Gross Income
Posted on June 6, 2008
Filed Under Federal Income Tax, Key Concepts
Textbooks on the law of federal income taxation routinely make reference to Section 61(a) of the Internal Revenue Code and its definition of gross income as “all income from whatever source derived, including (but not limited to) the following items: (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.”
And, on the whole, these same textbooks take note that the Internal Revenue Code is not so generous when it comes to deductions. In fact, deductions exist only as a result of “legislative grace.” Put differently, unlike gross income, there is no all-inclusive concept of exclusions or deductions from income. The reason for this apparent disparity is that Congress, through its drafting of a pervasive concept of income in the Code, brings into play its power to raise revenues for, ideally, public goods. Structurally, the Code does allow above the line deductions for ordinary and necessary business expenses and certain below the line deductions, but, in general, one should make the assumption that a desired deduction is not allowed unless granted and placed in the Code, for reasons sound or obscure, by Congress.
Several landmark Supreme Court cases reinforce the Code’s all-encompassing (egregious?) concept of income and add substance to its necessarily incomplete listing of items of income. First, in Old Colony Trust v. Commissioner, taxpayer’s company pays not only salary and commissions but also, and directly to the Bureau of Internal Revenue (renamed in 1953 as the Internal Revenue Service), his estimated federal income taxes. Taxpayer argues he never received monies sent on his behalf to the Bureau; therefore, he shouldn’t be taxed. The Supreme Court disagrees: the payment is not a gift but rather an increase in the taxpayer’s wealth.
Second, Commissioner v. Glenshaw Glass Co. deals with the portion of damage awards that are punitive in nature and, more generally, the definition of income in a previous landmark case, Eisner v. Macomber. In Glenshaw Glass, taxpayer argues that punitive damages are a windfall and accordingly not income under Macomber’s definition of income as “gain derived from labor, from capital, or from both combined.” The Court rules that sources of funds other than labor, capital, or combinations thereof also constitute “accessions to wealth“; in brief, punitive damages fit the category of accessions to wealth and are fully taxable.
Third, in United States v. Kirby Lumber Co. (pdf file), the taxpayer, a corporation, purchased its own bonds at a discount thereby increasing its net worth. The Court ruled that the taxpayer realized a clear economic benefit and, without an exclusion in the Code, such accessions to wealth are taxable. After the decision in Kirby Lumber Co., Section 108 was created leading to the Code’s general rule that, except for cases of bankruptcy or insolvency, discharge of indebtedness results in cancellation of debt income.
There are many other cases that document the concept of gross income but these examples should give the reader a feel for the all-embracing character of this key concept in federal income taxation.
For the interested reader, several additional resources on the concept of gross income are listed below:
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The Gross Income Song (YouTube)
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Gross Income (pdf file)
Many happy returns, Roger
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