Revenue Ruling 79-24 and Taxable Barter Income

An exchange of property or services for something other than cash carries specific tax implications. The Internal Revenue Service (IRS) issues Revenue Rulings to clarify how tax law applies to certain situations. Revenue Ruling 79-24 addresses the tax consequences of bartering, establishing a framework for how these non-cash transactions are treated for income tax purposes.

The Core Principle of the Ruling

Revenue Ruling 79-24 establishes that bartering is a taxable event for all parties involved. The principle is that the fair market value of the property or services received must be included in the recipient’s gross income for the taxable year. This is based on Section 61 of the Internal Revenue Code, which defines gross income as all income from whatever source derived.

Fair market value is the price that property or a service would command on the open market between a willing buyer and a seller. When you receive property or a service in a barter transaction, you have realized income equivalent to its fair market value. This ensures that income earned through bartering is taxed similarly to income earned through cash transactions.

Scenarios Illustrated in the Ruling

Revenue Ruling 79-24 presents two examples of direct barter exchanges. The first involves a lawyer who provides legal services to a house painter in exchange for painting the lawyer’s personal residence. The ruling concludes that both individuals must recognize income. The lawyer has income equal to the fair market value of the painting services, while the painter has income equal to the fair market value of the legal services.

The second scenario involves a landlord and an artist. The landlord allows the artist to use an apartment rent-free in return for creating a work of art for the landlord’s building. The artist must include the fair rental value of the apartment in their gross income, and the landlord must include the fair market value of the artwork in their gross income.

Determining the Amount of Income

The primary method to measure income from a barter transaction is to use the fair market value of the property or service that is received. The value of what you get in the exchange is the amount you must report as income. If the value of what is received cannot be readily determined, the value of the services or property given up can be presumed to be the fair market value. For instance, if services are rendered at a pre-agreed price, that price is generally accepted as the fair market value unless there is evidence to the contrary.