What is Gross Income?
Introduction to Income
Taxable income is gross income less certain authorized deductions.
Gross income means all income from whatever source derived. § 61
Including, but not limited to:
Compensation for services, including fees, commissions, fringe benefits, and similar items
Gross income derived from business
Gains derived from dealings in property
Alimony and separate maintenance payments
Income from life insurance and endowment contracts
Income from discharge of indebtedness
Distributive share of partnership gross income
Income in respect of a decedent
Income from an interest in an estate or trust
Gross income includes income realized in any form, whether in money, property, or services.
Gross income inclusion test: any financial benefit realized which is:
Not a mere return of capital
Not accompanied by a contemporaneously acknowledged obligation to repay
Not excluded by a specific statutory provision
Receipt of Cash and Property
Cesarini v. United States
Gross income means all income from whatever source derived unless the taxpayer can point to an express exemption.
Treasure trove, to the extent of its value in U.S. currency, constitutes gross income for the taxable year in which it is reduced to undisputed possession. § 1.61-14
Reduced to undisputed possession means actual discovery.
Old Colony Trust Co. v. Commissioner
Recharacterization doctrine – the discharge by a third party of an obligation to taxpayer is equivalent to the taxpayer receiving the money and paying the obligation themselves.
The payment by the employer of the income taxes assessable against the employee constitutes additional taxable income to such employee.
Charley v. Commissioner
Gross income means an undeniable accession to wealth, clearly realized and over which the taxpayer has complete dominion.
Travel credits received by employee from employer for personal use and under the control of the taxpayer are considered.
Travel credits reduced to cash by taxpayer are gains derived from dealing in property.
Raytheon Production v. Commissioner
In lieu of what were the damages awarded?
Where the suit is brought to recover lost profits, the recovery represents income.
Where the suit is brought for the injury to good will, the recovery represents a return of capital to the extent of the basis in the good will.
If the damages are a partial recovery of the fair market value of the good will prior to the breach, apply the damages to reduce the basis, then any damages in excess of basis are gain from the disposition of property and income to the taxpayer.
The determining factor is the nature of the basic claim from which the compromised amount was realized.
Although the injured party may not be deriving a profit as a result of the damage suit itself where the damages are awarded for destruction of good will, the conversion thereby of the property into cash is a realization of any gain made over the cost or other basis of the good will prior to the illegal interference.
Commissioner v. Glenshaw Glass Co.
Recoveries are taxable to the extent that they compensate for damages actually incurred. It would not make sense that Congress intended to tax a recovery for actual damages but not the additional amount extracted as punishment for the same conduct which caused the injury.
Punitive damages are not gifts, nor are they exempted by any exception, and thus includible in gross income.
Income Without Receipt of Cash or Property
· Imputed income
o Benefit received from the use of an employer’s property, services, or self-produced goods.
o Fringe benefits: form of pay for the performance of services and is taxable unless the specifically excludes it. § 132
· Satisfaction of an obligation
· Exchange of services
o Improvements by the lessee on the lessor’s real estate as a substitute for rent is gross income to the lessor. § 1.61(8)(c)
Revenue Ruling 79-24
If services are paid for other than in money, the fair market value of the property or services taken in payment must be included in income.
If the services are rendered at a stipulated price, such price will be presumed to be the fair market value of the compensation received.
Dean v. Commissioner
The fair rental value of the taxpayer’s home held in the name of the corporation is gross income to the taxpayer.
Imputed income because property of corporation.
Satisfaction of obligation because taxpayer’s legal obligation to provide a family home.
Helvering v. Independent Life Ins. Co.
The fair rental value of the taxpayer’s apartment in apartment building owned by taxpayer is not gross income because taxpayer’s own property.
