company to a second insurance company under the employer's group term insurance program is includible in gross income of the employer. See Rev. Rul. 77-92, page 41. 26 CFR 1.61-1: Gross income. Whether revenues generated by a race track corporation on charity days is includible in its gross income. See Rev. Rul. 77-124, page 39. 26 CFR 1.61-1: Gross income. The proper method of accounting, within the meaning of section 446 of the Code for reporting interest income by the mortgagee and interest deduction by the mortgagor on mortgages issued under a Graduated Payment Mortgage Plan implemented by the Department of Housing and Urban Development. See Rev. Rul. 77-135, page 133. tuted the National Swine Flu Immuni- in an interest-bearing arrangement; zation Program of 1976 (Program) (3) payment from the fund must be authorizing the Secretary of Health, made only from the invested principal Education and Welfare (HEW) to of the fund; and (4) payments may contract for the procurement of swine be made only for specified manufacflu vaccine and its distribution to the turer self-insured losses and related public. expenditures. Payments from the prinAs required by Pub. L. No. 94-380, cipal of the fund are limited to: (1) the United States assumes liability, sums that the United States has the under the Federal Tort Claims Act, right to recover from a manufacturer Pub. L. No. 89-506, 89th Cong., 2d. as damages under the program; and Sess., (July 18, 1966), for claims sub- (2) payments made by a manufacturer mitted after September 30, 1976, for for expenses (other than office expersonal injury or death arising out of penses or expenses of salaried employthe administration and use of the ees of the manufacturer) incurred in vaccine based upon the acts or omis- the investigation, settlement, or desions of a manufacturer. If a payment fense of any claim or suit, or in the is made by the United States to a investigation of a case reasonably likely claimant the United States, pursuant to result in such a claim or suit. Any to section 317(k)(7) of the Public interest earned on the fund is to be Health Service Act, 42 U.S.C., section reinvested with the balance of the 247b (1970), as amended by Pub. L. principal remaining in the fund. Any No. 94-380, may recover from a manu- amount in the fund that is not disfacturer that portion of the damages tributed before August 1, 1985, inpaid and expenses incurred resulting cluding all interest accrued to that from the failure of a manufacturer to date, must be returned to the United perform its obligations under the pro States not later than August 31, 1985. curement contract, or from its negli. In no event can the total payments gence, from the fund to a manufacturer exUnder the program each manufac- ceed 2x dollars. The program is on a turer obtained insurance coverage from cost reimbursement basis that allows a commercial insurer for claims and no profit to be realized by the manurelated expenses incurred in excess of facturers. 2x dollars. It was determined that the Section 61(a)(1) of the Internal additional cost for coverage of the first Revenue Code of 1954 provides that 2x dollars would be 2.5x dollars. Since gross income means all income from any reasonable insurance premium in- whatever source derived, including curred by the manufacturers to cover compensation for services, fees, comthe first 2x dollars of potential liability missions, and similar items. would be an allowable cost under the Section 162(a) of the Code states cost criteria governing the contracts, that there shall be allowed as a deducHEW determined that the establish- tion all the ordinary and necessary ment of an insurance fund for the expenses paid or incurred during the manufacturers with funds advanced by taxable year in carrying on any trade the United States would be less costly or business. than obtaining insurance to cover the Payment of the liability of one confirst 2x dollars of liability from com- tracting party by the other contracting mercial insurers. party pursuant to the terms of the The insurance fund agreement pro- contract generally results in gross in vides that: (1) the manufacturers must come to the party whose liability is place the amounts advanced by the paid. See Old Colony Trust v. Com. : United States in a segregated account missioner, 279 U.S. 716 (1929), VIII. in a federally-insured commercial 2 C.B. 222. bank; (2) the fund must be invested Accordingly, with respect to trans 26 CFR 1.61-2: Compensation for services, Advances to drug manufactur- Advice has been requested concerning the Federal income tax treatment of funds advanced by the United States to certain drug manufacturers, restricted to a particular use and deposited in a separate bank account. Pursuant to Pub. L. No. 94-380, 94th Cong., 2d. Sess., (August 12, 1976), the Federal government insti t later thered to the to thar for severived, ime from to absorb any losses resulting from the event. Accordingly, Y is the promoter of the charity day, and none of the pra ceeds therefrom are includible in X's gross income for Federal income tax purposes. Rev. Rul. 72-542 is distinguished. actions governed by Pub. L. No. 94. 