Source: https://www.globallegalinsights.com/practice-areas/blockchain-laws-and-regulations/14-u-s-federal-income-tax-implications-of-issuing-investing-and-trading-in-cryptocurrency
Timestamp: 2020-01-22 12:30:18
Document Index: 709948955

Matched Legal Cases: ['§ 1', '§ 351', '§ 721', '§ 1033', '§ 864', '§ 988', '§ 1', '§1', '§ 863', '§ 861', '§ 861', '§ 861', '§ 451', '§ 882', '§ 1', '§ 61', '§ 1', '§ 1', '§ 865', '§ 863', '§ 367', '§ 7874', '§ 482', '§ 1291', '§ 865', '§ 7201', '§ 512', '§ 512', '§ 1', '§ 475', '§1']

Blockchain Laws and Regulations | 14 U.S. Federal Income Tax implications of issuing, investing and trading in cryptocurrency | GLI
Home Practice areas Blockchain & Cryptocurrency Regulation 2020 14 U.S. Federal Income Tax implications of issuing, investing and trading in cryptocurrency
Blockchain & Cryptocurrency Regulation 2020 | 14 U.S. Federal Income Tax implications of issuing, investing and trading in cryptocurrency
Notice 2014-21: In general
Initial coin offerings/first token sales
Hard forks, soft forks, airdrops and awards/rewards
Use of a foreign jurisdiction for token issuance
Investing, trading and dealing in cryptocurrencies
Cryptocurrency is often issued in an initial coin offering (“ICO”) as “coins” or “tokens.” Broadly, tokens can be classified as “utility tokens,” which provide users with access to the blockchain platform developed by the issuer or products or services provided by the issuer on the blockchain platform, or as “security tokens,” which represent certain rights with respect to an entity, either as equity or debt. Furthermore, there are so-called “intrinsic” or “convertible” cryptocurrencies that generally are used as a medium of exchange (e.g., Bitcoin, Litecoin, etc.) or give access to a platform on which other blockchain projects are built (e.g., Ether, Neo, Eos, etc.). Some cryptocurrencies, such as Ether, can be viewed as hybrid tokens that can be used as a medium of exchange for ICOs of other cryptocurrencies, but also allows smart contracts for other blockchain projects to be built on its platform.
This chapter is intended as a primer on certain U.S. Federal Income Tax implications of cryptocurrency transactions and structures. Because of the dearth of authorities directly on point, much of the discussion below is based on analogies to the tax treatment of other property where the rules are more developed or on the application of the language of statutory provisions, regulations, and other authorities.
While the IRS has recently promised that additional guidance will be forthcoming, the only relevant formal guidance issued by it to date is Notice 2014-21.1 The basic rule of Notice 2014-21 is that cryptocurrency is property for United States federal income tax purposes and not “currency.” Therefore, taxpayers may not use cryptocurrency as a functional currency for purposes of Internal Revenue Code (“IRC” or “Code”) Section 985, and transactions in cryptocurrency would never be Section 988 transactions.2 Further, the rules applicable to foreign currencies do not apply to transactions in cryptocurrencies.3
More troubling for taxpayers is that, if cryptocurrencies are property, every disposition of cryptocurrency is a disposition of property. Each time cryptocurrency is purchased for fiat currency (such as U.S. dollars), basis must be recorded and tracked, and each time a chunk of cryptocurrency is disposed of, gain or loss is recognized.4
One problem with Notice 2014-21 is that it appears to be limited by its terms to what we would call “cryptocurrency,” rather than to utility tokens or equity tokens. It seems to apply only to cryptocurrency that can be used to pay for goods or services or that is held for investment purposes, and focuses on cryptocurrency that has an equivalent value in fiat currency, or that acts as a substitute for fiat currency (referred to as “convertible” cryptocurrency). The remainder of this article assumes that all tokens are property and not money and discusses U.S. federal income tax issues only unless otherwise indicated.
Startup companies may use ICOs as a means of raising funds. An ICO is the issuance of newly generated tokens for other cryptocurrencies or, less commonly, for fiat currency. Issuers can offer non-functional tokens, the proceeds from which are used by the issuer to develop its platform, product or services. Once the platform or product is fully functional, token purchasers can use the tokens for accessing the platform, product or services developed by the issuer. Alternatively, unless token purchasers are subject to a “lock-up” period, they can be exchanged for other tokens or fiat currency.