· Gross income includes amounts received as prizes and awards. §74(a)
o Exception: qualified scholarships under § 117
· Exception: prizes and awards (1) made primarily in recognition of religious, charitable, scientific, educational, artistic, literary, or civic achievement, (2) but only if the recipient was selected without any action on his part to enter the contest or proceeding, (3) the recipient is not required to render substantial future services as a condition to receiving the prize or award, and (4) the prize or award is transferred by the payer to a governmental unit or charitable organization pursuant to a designation made by the recipient. §74(b)
· Exception: employee achievement award (1) if it relates to length of service or to safety, (2) in the form of tangible personal property, (3) awarded as part of a meaningful ceremony, and (4) not disguised compensation. §74(c)
o A length of service award does not qualify unless the employee has been in the employer’s service for five years or more and has not received a length of service award for the current or any of the prior four years.
o A safety achievement award does not qualify if made to manager, administrator, clerical employee or other professional employee, but only if 10% or less of an employer’s qualified employees receive such awards during the year.
Allen J. McDonell
Employees expected to go with prize winners on vacation are not considered prize winners and trip is considered as business without income to employee.
Gain From Dealings in Property
Factors in the Determination of Gain
· Gain on the disposition of property is the excess of the amount realized over the adjusted basis. § 1001(a).
· Amount realized is the amount of money received and the fair market value of property (other than money) received on the disposition. § 1001 (b).
Property Acquired by Purchase
· Property acquired by purchase has a cost basis to the buyer in the amount of what the buyer paid for it.
o Employee discounts are included in basis.
· The basis of property shall be the cost of such property. § 1012.
Philadelphia Park Amusement v. United States
When property is exchanged for property in a taxable exchange, the taxpayer is taxed on the difference between the adjusted basis of the property given in exchange and the fair market value of the property received in exchange.
For purposes of determining gain or loss, the fair market value of the property received is treated as cash and taxed accordingly.
Adjustments to Basis
· Taxpayer must adjust initial basis in property during ownership to reflect additional investment in the property and capital recovery with respect to the property. §1016.
o Improvements to property result in an increase in the basis of the property. § 1016(a)
o Cost Recovery deductions for depreciation result in a decrease in the basis of the property. § 1016(a)
International Freighting v. Commissioner
Gain from the sale or other disposition of property shall be the excess of the amount realized over the basis and here the basis is the cost of such property.
Crane v. Commissioner
Property is the physical property itself, or the owner’s rights to possess, use, and dispose of it.
A mortgage on property is not taken into account when determining the basis of the property; the basis is calculated based on the type of acquisition of the property.
Commissioner v. Tufts
When mortgaged property is sold or otherwise disposed of and the purchaser assumes the mortgage, the associated extinguishment of the mortgagor’s obligation to repay is accounted for in the computation of the amount realized.
The amount of the loan relative to the fair market value of the property is irrelevant.
· An annuity is an arrangement under which one buys a right to future money payments and the receipt of annuity payments is a mere return of capital.
o Single-life annuity: fixed money payments to the annuitant for her life after which all rights under contract cease.
o Self-and-survivor annuity: fixed payments are made to an annuitant during her life and are then continued to another (in the same or different amount) after her death.
o Joint-and-survivor annuity: amounts are paid to two annuitants while both are living, and then payments are continued (in the same or different amount) to the survivor.
o Variable annuity: annuitant acquires an interest in a diversified investment portfolio and receives an amount which varies each time with the investment experience of the fund.
· Gross income includes any amount received as an annuity. § 71(b)(1)
· Gross income does not include a recovery of capital over the expected life of the contract. § 72(b)(2)
o Calculation for exclusion: portion of each payment which is in the ratio of the “investment in the contract” to the “expected return under the contract.”
§ Exclusion limited to basis in contract.
o Expected return = annuity payment (expected life)
o Ratio = investment / expected return
o The excess receipt is taxed as the income element in each payment. § 71(b)(1)
o If an annuitant lives beyond her life expectancy and fully recovers her investment in the contract, the full amount of any subsequent annuity payment is included in her gross income. § 72(b)(2)
o If she dies without fully recovering her investment, i.e. with an unrecovered investment in the contract, the amount of the unrecovered investment is allowed as a deduction on her last income tax return. § 72(b)(3)