380, the funds advanced by the United States are includible in the gross income of the manufacturers under sec. tion 61 of the Code in the taxable year in which, and to the extent, the funds are withdrawn from the special account by the manufacturers. The manufacturers may deduct under section 162(a) amounts paid or incurred by them (1) in satisfaction of damage recoveries owing to the United States, or (2) for expenses incurred in the investigation, settlement, or defense of any claim or suit, or in the investiga. tion of a case reasonably likely to result in such a claim or suit. 26 CFR 1.61-2: Compensation for serdices, including fees, commissions, and simslar items. Treatment of an arrangement wherein, in consideration of the drilling of an oil and gas well to a specified depth at a designated location on a leased tractor parcel of land, a taxpayer receives from the lessee the assignment of the entire working interest in the drill site and an undivided fraction of the working interest in the portion of the tract or parcel of land exclusive of the drill site. See Rev. Rul. 1.176, page 77. items. the agencies. X is to operate the facilities for the benefit of Y on that day and to pay over to Y the net proceeds. X will provide the personnel, manage ment, and other services necessary to conduct the races and operate the race track. The net proceeds will consist of gross proceeds less all operating ex. penses. The gross proceeds will include the receipts from parimutuel commissions and all receipts from parking, program sales, admissions, and concessions. According to the terms of the agreement, Y is to absorb any losses arising from the event and assume all responsibility for promotion of the event. Section 61 (a) of the Code defines gross income as all income from what ever source derived, except income that is specifically excluded in subtitle A of the Code. Section 1.61-2(c) of the Income Tax Regulations provides that the value of services is not includible in gross income when such services are rendered directly and gratuitously to an organization described in section 170(c) of the Code. If, however, pursuant to an agreement or understanding servo ices are rendered to a person for the benefit of an organization described in section 170(c), the amound paid to such organization is income to the person performing the services. Rev. Rul. 72-542, 1972-2 C.B. 37. provides that charity day proceeds earned by a parimutuel race track corporation and distributed to a charitable foundation must be included in the corporation's income. Under the facts in that Revenue Ruling the corporation was held to be the promoter and was determined not to be an agent for the foundation. Therefore, the corporation was, in effect, assigning to the foundation proceeds from the operation of the charity day racing that it had earned. In the instant case, Y has assumed all responsibility for advertising and publicizing the event and has agreed 26 CFR 1.61-2: Compensation for services, including fees, commissions and similar items. Payments received by participants in a training program established as a result of a collective bargaining agreement between several labor unions and employers, and funded by employer contributions. See Rev. Rul. 77-177, page 34. 26 CFR 1.61-2: Compensation for services, including fees, commissions, and similar (Also Section 170; 1.170A-1.) Race track corporation; distribution of charity day proceeds. Char ity day race proceeds distributed by a parimutuel race track corporation to an exempt charitable organization that agreed to absorb any losses arising from the event and assume all responsibility for promotion are not includible in the corporation's gross income for Federal income tax purposes; Rev. Rul. 72542 distinguished. Rev. Rul. 77-121 Advice has been requested concerning the Federal income tax treatment of proceeds received by a race track Corporation on a charity day and subsequently paid over to a charitable organization. X is a corporation that operates a parimutuel race track. Y is a tax exempt charitable organization described in section 170(c) (2) of the Internal Revenue Code of 1954. Y was organized to conduct fund raising campaigns for health and children's agencies within the state. X and Y have entered into an agreement providing that Y will promote a charity day to raise funds for company to a second insurance company under the employer's group term insurance program is includible in gross income of the employer. See Rev. Rul. 77-92, page 41. 