Less commonly, companies issue tokens that represent an ownership interest in the company or other property, or that are intended simply as a means of exchange.
Tax implications of ICOs for domestic issuers
The issuance by a U.S. issuer of utility or convertible tokens for cash, tokens, or other property may be treated as a sale (or, potentially, a license) of property or a promise to perform services in the future. As discussed below, in many of these situations, a domestic issuer will recognize income upon the issuance of the tokens or, potentially, later, when the services are performed.
Character and source of income
The U.S. tax implications to the issuer of tokens depend on whether income from their issuance will be characterized as sales, royalty or services income, and on the source of such income (i.e., the jurisdiction in which it arises for U.S. tax purposes).
In 1998, the IRS issued Treas. Reg. § 1.861-18 (also known as the “Software Regulations”), which provide a framework for determining the character of income from the transfer of intangible property. Although the Software Regulations were issued long before blockchain technology was even contemplated, they logically can be used as a starting point for determining the character and source of income from a cryptocurrency transaction.
Under such regulations, income from the transfer of intangible property is classified as: (1) the sale of copyright rights; (2) the license of copyright rights; (3) the sale of a copyrighted article; (4) the lease of a copyrighted article; (5) the provision of services related to a computer program; or (6) the provision of know-how related to a computer program.5
(a) Treatment of transfer of tokens as a sale
Generally, the issuance of tokens should not result in the transfer of copyright rights because token purchasers generally do not acquire unfettered rights with respect to the underlying blockchain technology. While tokens can provide the right and ability to build upon a blockchain platform, this right would appear to be more in the nature of a service or a license rather than a right to prepare a derivative work. For example, creating a private blockchain on the Ethereum platform requires the installation of “Geth.” A private blockchain created with Geth is a new asset facilitated by Ethereum, but is not a derivative of Ethereum.
However, the issuance of tokens might be analogized to a sale of intangible property that has indicia of a copyrighted article in that the purchaser acquires all of the benefits and burdens of an asset that is separate from the underlying blockchain platform and that can be used in perpetuity.6 In that case, the character of the income from the sale of a token will depend upon the character of the token in the hands of the transferor. It is unlikely that newly issued tokens qualify as capital assets in the hands of the issuer. Since newly issued tokens are created with the intention of selling them, they could be viewed as inventory.
If the tokens are inventory and were “produced” by the issuer, such income would be sourced based on the location of production of such inventory.7 However, the place of “production” of the tokens might not be at all clear. In a situation where the tokens are issued based on open-source technology, with all the actual development to come afterward, the jurisdiction of the issuer might be the place of production. However, the place where the concept was created or tested or where the programmers sit might be a more realistic alternative.
(b) Treatment as a license
The issuance of a token could, to some extent, be viewed as including a license to use the issuer’s blockchain platform (e.g., to access content on the platform or to build a separate blockchain project keyed off the issuer’s blockchain IP, although this might also be viewed as a service (as discussed below)).8 To the extent the issuance is treated as a license, the amount received for the tokens would be considered a royalty, which would be ordinary income, and the source of the royalty would be the place where the token is used, which may not be easily determined.9
(c) Treatment as a service
Potentially, the consideration received for the issuance of tokens could be treated as compensation for the provision of services provided by the issuer.
This treatment could apply to pre-ICO tokens where the issuer accepts consideration from the investors subject to an obligation to use the consideration to develop the issuer’s technology, although the issuer’s efforts generally would be considered services only if the token holders would have an ownership interest in the IP that is developed, which is unlikely in most cases. Any income from services would be ordinary income and generally would be sourced to the location where the services are performed.10 Services performed by individuals generally are sourced to the place where they are located when the services are performed.11 If equipment is involved in the performance of services, the location of the equipment is also considered.12
A blockchain platform may also provide automated services by acting as an online intermediary linking customers with providers or by hosting or streaming information or content that can be accessed by token holders. In such a case, sourcing the revenue will present more than the usual challenges for sourcing income because of the decentralized nature of blockchain technology.
