contribution when the employee's rights under the trust or plan are substantially vested. An employee is not taxed on the value of a vested interest in a trust attributable to contributions made to the trust while the trust was exempt from taxation under section 501(a). This is a change prompted by public comments on the rule announced in the 1971 notice of proposed rulemaking, which taxed employees on their entire vested interest in a trust upon the trust's loss of exempt status. Under section 404 (a) (5) an employer is entitled to a deduction for amounts contributed to a nonexempt employees' trust or for the purchase of an annuity under a nonqualified annuity plan, but only when the amounts due to such contributions are includible in the employee's gross income, and only if separate employee accounts are maintained. The regulations under section 404(a) (5) contained in this document clarify the separate account requirement. PUBLIC COMMENTS ON In addition to the changes already mentioned, several changes of less significance were made in response to public comments. Many comments suggested changes that either conflicted with the express statutory language or would have made the regulations unreasonably long and complex. Those suggestions were rejected. DRAFTING INFORMATION The principal author of this regulation was Geoffrey B. Lanning of the Legislation and Regulations Division of the Office of the Chief Counsel, Internal Revenue Service. However, personnel from other offices of the Internal Revenue Service and Treasury Department participated in developing the regulation, both on matters of substance and style. Adoption of amendments to the regulations Accordingly, the following amend ments are hereby adopted: Paragraph 1. Section 1.61-2 is amended by revising paragraph (d) (1), (2), (4) and (5), and adding paragraph (d) (6) to read as follows: § 1.61-2 Compensation for services, including fees, commissions, and similar items. (d) Compensation paid other than in cash-(1) In general. Except as otherwise provided in paragraph (d) (6) (i) of this section (relating to certain property transferred after June 30, 1969), if services are paid for in property, the fair market value of the property taken in payment must be included in income as compensation. If services are paid for in exchange for other services, the fair market value of such other services taken in payment must be included in income as compensation. If the serv ices are rendered at a stipulated price, such price will be presumed to be the fair market value of the compensation received in the absence of evidence to the contrary. For special rules relating to certain options received as compensation, see §§ 1.61-15, 1.83-7, and section 421 and the regulations thereunder. For special rules relating to premiums paid by an employer for an annuity contract which is not subject to section 403 (a), see section 403 (c) and the regulations thereunder and § 1.83-8(a). For special rules relating to contributions made to an employees' trust which is not exempt under section 501, see section 402(b) and the regulations thereunder, and § 1.83-8(a). em (2) Property transferred to ployee or independent contractor. (i) Except as otherwise provided in section 421 and the regulations thereunder and § 1.61-15 (relating to stock options), and paragraph (d) (6) (i) of this section, if property is transferred by an employer to an employee or if property is transferred to an independent contractor, as compensation for services, for an amount less than its fair market value, then regardless of whether the transfer is in the form of a sale or exchange, the difference between the amount paid for the property and the amount of its fair market value at the time of the transfer is compensation and shall be included in the gross income of the employee or independent contractor. In computing the gain or loss from the subsequent sale of such property, its basis shall be the amount paid for the property increased by the amount of such difference included in gross income. |