Amended W2 / Bargain Purchase

[bbrownatl]

Being told by a client that an amended W2 is forthcoming due to an in-kind or bargain purchase. Apparently the employee purchased a tract of land from the employer at approx. $30K when the land actually had a fair value of approx. $50K. The amended W2 apparently is now going to include the $20 bargain margin.. or so I'm told. I've not actually received the amended W2 so the whole story could be wrong. (Yes, trust but verify). Does this sound appropriate for the $20K to be included as W2 income? I've just not run across this before. Any input much appreciated.

Much thanks,
Brian

[TaxGuyBill]

It seems logical to me. Your client received something valued at $20,000 from his employer. That would be wages.

[spanel]

Bought for $30,000, not given. I don't know how you can say it was worth XXX but I sold it for this and your going to have to pay taxes on difference employee or not.

If it was given I can understand that would be taxable, but the employee purchased it...

Chris

[TaxGuyBill]

Here is an excerpt from Regulation 1.61-2(d)(2):

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.

https://www.law.cornell.edu/cfr/text/26/1.61-2#d

[FEDUKE404]

Here is an excerpt from Regulation 1.61-2(d)(2):

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.

https://www.law.cornell.edu/cfr/text/26/1.61-2#d

I think to a certain extent the devil is in the details.

Was the employee given a piece of property, as part of compensation, at a discount OR did the employee just purchase a piece of property at a "reduced" cost ??

Also, who determines the "value" of the property, and when ??

And then, maybe Bob works for Joe and one day Joe and Bob worked out a property purchase that had nothing to do with any employee "compensation" ??

FE

[TaxGuyBill]

I think to a certain extent the devil is in the details.
Was the employee given a piece of property, as part of compensation, at a discount OR did the employee just purchase a piece of property at a "reduced" cost ??

I don't have a citation for this handy, but I thought ANY type of payment, benefit, deal, etc. from an employer was "compensation". I've read things where an employer claims something is a "gift", but the IRS and/or courts say no way, anything through an employer is compensation.

[Rapid Robert]

"did the employee just purchase a piece of property at a "reduced" cost"

I think the phrase you are looking for is "arm's length transaction". It's pretty clear this was not an arm's length transaction. For example, would he have sold it to me for $20K below market rate?

"who determines the "value" of the property, and when "

The taxpayer is supposed to self-report, however the IRS can challenge that and have FMV determined, based on facts and circumstances, in an audit or in tax court.

If the employer is honest, they will report the $20K capital gain (plus any gain from $30K proceeds minus their own basis) as income, which it seems they are offsetting in part with deductible employee compensation.