Case Study

TAX 6025 Concepts of Federal Income

Tax

Lesson 2 Gross Income

Instructor: Alexander Martini

Disclaimer

• The views expressed during this course are those of the instructor in his personal capacity and do not represent those of the IRS Office of Chief Counsel or the Internal Revenue Service.

• Amendment XVI • “The Congress shall have 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.”

• Helvering v. Independent Life Ins. Co., 292 U.S. 371 (1934)

• Moore v. United States, 602 U.S. 572 (2024) 3

“Taxes on Incomes”

Section 213(a), Revenue Act of 1918 “[T]he term ‘gross income . . . [i]ncludes gains, profits, and income derived from salaries, wages, or compensation for personal service . . . of whatever kind and in whatever form paid, or from professions, vocations, trades, businesses, commerce, or sales. . . and income derived from any source whatever.”

Old Colony Trust Co. v. Comm’r, 279 U.S. 716 (1929)

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Gross Income

• Section 22(a) (1939 Code): “‘Gross income’ includes gains, profits, and income derived from salaries, wages, or compensation for personal service . . . or gains or profits and income derived from any source whatever.”

• Commissioner v. Glenshaw Glass Co., 348 U.S. 426 (1955) • “Here we have instances of undeniable accessions to wealth,

clearly realized, and over which the taxpayers have complete dominion.” Id. at 477.

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Gross Income

• Section 61(a) (1954 Code): “Except as otherwise provided in this subtitle, gross income means all income from whatever source derived, including (but not limited to) the following items:”

• Cesarini v. United States, 296 F. Supp. 3 (N.D. Ohio 1969)

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Gross Income

• Amendment XVI • “The Congress shall have 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.”

• Section 61(a) • “Except as otherwise provided in this subtitle, gross income

means all income from whatever source derived. . .”

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Constitutional Authority v. Statutory Enactment

(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) Annuities; (9) Income from life insurance and endowment contracts; (10) Pensions; (11) Income from discharge of indebtedness; (12) Distributive share of partnership gross income; (13) Income in respect of a decedent; and (14) Income from an interest in an estate or trust8

I.R.C. § 61(a)

∗ § 1.61–1 Gross income. ∗ § 1.61–2 Compensation for services, including fees, commissions, and similar items. ∗ § 1.61–3 Gross income derived from business. ∗ § 1.61–4 Gross income of farmers. ∗ § 1.61–5 Allocations by cooperative associations; per-unit retain certificates—tax treatment as to cooperatives and patrons. ∗ § 1.61–6 Gains derived from dealings in property. ∗ § 1.61–7 Interest. ∗ § 1.61–8 Rents and royalties. ∗ § 1.61–9 Dividends. ∗ § 1.61–10 Alimony and separate maintenance payments; annuities; income from life insurance and endowment contracts. ∗ § 1.61–11 Pensions. ∗ § 1.61–12 Income from discharge of indebtedness. ∗ § 1.61–13 Distributive share of partnership gross income; income in respect of a decedent; income from an interest in an estate or trust. ∗ § 1.61–14 Miscellaneous items of gross income. ∗ § 1.61–15 Options received as payment of income. ∗ § 1.61–21 Taxation of fringe benefits. ∗ § 1.61–22 Taxation of split-dollar life insurance arrangements.

Regulations

Realized in any form: • Money, property, services

Examples: • Meals, accommodations, stock • Punitive and exemplary damages (Glenshaw Glass) • Another person's payment of the taxpayer's income taxes (Old

Colony Trust) • Illegal gains and treasure trove (Cesarini)

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Treas. Reg. § 1.61-1(a), -14

• Types: • Wages, salaries, commissions paid salesmen, compensation for services on the

basis of a percentage of profits, commissions on insurance premiums, tips, bonuses (including Christmas bonuses), termination or severance pay, rewards, jury fees, marriage fees and other contributions received by a clergyman for services, pay of persons in the military or naval forces of the United States, retired pay of employees, pensions, and retirement allowances

• Valuation of noncash compensation • If services are paid for in property, the fair market value of the property received • If services are paid for in services, the fair market value of services received • If the 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

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Treas. Reg. § 1.61-2 Compensation for Services

 Helvering v. Independent Life Ins. Co., 292 U.S. 371 (1934)  Use of one’s own property

 Dean v. Commissioner, 187 F.2d 1019 (3d Cir. 1951)  Use of corporate property by shareholders

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Rental Value of Use of Property

 Revenue Ruling 79-24

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Bartering

1.Would the results to the taxpayers in the Cesarini case be different if, instead of discovering $4,467 in old currency in the piano, they discovered that the piano, a Steinway, was the first Steinway piano ever built and it is worth $500,000?

2.Winner attends the opening of a new department store. All persons attending are given free raffle tickets for a watch worth $200. Disregarding any possible application of I.R.C. § 74, must Winner include anything within gross income when she wins the watch in the raffle?

3.Employee has worked for Employer’s incorporated business for several years at a salary of $80,000 per year. Another company is attempting to hire Employee but Employer persuades Employee to agree to stay for at least two more years by giving Employee 2% of the company’s stock, which is worth $100,000, and by buying Employee’s spouse a new car worth $30,000. How much income does Employee realize from these transactions?

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Problems pg. 56

4.Insurance Adjuster refers clients to an auto repair firm that gives Adjuster a kickback of 10% of billings on all referrals. (a)Does Adjuster have gross income? (b)Even if the arrangement violates local law?

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Problems pg. 56

5.Owner agrees to rent Tenant her lake house for the summer for $4,000. (a)How much income does Owner realize if she agrees to charge only

$1,000 if Tenant makes $3,000 worth of improvements to the house? (b)Is there a difference in result to Owner in (a), above, if Tenant effects

exactly the same improvements but does all the labor himself and incurs a total cost of only $500?

(c)Are there any tax consequences to Tenant in part (b), above?

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Problems pg. 56

1. Vegy grows vegetables in her garden. Does Vegy have gross income when: (a)Vegy harvests her crop? (b)Vegy and her family consume $100 worth of vegetables? (c)Vegy sells vegetables for $100? (d)Vegy exchanges $100 worth of vegetables with Charlie for $100

worth of tuna which Charlie caught?

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Problems pg. 59

2.Doctor needs to have his income tax return prepared. Lawyer would like a general physical check up. Doctor would normally charge $200 for the physical and Lawyer would normally charge $200 for the income tax return preparation. (a)What tax consequences to each if they simply swap services without

any money changing hands? (b)Does Lawyer realize any income when she fills out her own tax

return?

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Problems pg. 59