Question

With reference to relevant legislation and case law, determine if the following scenarios give rise to income for tax purposes:

1. John is a pensioner and swapping his surplus free range eggs valued at $150 (for the year) with his neighbour Alex for surplus vegetables grown in his home garden.

ANSWER: ** Answer box will enlarge as you type

David is a builder and helping John at weekends to build his home, doing so on the basis that David can have John’s caravan towed trailer (which cost him $10,500 on 1 January 1997) when John move into his current home. Assume the value of the David’s work was $11,000 and the caravan had a market price of $12,000 when John handed it over on 1 January in the current income year. (5 marks

Answer 1

According to IRS regulations, these transactions are termed as Barter exchanges.

The IRS reminds all taxpayers that the fair market value of property or services received through a barter is taxable income. Both parties must report as income the value of the goods and services received in the exchange.

1. Barter exchanges. A barter exchange is an organized marketplace where members barter products or services. Some exchanges operate out of an office and others over the Internet. All barter exchanges are required to issue Form 1099-B, Proceeds from Broker and Barter Exchange Transactions, annually. The exchange must give a copy of the form to its members and file a copy with the IRS.
   
2. Bartering income.  Barter and trade dollars are the same as real dollars for tax reporting purposes. If you barter, you must report on your tax return the fair market value of the products or services you received.
   
3. Tax implications. Income is taxable in the year when barter exchange occurs. This exchange may owe income taxes, self-employment taxes, employment taxes or excise taxes on their bartering income.
   
4. Reporting rules: Barter Income should get reported on Form 1040, Schedule C, Profit or Loss from Business and we might be able to deduct some expenses which are incurred to perform this exchange.

Conclusion:

(a) For John: Fair value of grown vegetables in home garden of Alex is taxable in the hands of John.

For Alex: Fair value of eggs i.e. $150 is taxable in the hands of Alex.

(B) For John: Fair value of Home care service i.e. $11,000 from David is taxable in the hands of John.

For David: Fair value of Caravan i.e. $12,000 received from John is taxable in the hands of David.