Timing of recognition of income by issuers
Generally, income must be recognized immediately upon receipt of consideration for the transfer of property or the provision of services – i.e., in the case of an ICO, at the time of the issuance. However, in certain limited circumstances, an accrual basis issuer can defer taxation on at least a portion of the amount received to the succeeding taxable year if the receipt of the consideration is treated as an advance payment for future goods or services (e.g., for pre-functional tokens).13 The sale of pre-functional tokens or an agreement to sell future tokens (also known as Simple Agreement for Future Tokens (SAFT)) could also potentially be viewed as a forward contract to develop the technology and deliver the functional tokens in the future. Generally, under the common law open transaction doctrine, the execution of a forward contract will not be a taxable event until the transaction is closed.14 However, if the governing documents do not contain a refund provision, it is highly likely that the amount received by the issuer would be considered income at the time received.
Regardless of when the income is recognized, a U.S. issuer should be able to offset such income with operating losses (or depreciation or amortization of capitalized expenses) incurred prior to issuance to the extent eligible to be carried forward. For foreign issuers, operating losses can be carried forward only if the issuer files timely and accurate U.S. income tax returns for the years in which the losses were incurred.15
Tax consequences to issuer of use of tokens by purchasers
Notice 2014-21 provides that a taxpayer who receives cryptocurrency as payment for goods or services must include in gross income or gross receipts the fair market value of the tokens, measured in U.S. dollars as of the date the tokens are received. Thus, if the issuer provides a service that is accessed by using tokens it had previously issued, the issuer would include, in income, the fair market value of the tokens at the time of their use. The issuer’s tax basis in the tokens received in exchange for the services would be the fair market value of the tokens at the time of their receipt.
The purchase of tokens in an ICO using fiat currency should not be a taxable event for the purchaser. However, if tokens are purchased using another cryptocurrency, a U.S. taxpayer would recognize gain or loss equal to the difference between the value of the tokens purchased and the tax basis in the cryptocurrency exchanged therefor.
A purchaser’s basis in the tokens acquired would be their purchase price in U.S. dollars (or translated into U.S. dollars at the time of purchase if purchased using another cryptocurrency).
Sale or use of tokens
If tokens are sold or transferred in exchange for goods or services, the transaction generally will be a taxable event and will give rise to capital gain or ordinary income depending on their character. The amount of the gain or loss will be the difference between the token holder’s basis in the tokens sold or exchanged and the amount of fiat currency or the fair market value of property or services receives for them.16
If the tokens were held as an investment or for trading, then the gain or loss generally should be capital gain or loss, and would be short-term or long-term depending on whether the tokens were held for more than one year. If the tokens were held by an individual as personal-use property and not for investment (e.g., to access media, to shop or for comparable purposes), such property would be a capital asset and any gain (but not loss) recognized on the disposition of such cryptocurrency generally would be treated as described above.
Furthermore, although Notice 2014-21 is silent with respect to the use of tokens in transactions that might otherwise result in non-recognition, presumably the language in Q&A # 1 to the effect that, “general tax principles applicable to property transactions apply to transactions using virtual currency” would cover this situation. Accordingly, the contribution of tokens or cryptocurrency to a corporation in exchange for its stock or to a partnership in exchange for a partnership interest should not result in any gain or loss if a transfer of any other property would result in non-recognition (e.g., pursuant to IRC § 351 or § 721).
If the tokens are not held as capital assets or Section 1231 assets (e.g., if they constitute inventory), and do not qualify for tax-free treatment under a non-recognition provision, the token purchaser would recognize ordinary gain or loss on their sale or exchange. To date, there is no de minimis exception for small transactions, and a significant issue for token holders is how to determine the basis of the particular tokens used and the value of the property or services received in return.17
The term “airdrop,” as used currently in an evolving cryptocurrency jargon, means a project founder’s distribution of tokens, coins or other digital assets to holders of existing cryptocurrency without any consideration from the token recipient. Generally, airdrops occur when a new blockchain project distributes free tokens to existing holders of certain cryptocurrency such as Bitcoin and Ethereum. Issuers may also issue tokens as rewards for using an app, purchasing merchandise, referring customers, watching advertisements, etc.
A “hard fork” is a material change to a blockchain-system protocol that generally (but not always) results in a split of the existing blockchain protocol pursuant to which the nodes running on the existing version of the blockchain are no longer accepted in the updated version. As a result, a new blockchain is created that follows the updated rules, while the pre-split blockchain that follows the legacy rules still exists. A holder of a pre-split cryptocurrency generally receives additional cryptocurrencies that are generated by the newly created blockchain. For example, Bitcoin hard forks that occurred in August 2017 and October 2017 created a split in the existing Bitcoin blockchain and pre-split Bitcoin holders received Bitcoin Cash and Bitcoin Gold, respectively.
