And Now For The Bad News...Game Shows

[Ike_Witt]

@Tengu

And Canada. (Not that we have any game shows worth mentioning up here - I think our version of Cash Cab may be it - but it also applies to Canadians’ winnings on American shows (or at American casinos), so…)

It’s time to bring back Definition. And maybe Half Wits.

[Randy_Seltzer]

@Bone

This doesn’t seem quite right. Can you cite this?

Okay, I’m back home with access to my materials.

The the rule that only the first level of the “pyramid” is counted as income shows up in my Taxation lecture notes under the case Old Colony Trust Company v. Commissioner, 279 U.S. 716 (1929). However, turning the page after this case in my old textbook, there is a lengthy note about the history of this doctrine. And as it so often turns out, there is a lot more to it than my professor let on. My textbook is Federal Income Taxation, 6th ed, by McDaniel, McMahon, Simmons, & Polsky. I’m referring to p. 71, section entitled “2. The Tax on a Tax” and I quote briefly from that section:

[illustrative example given]
[…]
The difference between applying one “layer” of tax and “pyramiding” is thus significant. The amount of before-tax gross income to which the tax payment is equivalent may be computed by mathematical formula.[sup]1[/sup] Ironically, the computation in United States v. Boston & Maine Railroad, supra, the companion case to Old Colony, actually involved full pyramiding of each additional tax layer, although the Court apparently was not aware of this. Prior to 1952, the IRS included only the first layer of tax paid on behalf of the taxpayer in taxable income. This policy was reversed by Mim. 6779, 1952-1 C.B. 8, and Mim. 51, 1952-2 C.B. 65, requiring that a taxpayer include in income all federal income taxes paid on his behalf, not only the first layer. These rulings permit the taxpayer and the employer to agree on the mechanism for computing the tax, or on the amount of tax to be paid, thereby simplifying the calculation and avoiding some pyramiding of the tax.
[…]

So it seems that either 1) my professor was wrong, 2) I misheard her or misremember what she said lo these several years ago (though I do very distinctly remember her saying this) or 3) there’s something in those two 1952 rulings that complicates this enough that my professor was comfortable with a blanket statement that income is not “pyramided.”

In any event, I’m not a tax lawyer, though I do enjoy the subject matter. Perhaps our resident tax attorney can weigh in on the current state of affairs?

[Rand_Rover]

Randy, I agree with the rest of the folks above that a full gross-up is only accomplished using the full pyramiding or fully iterative method, not just by paying on the first layer. The idea is that every dollar that (for example) an employer gives an employee is taxable income–it doesn’t matter that the dollar was given for the purpose of paying tax on other income. That textbook excerpt seems to just belabor a slightly dumb result from one case that was probably inadvertent anyway (as textbooks are won’t to do). I could probably find something to cite on this point, but I don’t think it’s really necessary.

Also, while I’m here, lemme correct an incorrect use of the term “gift tax” above. Nothing in this thread is about the gift tax. When a person gives someone a gift, the receiver must include thew gift in their income (unless certain enumerated excceptions apply), so the taxes discussed in this thread are just regular old income taxes. The gift tax is payable by the giver, and it’s a complement to the estate tax (because the value of the estate has been reduced by the gift).