Federal Income Tax Problems/Solutions Latest Update 2025-2026
2B 1. Would the results to the taxpayers in the Cesarini case be different if, instead of
discovering $4,467 in old currency the piano, they discovered that the piano, a Steinway, was the
first Steinway piano ever built and it is worth $500,000? - Answers Yes; Cesarini articulates the
tax consequences of finding a treasure trove: it is taxable in the year in which it is reduced to
undisputed possession. Here, the higher than expected value of the item purchase itself does
not constitute a treasure trove. Provided that this is an arms length transaction, TP would take a
basis in the item equal to the purchase price and then upon sale of the item TP would recognize
a capital gain.
2B 2. Winner attends the opening of a new department store. All persons attending are given
free raffle tickets for a watch worth $200. Disregarding any possible application of I.R.C. § 74,
must Winner include anything within gross income when she wins the watch in the raffle? -
Answers Yes, $200 gross income b/c when the watch crossed the barrier of ownership TP
clearly realized a $200 accession to wealth.
2B 3. Employee has worked for Employer's incorporated business for several years at a salary of
$80,000 per year. Another company is attempting to hire Employee but Employer persuades
Employee to agree to stay for at least two more years by giving Employee 2% of the company's
stock, which is worth $100,000, and by buying Employee's spouse a new car worth $30,000.
How much income does Employee realize from these transactions? - Answers The $100,000
worth of stock results in $100,000 gross income to Employee because when the stock crosses
the barrier of ownership he clearly realizes a $100,000 accession to wealth. The $30,000 car
also results in $30,000 gross income to Employee. Even though the car is given to Wife, it is
given by Employer in compensation for Employee giving up HIS right to leave his job for another
2 years, so it is gross income to Employee. Moreover, Employee is really in control of the
disposition of the car b/c he could have negotiated an alternative deal.
He also has $80,000 from his salary.
2B 4. Insurance Adjuster refers clients to an auto repair firm that give Adjuster a kickback of
10% of billings on all referrals.
(a) Does Adjuster have gross income? - Answers Yes
2B 4. Insurance Adjuster refers clients to an auto repair firm that give Adjuster a kickback of
10% of billings on all referrals.
(b) Even if the arrangement violates local law? - Answers Yes, illegal income is still gross
income.
2B 5. Owner agrees to rent Tenant her lake house for the summer for $4,000.
(a) How much income does Owner realize if she agrees to charge only $1,000 if Tenant makes
,$3,000 worth of improvements to the house? - Answers $4,000 gross income
$1,000 cash
$3,000 in improvements that were agreed to be a substitute for rent. § 109 does not apply here,
because the improvements were required as rent.
See IRC § 109
"Gross Income DOES NOT INCLUDE INCOME (OTHER THAT RENT) derived by a lessor or real
property on the termination of a lease, representing the value of such property attributable to
BUILDINGS ERECTED OR OTHER IMPROVEMENTS MADE BY THE LESSEE.
2B 5. Owner agrees to rent Tenant her lake house for the summer for $4,000.
(b) Is there a difference in result to Owner in (a), above, if Tenant effects exactly the same
improvements but does all the labor himself and incurs a total cost of only $500? - Answers No,
the fair market value (FMV) of the improvements made is still $3,000 and it is still a substitute
for cash rent payments.
2B 5. Owner agrees to rent Tenant her lake house for the summer for $4,000.
(c) Are there any tax consequences to Tenant in part (b), above? - Answers Tenant has $3,000 in
gross income because he has been compensated $3,000 for making the improvement. He may
have only $2,500 income if can deduct the $500 in expenses.
*Treat as if tenant paid landlord $4,000 in rent, then landlord paid tenant $3,000 to make
improvements. PUT CASH IN THE MIDDLE.
Chapter 2 C
2C 1. Vegy grows vegetables in her garden. Does Vegy have gross income when:
(a) Vegy harvests her crop? - Answers No
2C 1. Vegy grows vegetables in her garden. Does Vegy have gross income when:
(b) Vegy and her family consume $100 worth of vegetables? - Answers No, imputed income is
not taxable.