A soft fork is a backward-compatible method of upgrading existing nodes. If a majority consensus is reached for the new rules, then only the new chain is followed. In soft forks, holders may also be required to take affirmative action to get access to or convert their outdated tokens (which may be worthless) for the upgraded tokens.
Generally, a U.S. taxpayer’s gross income means all income from whatever source derived,18 and the Supreme Court defined gross income as an undeniable accession to wealth over which the taxpayer has complete dominion.19 Thus, it is likely that the IRS would consider receipt of tokens by a taxpayer via hard forks, airdrops or rewards as undeniable access to wealth and therefore taxable.20 However, it may be difficult to determine the time (if at all) as of which a taxpayer can be considered to have complete dominion over such tokens. For example, most airdrops target owners of Ethereum. However, an Ethereum owner will not have dominion and control over an airdropped token unless such owner’s Ethereum is kept on an ERC-20 compatible wallet that supports Ethereum and provides private keys. Thus, if an owner’s Ethereum is held on an exchange, s/he will not have any access to (and may not even be aware of) the airdropped tokens.21 Similarly, at the time of the hard fork of Bitcoin Cash from Bitcoin, holders were provided with an equal number of Bitcoin Cash; however, such holders might not have had dominion and control over the Bitcoin Cash until their wallets were upgraded to support Bitcoin Cash.
Tokens received in hard forks, airdrops, or as rewards generally must be included in income at their fair market value. Most airdropped tokens have zero value at the time of the airdrop and will not result in any taxable income. However, tokens received in hard forks, e.g., Bitcoin Cash, may have a significant value, which can be determined by looking at the price for which it is being traded on an exchange at the time the taxpayer acquires dominion over such tokens. The value of tokens received as rewards will have to be determined based on the facts.22
Notice 2014-21 does not provide any guidance for determining the fair market value of tokens that are not listed on an exchange. In such cases, the general rules of taxation apply, and the taxpayer must make a good faith effort to determine the value of such tokens by considering all the relevant factors. The income, if any, of a holder on the receipt of tokens in a hard fork or airdrop or as a reward should be treated as ordinary income as there is no sale or exchange of a capital asset that resulted in such accretion to wealth. The basis in the tokens received should be equal to the amount included in income.
The tax treatment of a soft fork may be different because the holder of the original tokens generally must exchange those tokens for the new tokens to preserve any value. Absent guidance to the contrary, such an exchange is likely to be a taxable event, although arguably the involuntary conversion rules of IRC § 1033 might apply. Generally, gain on such an exchange should qualify as capital gain if the exchanged tokens were held by the taxpayer as personal or investment assets.
A foreign issuer generally can avoid U.S. taxation on an ICO if it avoids critical contact with the U.S. However, some or all of the income of a foreign issuer can be subject to U.S. tax to the extent the income of the issuer is sourced to the U.S., which will depend on the character of the income (sales, royalties or services), where the management of the entity is located, where decisions are taken, whether marketing activities or sales take place in the United States, and any number of other factors. As a general rule, gain on a sale of personal property by a foreign person is sourced to the jurisdiction of the seller.23 However, if the tokens constitute inventory in the hands of the issuer (which is likely), special rules apply. If the inventory is considered to be “produced” by the issuer, then the income is allocated and apportioned between sources within and without the U.S. based on where the “production activities” occurred.24 This might not be readily apparent, although the location of the individuals who developed the concept, the promoters and the IP developers are logical places to start.
Notwithstanding that a foreign issuer might avoid U.S. tax on an ICO, U.S. shareholders of the foreign issuer may not be as fortunate. First, if the IP was developed in the U.S., any contribution of such IP to a foreign corporation in exchange for its stock generally will be a taxable event,25 and, in certain circumstances, could result in a corporate “inversion” that would cause the foreign corporation to be treated as a U.S. corporation.26 Any actual sale or license of such IP by a U.S. person to a foreign entity also would result in a taxable event, and would be subject to the U.S. transfer pricing rules.27 These rules require that payments between related parties for the purchase, license, lease or use of property be set at arm’s length rates, which requires that the consideration received (whether as a lump sum or over time) be commensurate with the income attributable to the IP.