26 CFR 1.61-1: Gross income. Whether revenues generated by a race track corporation on charity days is includible in its gross income. See Rev. Rul. 77-124, page 39. 26 CFR 1.61-1: Gross income. The proper method of accounting, within the meaning of section 446 of the Code for reporting interest income by the mortgagee and interest deduction by the mortgagor on mortgages issued under a Graduated Payment Mortgage Plan implemented by the Department of Housing and Urban Development. See Rev. Rul. 77-135, page 133. tuted the National Swine Flu Immuni. in an interest-bearing arrangement; zation Program of 1976 (Program) (3) payment from the fund must be authorizing the Secretary of Health, made only from the invested principal Education and Welfare (HEW) to of the fund; and (4) payments may contract for the procurement of swine be made only for specified manufac- do flu vaccine and its distribution to the turer self-insured losses and related public. expenditures. Payments from the prinAs required by Pub. L. No. 94-380, cipal of the fund are limited to: (1) on the United States assumes liability, sums that the United States has the under the Federal Tort Claims Act, right to recover from a manufacturer Pub. L. No. 89-506, 89th Cong., 2d. as damages under the program; and Sess., (July 18, 1966), for claims sub- (2) payments made by a manufacturer min mitted after September 30, 1976, for for expenses (other than office expersonal injury or death arising out of penses or expenses of salaried employthe administration and use of the ees of the manufacturer) incurred in vaccine based upon the acts or omis- the investigation, settlement, or desions of a manufacturer. If a payment fense of any claim or suit, or in the is made by the United States to a investigation of a case reasonably likely claimant the United States, pursuant to result in such a claim or suit. Any to section 317(k) (7) of the Public interest earned on the fund is to be . Health Service Act, 42 U.S.C., section reinvested with the balance of the ci 247b (1970), as amended by Pub. L. principal remaining in the fund. Any No. 94-380, may recover from a manu- amount in the fund that is not disfacturer that portion of the damages tributed before August 1, 1985, in- acko paid and expenses incurred resulting cluding all interest accrued to that erity from the failure of a manufacturer to date, must be returned to the United dep perform its obligations under the pro- States not later than August 31, 1985. utue curement contract, or from its negli. In no event can the total payments exen from the fund to a manufacturer ex- mat ag Under the program each manufac- ceed 2x dollars. The program is on a 'sing i turer obtained insurance coverage from cost reimbursement basis that allows resp a commercial insurer for claims and no profit to be realized by the manu- fot in related expenses incurred in excess of facturers. ErOSS 2x dollars. It was determined that the Section 61(a)(1) of the Internal apur additional cost for coverage of the first Revenue Code of 1954 provides that guish 2x dollars would be 2.5x dollars. Since gross income means all income from, any reasonable insurance premium in- whatever source derived, including "12 curred by the manufacturers to cover compensation for services, fees, com- as be the first 2x dollars of potential liability missions, and similar items. deral party pursuant to the terr contract generally results i 26 CFR 1.61-2: Compensation for services, Advances to drug manufactur- Advice has been requested concerning the Federal income tax treatment of funds advanced by the United nited States to certain drug manufacturers, restricted to a particular use and deposited in a separate bank account. Pursuant to Pub. L. No. 94-380, 94th Cong., 2d. Sess., (August 12, 1976), the Federal government insti gence. imilar itene code deduc-? or come to Old Co97161 e a to absorb any losses resulting from the event. Accordingly, Y is the promoter of the charity day, and none of the proceeds therefrom are includible in X's gross income for Federal income tax purposes. Rev. Rul. 72-542 is distinguished. actions governed by Pub. L. No. 94. 