2C 1. Vegy grows vegetables in her garden. Does Vegy have gross income when:
, (c) Vegy sells vegetables for $100? - Answers Yes, $100 gross income
2C 1. Vegy grows vegetables in her garden. Does Vegy have gross income when:
(d) Vegy exchanges $100 worth of vegetables with Charlie for $100 worth of tuna which Charlie
caught? - Answers Yes, $100 gross income. Here, there is a transaction in which the vegetables
and tuna cross the barrier of ownership, thus we treat the transaction as if there was cash in the
middle and apply the FMV of the goods exchanged as income to each respective recipient party.
See Rev. Ruling 79-24: when payment is made in a form other than cash income is assessed
based on the FMV of the property or services taken in payment.
2C 2. Doctor needs to have his income tax return prepared. Lawyer would like a general physical
check up. Doctor would normally charge $200 for the physical and lawyer would normally
charge $200 for the income tax return preparation.
(a) What tax consequences to each if they simply swap services without any money changing
hands? - Answers Each will have $200 in GI. See Rev. Ruling 79-24: When payment is made in a
form other that cash, the amount of income is the FMV of services or property taken in payment.
2C 2. Doctor needs to have his income tax return prepared. Lawyer would like a general physical
check up. Doctor would normally charge $200 for the income tax return preparation.
(b) Does Lawyer realize any income when she fills out her own tax return? - Answers No,
imputed income is not taxable.
3B1 1. Our system of self-assessment requires the taxpayer to make the initial determination of
gift or income, and tax administration procedures give the Commissioner the power to
challenge that decision. If a judicial controversy develops, why is the decision of the trial court
so important, and what role may an appellate court play? - Answers The decision of the trial
court is important because determination of whether a transfer constitutes a gift is highly
dependent on the fact finder's (jury's or, in a bench trial, judge's) assessment of the transfer with
respect to the "donor's" intent. This case by case approach can yield wildly incongruous results
depending on how an individual fact finding body assesses an individual donor's intent, which is
largely based on self serving testimony that the fact finder assess for credibility/truth.
3B2 1. Employer gives all of her employees, except her son, a case of wine at Christmas, worth
$120. She gives Son, who also is an employee, a case of wine, worth $700. Does son have gross
income? - Answers Most likely yes, but it can be argued both ways. The most likely result is
2B 1. Would the results to the taxpayers in the Cesarini case be different if, instead of
discovering $4,467 in old currency the piano, they discovered that the piano, a Steinway, was the
first Steinway piano ever built and it is worth $500,000? - Answers Yes; Cesarini articulates the
tax consequences of finding a treasure trove: it is taxable in the year in which it is reduced to
undisputed possession. Here, the higher than expected value of the item purchase itself does
not constitute a treasure trove. Provided that this is an arms length transaction, TP would take a
basis in the item equal to the purchase price and then upon sale of the item TP would recognize
a capital gain.
2B 2. Winner attends the opening of a new department store. All persons attending are given
free raffle tickets for a watch worth $200. Disregarding any possible application of I.R.C. § 74,
must Winner include anything within gross income when she wins the watch in the raffle? -
Answers Yes, $200 gross income b/c when the watch crossed the barrier of ownership TP
clearly realized a $200 accession to wealth.
2B 3. Employee has worked for Employer's incorporated business for several years at a salary of
$80,000 per year. Another company is attempting to hire Employee but Employer persuades
Employee to agree to stay for at least two more years by giving Employee 2% of the company's
stock, which is worth $100,000, and by buying Employee's spouse a new car worth $30,000.
How much income does Employee realize from these transactions? - Answers The $100,000
worth of stock results in $100,000 gross income to Employee because when the stock crosses
the barrier of ownership he clearly realizes a $100,000 accession to wealth. The $30,000 car
also results in $30,000 gross income to Employee. Even though the car is given to Wife, it is
given by Employer in compensation for Employee giving up HIS right to leave his job for another
2 years, so it is gross income to Employee. Moreover, Employee is really in control of the
disposition of the car b/c he could have negotiated an alternative deal.
He also has $80,000 from his salary.
2B 4. Insurance Adjuster refers clients to an auto repair firm that give Adjuster a kickback of
10% of billings on all referrals.
(a) Does Adjuster have gross income? - Answers Yes
2B 4. Insurance Adjuster refers clients to an auto repair firm that give Adjuster a kickback of
10% of billings on all referrals.