Furthermore, income generated by an ICO or from ongoing operations of a foreign issuer that is a controlled foreign corporation (“CFC”)28 could give rise to Subpart F income or global intangible low-taxed income (“GILTI”) that may be includible in the income of any direct or indirect U.S. shareholder of such CFC that owns, directly or indirectly, at least 10% of its voting power or value (a “U.S. 10% Shareholder”). In addition, if a foreign corporation qualifies as a passive foreign investment company (“PFIC”), it could generate a roster of issues for certain of its direct or indirect U.S. owners who are not caught by the CFC rules.29
While the dividing line is blurred, a person generally will be a trader rather than an investor in cryptocurrencies if its trading is frequent and substantial.30 While both traders and dealers may buy and sell within a very short period of time and take advantage of cross-border price-differential arbitrage, the major distinction between dealers and traders is that dealers have “customers” to whom they are selling rather than simply non-customer counterparties.
Cryptocurrencies held by an investor or a trader generally will qualify as capital assets and gain or loss from their sale or other disposition generally will constitute capital gain or loss, which will be short- or long-term depending on whether the cryptocurrency sold or disposed of was held for more than one year.
As a general rule, income from the sale of personal property (other than inventory) by a United States resident is sourced to the United States, and by a nonresident is sourced outside the United States.31
Taxation of U.S. traders in cryptocurrencies
U.S. taxpayers who trade in cryptocurrencies may be taxable or tax-exempt (e.g., IRAs or other retirements funds, charitable organizations, etc.). U.S. taxpayers who are individuals generally would be subject to the U.S. federal income tax at rates graduating to a maximum of 37% in the case of short-term capital gains and ordinary income, and 20% in the case of long-term capital gains. Such individual investors may also be subject to the 3.8% net investment income tax (“NIIT”) on their net investment income, which is likely to include income from cryptocurrencies or a crypto fund.
U.S. taxable investors that are corporations generally would be subject to U.S. federal income tax at a flat 21% rate regardless of whether the income allocated to it is capital gain or ordinary income and regardless of its source.32
U.S. tax-exempt entities generally would be subject to tax on any gains from trading in cryptocurrencies only to the extent that such income is characterized as unrelated business taxable income (“UBTI”). For this purpose, gains and losses from dispositions of “property” are specifically excluded from UBTI unless the property is subject to acquisition indebtedness or is inventory held for sale to customers in the ordinary course of an unrelated trade or business.33 Cryptocurrency is classified as “property” for tax purposes. Therefore, assuming an exempt entity is a trader or invests in a fund that is a trader in cryptocurrencies and does not otherwise hold cryptocurrency for sale to customers, its gain might not be treated as UBTI.34
Taxation of foreign traders in cryptocurrency
The U.S. taxation of non-U.S. traders in cryptocurrencies depends on whether the income earned is characterized as income that is effectively connected with a U.S. trade or business (“ECI”) or investment income.
Trading in stock, securities or commodities constitutes a trade or business for U.S. income tax purposes and, if such activities are carried on in the U.S., they generally will generate ECI. However, there is a limited exception to ECI treatment for gains and losses that qualify for the “Trading Safe Harbor” under IRC § 864(b)(2). Under that provision, foreign persons that trade in stock, securities or commodities (and derivatives based on stock, securities or commodities) in the United States for their own account are not considered to be engaged in a U.S. trade or business. Such trading can be done in the U.S. by the taxpayer through its personnel or through a resident broker, commission agent, custodian, or other agent.35
The principal issue for foreign traders in cryptocurrencies is that cryptocurrencies, with limited exceptions, will not qualify as stock, securities or commodities for U.S. tax purposes. The definition of a security for tax purposes is very different than for securities law purposes, and includes only stock in a corporation; interests in widely held or publicly traded partnerships or trusts; notes, bonds, debentures, or other evidences of indebtedness,36 and it appears unlikely that most types of cryptocurrency could qualify as securities under any of these categories. To qualify as a commodity, a cryptocurrency would have to be traded in and listed on commodity exchanges located in the United States, such as the CME or the CBOE, and not constitute goods or merchandise that are traded in “ordinary commercial channels.”37
The IRS has issued a private letter ruling involving foreign currencies, which are also treated as “property” for U.S. tax purposes, in which it took the position that in order for trading in a foreign currency to qualify for the Trading Safe Harbor, the specific foreign currency in which the trading occurred had to be traded on a commodities exchange.38
Bitcoin derivatives are currently traded on exchanges that are regulated by the CFTC trading activity in Bitcoin or Bitcoin derivatives (but not in other cryptocurrencies) may qualify for the Trading Safe Harbor.