380, the funds advanced by the United States are includible in the gross in come of the manufacturers under sec. tion 61 of the Code in the taxable year in which, and to the extent, the funds are withdrawn from the special account by the manufacturers. The manufacturers may deduct under section 162(a) amounts paid or incurred by them (1) in satisfaction of damage recoveries owing to the United States, or (2) for expenses incurred in the investigation, settlement, or defense of any claim or suit, or in the investigation of a case reasonably likely to result in such a claim or suit. 26 CFR 1.61-2: Compensation for setuices, including fees, commissions, and similar items. Treatment of an arrangement wherein, in consideration of the drilling of an oil and gas well to a specified depth at a designated location on a leased tractor parcel of land, a taxpayer receives from the lessee the assignment of the entire working interest in the drill site and an undivided fraction of the working interest in the portion of the tract or parcel of land exclusive of the drill site. See Rev. Rul. 17-176, page 77. the agencies. X is to operate the facilities for the benefit of Y on that day and to pay over to Y the net proceeds. X will provide the personnel, manage ment, and other services necessary to conduct the races and operate the race track. The net proceeds will consist of gross proceeds less all operating expenses. The gross proceeds will include the receipts from parimutuel commissions and all receipts from parking, program sales, admissions, and concessions. According to the terms of the agreement, Y is to absorb any losses arising from the event and assume all responsibility for promotion of the event. Section 61 (a) of the Code defines gross income as all income from what ever source derived, except income that is specifically excluded in subtitle A of the Code. Section 1.61-2(c) of the Income Tax Regulations provides that the value of services is not includible in gross income when such services are rendered directly and gratuitously to an organization described in section 170(c) of the Code. If, however, pursuant to an agreement or understanding services are rendered to a person for the benefit of an organization described in section 170(c), the amound paid to such organization is income to the person performing the services. Rev. Rul. 72-542, 1972-2 C.B. 37, provides that charity day proceeds earned by a parimutuel race track corporation and distributed to a charitable foundation must be included in the corporation's income. Under the facts income Under the facte in that Revenue Ruling the corporation was held to be the promoter and was determined not to be an agent for the foundation. Therefore, the corporation was, in effect, assigning to the foundation proceeds from the operation of the charity day racing that it had earned. In the instant case, Y has assumed all responsibility for advertising and publicizing the event and has agreed 26 CFR 1.61-2: Compensation for services, including fees, commissions and similar items. Payments received by participants in a training program established as a result of a collective bargaining agreement between several labor unions and employers, and funded by employer contributions. See Rev. Rul. 77-177, page 34. 26 CFR 1.61-2: Compensation for services, including fees, commissions, and similar items. (Also Section 170; 1.170 A-1.) Race track corporation; distribution of charity day proceeds. Char ity day race proceeds distributed by a parimutuel race track corporation to an exempt charitable organization that agreed to absorb any losses arising from the event and assume all responsibility for promotion are not includible in the corporation's gross income for Federal income tax purposes; Rev. Rul. 72. 542 distinguished. Rev. Rul. 77-121 Advice has been requested concerning the Federal income tax treatment of proceeds received by a race track corporation on a charity day and subsequently paid over to a charitable organization. X is a corporation that operates a parimutuel race track. Y is a tax exempt charitable organization described in section 170(c)(2) of the Internal Revenue Code of 1954. Y was organized to conduct fund raising campaigns for health and children's agencies within the state. X and Y have entered into an agreement providing that Y will promote a charity day to raise funds for 26 CFR 1.61-4: Gross income of farmers. Whether, under an accrual method of accounting, taxpayers operating farms, nurseries, and florist shops must use inventories to compute their gross income. See Rev. Rul. 77-64, page 136. 26 CFR 1.61-7: Interest. Whether interest to be paid on obligations of a political subdivision of a state tions will be exempt from tax. See Rev. Rul. 77-14, page 18. 26 CFR 1.61-7: Interest. Whether interest to be paid on obligations of a state will be exempt from tax. See Rev. Rul. 77-55, page 18. 26 CFR 1.61-7: Interest. Whether interest to be paid on obligations of a political subdivision of a state will be exempt from tax. See Rev. Rul. 77-186, page 22. 