Thursday, May 13, 2004
Friday, May 14, 2004
Following up on this week's TaxProf Blog posts (see here and here) on Newsweek's discussion of the tax consequences of ABC's plan to help the recipients of home makeovers avoid tax on the value of the improvements by characterizing the items as short term rental payments within the meaning of Code section 280A(g), two Tax Profs report that they use very similar fact patterns in their tax books:
From Gail Levin Richmond (Nova), Federal Tax Research (Foundation Press, 6th ed. 2002):
Your client was approached by a movie producer, who wants to film her home. He is interested only in the home's façade; he will film interior shots at the production company's studio. The producer offered your client rent for "camping out" on her lawn. Although he believes he will need only two days, he has offered $7,000 for ten days or $12,000 for twenty days. Find any tax provisions concerning the short-term rental of a home. Discuss how these apply to the time periods involved and to renting the façade only. What advice do you give your client?
From Sam Donaldson (Washington), Federal Income Taxation of Individuals (West, forthcoming 2004):
On the television show "Trading Spaces," neighbors agree to switch homes for 48 hours and completely redecorate one room in the other's house. They are assisted by a professional designer and a carpenter. The designer and the neighbors are limited to a budget of $1,000, furnished by the producers of the show.
Suppose that Ricky and Lucy Ricardo, a married couple, agree to appear on the show with their neighbors, Fred and Ethel Mertz, also married. Ricky and Lucy remodeled the kitchen in the Mertz home with the assistance of designer Laurie Hickson-Smith. Meanwhile, Fred and Ethel remodeled the living room in the Ricardo home with the idle assistance of designer Doug Wilson. Amy Wynn Pastor served as the carpenter for both projects.
Because of Laurie's expert eye and good taste, and because of the Herculean efforts of Ricky and Lucy, the Mertz home increased in value by $5,000. On the other hand, Doug's awkward sense of style and penchant for clashing colors caused the value of the Ricardo home to increase by only $1,000, the cost of the materials used to make the "improvements." Without the skills of Amy Wynn, the Ricardo home might have even lost value!
Assuming that Laurie and Doug both charge their normal customers $10,000 for two full days of advice and assistance, what are the federal income tax consequences to Ricky, Lucy, Fred, and Ethel?