Rev. Rul. 74-32

The purpose of this Revenue Ruling is to update and restate under the current statute and regulations the position set forth in Mimeograph 3040, II-1 C.B. 48 (1923).

The question presented is whether a taxpayer must include in his income under the circumstances described below: (1) that portion of his compensation paid to a third party; or (2) the gain attributable to the proceeds from the sale of his property paid to a third party.

Taxpayer A owned property that he had purchased at a cost of $10,000. He subsequently sold the property for $25,000, stipulating in the contract of sale that $10,000 of the selling price was to be paid to him, and at the same time $15,000 was to be paid to a third party.

Taxpayer B who reports his income on the cash receipts and disbursements method of accounting contracted to perform services under an arrangement whereby the remuneration for his services would be paid to a third party.

Section 1.61-6 of the Income Tax Regulations provides that gain realized on the sale or exchange of property is included in gross income, unless excluded by law.

Under section 1.61-2 of the Regulations compensation for services, including fees, commissions, and similar items is includible in gross income.

In the first situation above, the contract has the same effect as would have resulted if the entire proceeds of the sale had been paid directly to taxpayer A and $15,000 had been given by him to the third party. Accordingly, the entire gain from the sale is includible in taxpayer A's gross income. See Lucas v. Earl, 281 U.S. 111 (1930) and T. J. Rogers, 15 B.T.A. 638 (1929). In the second situation, the payment is includible in taxpayer B's gross income at the time it is received by the third party.

Mimeograph 3040 is hereby superseded, since the position stated therein is restated under current statute and regulations in this Revenue Ruling.

¹ Prepared pursuant to Rev. Proc. 67-6, 1967-1 C.B. 576.