Chapter 2 – What is income?
–§61 Gross Income – provides a non-inclusive list (15 items) defining GI §61 requires that a direct tax must be imposed on “income” – “all income from whatever source derived” – therefore, what is income?
–Exclusionary Rules: §101 – 135 – defines items that can be excluded from income
o §101 – Certain death benefits
o §102 – Gifts and inheritances
o §103 – Interest on State and Local Bonds
o §104 – Compensation for Injuries or Sickness
o §105 – Amounts Received Under Accident and Health Plans
o §106 – Contributions by ER to Accident and Health Plans
o §108 – Income for Discharge of Indebtedness
o §117 – Qualified Scholarships
o §119 – Meals or Lodging Furnished for the Convenience of the ER
o §132 – Certain Fringe Benefits
–Inclusionary Rules – §71 – §86 (specifically §83 property). Defines items that are specifically included in income
–Not Reportable Income – these benefits are neither an exclusion nor an inclusion. Example: Frequent flyer miles or welfare benefits. Reasons:
o 1. Identifiable – must be able to identify the benefit
o 2. Value – must be able to put a value on the benefit.
o 3. Administratable – must be a way to administrate the law.\
–Glenshaw Glass – Held: Stands for the proposition that “income” should be broadly construed in the absence of a specific congressional directive to the contrary. Held: Punitive damages are income!
o Rule: Income includes:
§ (1) “Undeniable accessions to wealth” – if net wealth goes up due to receipt of a benefit = income!
§ (2) clearly realized – the benefit must be clearly realized
§ (3) dominion and control – the TP has complete dominion and control over the wealth/benefit
§ Increase in net worth – Ruling represents the prevailing definition of income and says that any item that increases a taxpayer’s net worth is gross income
§ Any increase is potentially income – any decrease is potentially deductible (if deduction is specifically provided by statute)
1. Compensation for services
A. Form of Receipts
· Old Colony Trust v. Commissioner– Employer pays the taxes of the president
o Rule: Employer paid tax is income – in-kind benefit transferred as compensation for services rendered is income! (unless there is an exclusion in the tax code.
o Analysis: Barter and Consideration – Taxes were paid upon a valuable consideration, namely, the services rendered by the President and
income worker’s comp, disability pensions, and annuities received as a result of active service in the military, foreign service, etc
– What if there is a physical injury, but also emotional distress? This is probably excludable. Every case has held that emotional distress is not entitled to the exclusion.
o §105 Amount Received under Health Plans: excludes from income benefits paid under an employee’s accident and health plan for the medical expenses of employees and their families as well as for permanent disfigurement or loss of a limb
– §105(a)-If you actually receive a benefit, HAVE TO INCLUDE—ex: employer pays premium on health policy, don’t have to include, BUT if you get sick and go to the hospital and the employer pays your $15000 hospital bill, you have to include this in income
§105(b): gross income does not include amts referred to in (a) if such amounts are paid, directly or indirectly, to TP for expenses incurred by him for the medical care