(b) Even if the arrangement violates local law? - Answers Yes, illegal income is still gross
income.
2B 5. Owner agrees to rent Tenant her lake house for the summer for $4,000.
(a) How much income does Owner realize if she agrees to charge only $1,000 if Tenant makes
,$3,000 worth of improvements to the house? - Answers $4,000 gross income
$1,000 cash
$3,000 in improvements that were agreed to be a substitute for rent. § 109 does not apply here,
because the improvements were required as rent.
See IRC § 109
"Gross Income DOES NOT INCLUDE INCOME (OTHER THAT RENT) derived by a lessor or real
property on the termination of a lease, representing the value of such property attributable to
BUILDINGS ERECTED OR OTHER IMPROVEMENTS MADE BY THE LESSEE.
2B 5. Owner agrees to rent Tenant her lake house for the summer for $4,000.
(b) Is there a difference in result to Owner in (a), above, if Tenant effects exactly the same
improvements but does all the labor himself and incurs a total cost of only $500? - Answers No,
the fair market value (FMV) of the improvements made is still $3,000 and it is still a substitute
for cash rent payments.
2B 5. Owner agrees to rent Tenant her lake house for the summer for $4,000.
(c) Are there any tax consequences to Tenant in part (b), above? - Answers Tenant has $3,000 in
gross income because he has been compensated $3,000 for making the improvement. He may
have only $2,500 income if can deduct the $500 in expenses.
*Treat as if tenant paid landlord $4,000 in rent, then landlord paid tenant $3,000 to make
improvements. PUT CASH IN THE MIDDLE.
Chapter 2 C
2C 1. Vegy grows vegetables in her garden. Does Vegy have gross income when:
(a) Vegy harvests her crop? - Answers No
2C 1. Vegy grows vegetables in her garden. Does Vegy have gross income when:
(b) Vegy and her family consume $100 worth of vegetables? - Answers No, imputed income is
not taxable.
2C 1. Vegy grows vegetables in her garden. Does Vegy have gross income when:
, (c) Vegy sells vegetables for $100? - Answers Yes, $100 gross income
2C 1. Vegy grows vegetables in her garden. Does Vegy have gross income when:
(d) Vegy exchanges $100 worth of vegetables with Charlie for $100 worth of tuna which Charlie
caught? - Answers Yes, $100 gross income. Here, there is a transaction in which the vegetables
and tuna cross the barrier of ownership, thus we treat the transaction as if there was cash in the
middle and apply the FMV of the goods exchanged as income to each respective recipient party.
See Rev. Ruling 79-24: when payment is made in a form other than cash income is assessed
based on the FMV of the property or services taken in payment.
2C 2. Doctor needs to have his income tax return prepared. Lawyer would like a general physical
check up. Doctor would normally charge $200 for the physical and lawyer would normally
charge $200 for the income tax return preparation.
(a) What tax consequences to each if they simply swap services without any money changing
hands? - Answers Each will have $200 in GI. See Rev. Ruling 79-24: When payment is made in a
form other that cash, the amount of income is the FMV of services or property taken in payment.
2C 2. Doctor needs to have his income tax return prepared. Lawyer would like a general physical
check up. Doctor would normally charge $200 for the income tax return preparation.
(b) Does Lawyer realize any income when she fills out her own tax return? - Answers No,
imputed income is not taxable.
3B1 1. Our system of self-assessment requires the taxpayer to make the initial determination of
gift or income, and tax administration procedures give the Commissioner the power to
challenge that decision. If a judicial controversy develops, why is the decision of the trial court
so important, and what role may an appellate court play? - Answers The decision of the trial
court is important because determination of whether a transfer constitutes a gift is highly
dependent on the fact finder's (jury's or, in a bench trial, judge's) assessment of the transfer with
respect to the "donor's" intent. This case by case approach can yield wildly incongruous results
depending on how an individual fact finding body assesses an individual donor's intent, which is
largely based on self serving testimony that the fact finder assess for credibility/truth.
3B2 1. Employer gives all of her employees, except her son, a case of wine at Christmas, worth
$120. She gives Son, who also is an employee, a case of wine, worth $700. Does son have gross
income? - Answers Most likely yes, but it can be argued both ways. The most likely result is