Notwithstanding that income from trading in cryptocurrencies may not qualify for the Trading Safe Harbor, if a trader operates from outside the U.S. (i.e., if the trader is an individual, such individual, or if the trader is an entity, its personnel, are located outside the U.S., decisions are taken outside the U.S. and trades are placed outside the U.S.), it should not be considered to be engaged in a U.S. trade or business, and thus should not be taxable by the U.S.
Gain or loss from the sale by a foreign individual or entity of cryptocurrency that is held as an investment should not be subject to U.S. tax as it should qualify as capital gain or loss and be sourced to the country of the foreign seller. Again, however, U.S. members of such an entity may be subject to U.S. tax if, inter alia, the entity is a partnership or other form of tax transparent entity, or if the U.S. anti-deferral rules apply.
1. 2014-16 IRB 938, 03/25/2014.
2. IRC § 988(c)(1).
3. Notice 2014-21 Q&A #2.
4. This is complicated by the fact that lots of cryptocurrencies are not fungible. Each time a taxpayer disposes of a lot of, e.g., Bitcoin, the specific lot or lots must be specified in the block. It would be welcome relief if future IRS guidance provides that a simplified accounting method, such as FIFO or LIFO, could be used.
5. Treas. Reg. § 1.861-18(c).
6. See Treas. Reg. §1.861-18(c)(ii).
7. IRC § 863(b).
8. It is also possible that some states may take the position that if it is treated as a license to use Software as a Service (“SaaS”) or Platform as a Service (“PaaS”), it might be subject to sales and use tax under existing state sales tax rules (for states that tax such services).
9. IRC § 861(a)(4).
10. IRC § 861(a)(3).
11. IRC §§ 861(a)(3), 862(a)(3).
12. See, e.g., Comm’r v. Hawaiian Philippine Co., 100 F2d 988 (9th Cir. 1939), cert. denied, 307 US 635; Piedras Negras Broadcasting Co., 43 BTA 297 (1941).
13. IRC § 451(c).
14. See, e.g., Rev. Rul. 2003-7; Estate of Andrew J. McKelvey, et al. v. Commissioner, 148 T.C. No. 13 (Apr. 19, 2017).
15. IRC § 882(c); Treas. Reg. § 1.882-4(a); Swallows Holding, Ltd. v. Commissioner, 515 F.3d 162 (3d Cir. 2008).
16. See Notice 2014-21 Q&A #5.
17. Notice 2014-21 Q&A # 13 specifically provides that a person who in the course of a trade or business makes a payment using virtual currency worth $600 or more in a taxable year to an independent contractor for the performance of services is required to report that payment to the IRS and to the payee on Form 1099-MISC.
18. IRC § 61.
19. See Commissioner v. Glenshaw Glass, 348 U.S. 426, 431 (1955).
20. See, e.g., Treas. Reg. § 1.61-14(a); Cesarini v. U.S., 296 F.Supp. 3 (N.D. Ohio 1969); Hornung v. Commissioner, 47 T.C. 428, 1967 (T.C. 1967); Haverly v. United Case, 513 F.2d 224 (7th Cir. 1975).
21. See Treas. Reg. § 1.451-2(a); Rev. Rul. 80-300, 1980-2 C.B. 165.
22. Perhaps the IRS will see fit to treat tokens received as rewards like frequent flying miles and not assert that such rewards are income unless and until further guidance is provided. See Announcement 2002-18, 2001-CB 621.
23. IRC § 865(a).
24. IRC § 863(b).
25. IRC § 367.
26. IRC § 7874.
27. IRC § 482.
28. A CFC is a foreign corporation owned more than 50% (by vote or value) by U.S. persons, each of whom owns directly, indirectly or by attribution at least 10% (by vote or value) of such corporation.
29. IRC §§ 1291-1298.
30. See, e.g., Ball v. Commissioner, T.C. Memo. 2000-245; Mayer v. Commissioner, T.C. Memo. 1994-209; Holsinger v. Commissioner, TC Memo 2008-191.
31. IRC § 865(a).
32. See IRC § 7201 et seq. for tax consequences of not reporting the income.
33. IRC § 512(b)(5).
34. IRC § 512(b)(1).
35. Treas. Reg. § 1.864-2(c).
36. IRC § 475(c)(2).
37. Treas. Reg. §1.864-2(d)(3).
38. PLR 8326013, Dec. 27, 1982.
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