26 CFR 1.61-8: Rents and royalties. Whether the value of stock of a controlled corporation which is distributed by the controlling corporation to one of its shareholders, that is in excess of the value of the stock surrendered by the shareholder in exchange therefore in a transaction qualifying under section 355 of the Code is includible in the gross income of the shareholder as rent under section 61 or as additional consideration under section 356. See Rev. Rul. 77-20, page 91. insurance. The master policy covering the company's employees provides that the employer, upon written notice to the insurer, may select a method of settlement other than a lump-sum payment upon the death of an employee. Under this provision of the insurance plan, the employer can elect to have the insurance carrier pay insurance benefits to the employee's beneficiaries in equal annual or monthly installments over a fixed period of time not to exceed 20 years. Held, the installment method of payment described above, if selected by the employer for an employee's beneficiaries, will not affect the plan's status as a group-term life insurance within the meaning of section 79 of the Internal Revenue Code of 1954. Section 62.-Adjusted Gross Treatment of expenses incurred by an employee seeking new employment in the same trade or business. See Rev. Rul. 77. 16, page 37. jurisdiction and no other parties possess any interest in the system. X does not own or operate electrical generating facilities. All electrical energy is purchased wholesale from a private utility company. X resells the electrical energy at a markup to all members of the general public located within the city. The proposed bonds will not be arbitrage bonds within the meaning of section 103(c) of the Internal Revenue Code of 1954. Held, for purposes only of the "trade or business test" under section 1.103-7(b)(3) of the Income Tax Regulations, the mere purchase of electrical output from a nonexempt person does not cause X's distribution system to be deemed used by such nonexempt person in its trade or business. Thus, the bonds to be issued by X will not be industrial development bonds under section 103(b) of the Code. Therefore, the interest to be paid on the bonds will be excludable from the gross incomes of the bondholders under section 103(a)(1). Part II.-Items Specifically included in Gross Income Section 72,- Annuities; Certain Proceeds of Endowment and Life Insurance Contracts Part III.-Items Specifically Excluded From Gross Income 26 CFR 1.72-2: Applicability of section. Federal income tax treatment of investment annuity arrangements involving a custodial account. See Rev. Rul. 77-85, 5 page 12. 26 CFR 1.72-2: Applicability of section. Taxability of periodic payments received by a permanently disabled taxpayer from an annuity contract purchased as a terminating distribution of taxpayer's share in the employer's saving and profit sharing fund in which the taxpayer had participated. See Rev. Rul. 77-123, page 28. pment are not indrivate util Section 103.-Interest On Certain Governmental Obligations 26 CFR 1.103-1: Interest upon obligations of a State, Territory, etc. (Also Section 61; 1.61-7.) Municipal electric distribution system; bond interest. Bonds issued by a city to finance the expansion of an electrical distribution system, owned and operated by the city and for which the city purchases electricity for resale from a private utility company, are not industrial development bonds under section 103(b) of the Code, and interest paid on the bonds will be excludable from the gross incomes of the bondholders under section 103 (a)(1). Rev. Rul. 77-14 Due to a rapid increase in population, City X proposes to issue revenue bonds to finance the expansion of an existing electrical distribution system that X has owned and operated for the past 60 years. X possesses the exclusive right to own and operate the electrical distribution system within its 26 CFR 1.103-1: Interest upon obligations of a State, Territory, etc.. (Also Section 61; 1.61-7.) Industrial development bonds; exempt small issue. A state's issuance of industrial development bonds in 40 lots of $1 million each on the same day under a single bond indenture, all maintained under a single pooled security by a single trustee, is considered to be a single $40 million issuance that is not an exempt small issue under section 103(b)(6)(A) of the Code, and the interest is not excludable under section 103(a)(1). Rey. Rul. 77-55 26 CFR 1.72-15: Applicability of section 72 to accident of health plans. Whether amounts received under an annuity plan may be excluded as sick pay. See Rev. Rul. 77-28, page 27. de, aner Sectide Section 79.-Group-Term Life A company furnishes all of its em...ployees with a plan of group-term life Advice has been requested whether, under the circumstances described below, the interest on bonds to be issued by a state will be excludable from the gross incomes of the bondholders under the provisions of section 103(a) |