Select Page

Federal Income Tax
West Virginia University School of Law
Wilson, Elaine Waterhouse

 
Tax
Wilson
Fall 2014
 
 
What is Gross Income?
 
Section 61: Gross Income Defined p. 60
 
Gross income means all income from whatever source derived, including, but not limited to:
 
   (1)            Compensation for services, including fees, commissions, fringe benefits, and similar items;
   (2)            Gross income derived from business;
   (3)            Gains derived from dealings in property;
   (4)            Interest;
   (5)            Rents;
   (6)            Royalties;
   (7)            Dividends;
   (8)            Alimony and separate maintenance payments;
   (9)            Annuities;
(10)            Income from life insurance and endowment contracts;
(11)            Pensions;
(12)            Income from discharge of indebtedness;
(13)            Distributive share of partnership gross income;
(14)            Income in respect of a decedent; and
(15)            Income from an interest in an estate or trust.
 
 
Treas. Reg. Section 1.61-2(d)(1): Compensation for Services, including fees, commissions, and similar items: Compensation Paid Other than in Cash p. 901
 
Except as stated in (d)(6)(i):
 
1.      If services are paid for in property, the fair market value of the property taken in payment must be included in income as compensation
2.      If services are paid for in exchange for other services, the fair market value of such other services taken in payment must be included in income as compensation.
3.      If services are rendered at a stipulated price, such price will be presumed to be the fair market value of the compensation received in the absence of evidence to the contrary.
 
 
Treas. Reg. Section 1.61-14(a): Miscellaneous Items of Gross Income p. 905
 
In addition to 61(a), there are many other kinds of gross income. For example (not dispositive):
 
1.      Punitive damages such as treble damages under the antitrust laws and exemplary damages for fraud are gross income;
2.      Another person’s payment of the taxpayer’s income taxes constitutes gross income to the taxpayer unless excluded by law;
3.      Illegal gains;
4.      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.
 
Eisner v. Macomber (1920) pg. 59
 
16th Amendment: The Congress shall have the power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several states, and without regard to any census or enumeration.”
 
Revenue Act of 1916: “The net income of a taxable person shall include … dividends… Provided, that the term ‘dividends’ as used in this title shall be held to mean any distribution made or order to be made by a corporation … whether in cash or in stock of the corporation… to the amount of its cash value.”
 
Takeaways: (1) The income tax does not tax wealth; (2) It taxes “income” as we’ve chosen to define it statutorily; and (3) the tax term “income” is not the same as the economic or dictionary definition.
 
Distinguished gain from capital.
 
Severance from capital element?
 
Commissioner v. Glenshaw Glass Co. (1955) p. 63
 
Facts: Glenshaw Glass Co. (Glenshaw) (P) and William Goldman Theatres, Inc. (Goldman) (P) were involved in unrelated antitrust litigation. As part of a settlement, Glenshaw (P) received $800,000, of which $324,529.94 represented punitive damages. Glenshaw (P) did not report the latter amount as income. In its antitrust suit, Goldman (P) was awarded treble damages amounting to $375,000. As did Glenshaw (P), Goldman (P) failed to report the punitive amount—$250,000—as taxable income. The Internal Revenue Commissioner sought to recover the deficiencies, but both the Tax Court and the Court of Appeals found for the taxpayers.
 
Issue: Are punitive damages gross income under the IRC?
 
Rule: Gross income is an accession to wealth, clearly realized, and over which the taxpayer has complete dominion and control
 
——————————————————————————————————————————-
 
Windfalls, Finds and Treasure Trove
 
Cesarini v. United States (1969) p. 66
 
Facts: In 1957, Mr. and Mrs. Cesarini (P) purchased a piano for approximately $15.00. In 1964, while cleaning out the piano, the Cesarinis (P) found $4,467.00 in old currency. The Cesarinis (P) exchanged the old currency for new, and reported the total amount on their tax return for 1964. They were forced to pay tax on the money totaling $836.51, which they subsequently asked be refunded. The Commissioner refused and this appeal followed.
 
Issue: Is treasure-trove includable as gross income?
 
Rule: Gross income is all-inclusive, so every exclusion must be specifically contained in the code. Treasure-trove is specifically includable as gross income. (Treas. Reg. Section 1.61-14(a)).
 
 
 
 
 
Bartering
 
Revenue Ruling 79-24 (1979) p. 74
 
Facts: Situation 1 – Lawyer and housepainter swap services as payment. Situation 2 – Professional artist paints a work of art in exchange for six months rent-free use by the apartment owner.
 
Rule: Treas. Reg. Section 1.61-2(d)(

nsation
2.      If services are paid for in exchange for other services, the fair market value of such other services taken in payment must be included in income as compensation.
3.      If services are rendered at a stipulated price, such price will be presumed to be the fair market value of the compensation received in the absence of evidence to the contrary.
 
AND
 
1.      If property is transferred:
a.       By an employer to an employee; or
b.      To an independent contractor
 
2.      As compensation for services
3.      For an amount less than its fair market value
4.      Then, regardless of whether the transfer is in the form of a sale or exchange
5.      The difference between the amount paid for the property and the amount of its fair market value at the time of the transfer is compensation
6.      Included in the gross income of the employee or independent contractor.
 
7.      In computing the gain or loss from the subsequent sale of such property
8.      Its basis shall be the amount paid for the property increased by the amount of such difference included in gross income.
 
Section 74(a): Prizes and Awards p. 90
 
Except as otherwise provided in this section or section 117 (qualified scholarships), gross income includes amounts received as prizes and awards.
 
McCann v. United States (1981) p. 86
 
General Issue: Do the McCanns have income from a Las Vegas trip paid for by Mrs. McCann’s company?
 
Specific Issues: (1) Compensation for services under Section 61? (2) Income under Glenshaw Glass? Prize or award under Section 74?
 
Rule: Generally, prizes and awards, such as free trips, for good work constitute part of gross income under 74(a).
 
 
 
 
United States v. Gotcher (1968) p. 91
 
Facts: VW pays for a trip to Germany for Gotcher to tour the car line, the company, and certain historical locations. Was put up in a luxury hotel, a requirement if he decided to take the trip. The trip was to get him to invest in the company.
 
Issue: Do the Gotchers have income for a trip to Germany paid for by VW?