I. GROSS INCOME
A. (GI-Deductions)x Tax Rate= Tax
1. IRC § 61: All income from whatever source derived. Including: Compensation for services: i.e wages, fees, commissions, fringe benefits, tips, rewards, severance pay, business income, money from property, interest, rent, royalties, dividends, alimony, income from life insurance, pension, discharge of indebtedness, share of partnership GI, $ in respect of a decedent income from interest in an estate or trust
2. Reg § 1.61-1(a)- GI includes income realized in any form whether in money property or services..
(1) Mere appreciation in value is not included in GI unless clearly realized
(a) Ex. You bought stock for $10. It goes up in value to $20. The moment you sell the stock it become GI. If you still have the stock, not GI.
(2) Accession to wealth is included in GI
B. Included
1. Punitive Damages
a) Glenshaw Glass: Taxpayers were paid punitive damages. They tried to argue it was outside the definition of GI.
b) Rule: an accession to wealth clearly realized and over which the taxpayer has complete dominion and control.
2. Treasure Trove
a) Cesarini: Taxpayer bought piano one year and then find $ years later.
b) Rule: If you find money, it is GI in the year you find it.
3. Compensation: when something is received from an employer by an employee, it is presumed to be compensation
a) Taxes Paid by Employer in exchange for services
(1) Old Colony: Taxpayer had his taxes paid by corp he worked for. He argued he didn’t ask for his taxes to be paid so it shouldn’t be GI.
(2) Holding: Taxpayer performed services in exchange for having taxed paid. This was compensation.
(3) Gift argument: Difficult with an employer/Employee situation, usually won’t work
b) Barter transactions
(1) Personal Property or other services in exchange for services(painting). (Rev. Rul. 79-24)
(2) Services for services is GI.
(3) Use FMV- based on what a willing buyer and willing seller will sell for
(4) HYPO: you have a painter and a lawyer. Lawyer renders $1000 in services and he painter renders $5000. The painter has gross income $1000 and the lawyer has Gross income $5000.
c) Financial benefits(trips) in exchange for services is GI
(1) McCann: Taxpayer got trip to Vegas for getting good sales with the company which included going to a seminar, tours, parties. Taxpayer was not required to go.
(2) Holding: this was compensation for services rendered because of the types of things that were paid for. Taxpayer must report the FMV of the trip as gross income. The value of what you receive. Look at the substance of what is happening
(3) Convenience of the employer EXCEPTION(Reg. sec. 1.61-21 ): If the seminar had been mandatory and look more like it was work related then it could have been excluded from GI.
4. Obligations to Repay
a) Advances
(1) Protects against risk that the transferor will back out. Transferee has complete control and dominion over the funds. Transferor has no right to demand return of the funds.
(2) general rule: receipt of prepayments for services or property must be included in income upon receipt. By analogy, see Reg. § 1.61-8(b)
b) Dividends
c) Amounts Received under Claim of Right Dcotrine
(1) Property received with no obligation to repay and with no substantial restriction on disposition or use, must be included in gross income.
(2) Examples:
(a) Inadvertent overpayment
(b) Contingent obligations to repay
(c) Like money place in a trust fund account
(3) N.American Oil: Taxpayer had claim to money and the issue was when taxes needed to be paid. It came down to who had the money. Even if you have money that you ight return, you still have GI.
d) Illegal Payments
(1) Income obtained by embezzlement or other illegal means is included in wrongdoer’s gross income even though he is obligated to return it. James v. United States; Reg. § 1.61-14(a).
(2) Taxpayers argument: like a loan since he has to pay it back and there is not restriction to the ways he could use the $.
(3) Remedies: when embezzler pays $ back, he can take a deduction.
e) Prepayments
f) Discharge of indebtedness is GI- getting something for free
y it back as your graduation gift.
(b) Hypo: Jo is insolvent. Asset=40 L= 60. NW= (20). Debt from mom 50 and she forgives it. NO GI. The debt discharge represents a gift. NOT discharge of indebtedness income which would be GI.
(5) Contested Liability Doctrine
(i) Settlement of a disputed liability does not result in debt discharge income. Zarin
(ii) Hypo: landscaper does $10k of work and you don’t pay b/c you don’t agree w/the amt. This is a dispute so this is not discharge of indebtedness income.
(iii)Hypo: if landscaper sues and says you owe me $10, and they both agree to reduce your bill, this is not discharge of indebtedness.
5. Gains Derived from Dealings in Property:
a) Calculating Gain: IRC § 1001 gain from the sale or other disposition of property is the excess of amount realized over adjusted basis. AR-AB=GAIN. It’s the difference b/t what you paid and what you are selling it for.
(1) Basis- 3 Typesè 1012 Cost, 1015 Gift, 1014 Death, 1041 Divorce
(a) Cost basis: A buyer’s basis in purchased property, equals his or her cost of the property 1012.
(i) Cash: If a buyer acquires property for cash, the property’s basis equals the cash used in the acquisition. (section 1012)
(a) Ex. If you get a boat, your basis is the amt of cash you gave. Code assumes this is an arm’s length transaction.
(b) Note: Paying down your mortgage does not affect your basis.
(ii) Non-cash: If a buyer acquires property in a taxable exchange for non-cash property, basis of the acquired property is its fair market value. (Philadelphia Park)
(a) Basis = cost = FMV of property received
Ex. You pay $1000 for a car with a FMV of $750. We use the FMV of
