The IRS wants your money. If you're making money, the IRS wants a piece of the action. In fact, if events have occured that have resulted in your becoming materially better off in some way, the IRS wants a cut of that, too. Does your workplace offer free meals? That's taxable compensation (unless it meets some fairly stringent criteria). Did you win a doll as a door prize? That's taxable income. Did you purchase a grand piano and discover a roll of hundred dollar bills wadded under the strings? A taxable event has occurred, and the IRS wants to wet its beak. That last example, incidentally, was an actual case that went to the Supreme Court. The taxpayer lost and had to pay tax on the wad of bills.
The Internal Revenue Code defines Gross Income in Section 62(a) as "all income from whatever source derived." What's more, income need not be monetary. In Revenue Ruling 79-24 the IRS considered the case of barter or service-for-service exchanges. In one case a housepainter painted a lawyer's house in exchange for legal services, with no money changing hands. The IRS ruled that both the house-painting and the legal services were income; the painter was to be taxed on the fair market value of the services, while the lawyer was to be taxed at the fair market value of the house-painting job.
In the same ruling, the IRS considered a service-for-rent exchange. An artist gave his landlord a piece he had created in exchange for six months in the apartment rent-free. The IRS ruled that this was income for both parties. The landlord had to be taxed at the fair market value of the painting and the artist had to be taxed at the value of six month's rent.
This raises an interesting question, to which I don't know the answer: how do co-ops like Berkeley's report their taxable income? As you know, Bob, Berkeley's co-ops offer room and board to students at rates well below market in exchange for a certain amount of labor to keep the co-op running. So far as I know (and it is, confessedly, not very far) the IRS would expect the co-ops to report the labor they receive from students, assess its fair market value, and pay appropriate taxes on it.
As you've probably noticed, this would create something of a problem. Students are happy to trade labor for food and shelter, but the IRS is less enthusiastic about the barter economy. When students give their labor to the co-ops the IRS believes income has been generated and wants a cash percentage of that increase in income, even if the co-ops's bank account isn't any bigger.
It also seems like the ruling indicates that students should be paying tax on the presumed income that they receive in the form of rent below market rates. That is, it seems like the IRS expects co-op denizens to report on their 1040s the difference between the rent they pay and fair market rent as income. I doubt that this happens much, though.
Policy-wise, I suppose this favors cash transactions over non-cash transactions. Assume the extreme case of somebody who foregoes cash entirely and only trades her labor directly for the goods and services she needs. At the end of the year, the IRS expects her to pay a percentage of the value of what she's bartered for over they year, and it wants payment in cash.
I'm thinking of e-mailing this as a question to my tax professor, to confirm that my interpretation is correct and that the co-ops are, indeed, expected to pay tax on the imputed income from the services they receive. I'm not suggesting that Berkeley's co-ops are tax cheats; I'm sure they aren't. They could be paying taxes as part of the expenses that students pay rent for, or they could be organized as a tax-exempt organization, or any number of other fancy tax schemes. I'm just saying, you know, huh. It's interesting.
