Quit Course

Gross Income

Introduction

Learning Objectives

What Is "Gross Income"?

"Income" for Income Tax Purposes Distinguished FromEconomic Income and Accounting Income

Types of Items Included in Gross Income

Types of Items Not Treated as Gross Income

To Whom Income Is Taxable

Year That Income Has To Be Included in Gross Income

Special Rules for Property Transferred asCompensation for Services

Special Rules for Stock Options

Summary

Final Exam

Course Evaluation

Certificate of Completion

2009, CCH INCORPORATED. All Rights Reserved.A WoltersKluwer Company

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Introduction

This course is one of a series of courses developed to introduce you to federaltaxation. Each course takes one aspect of federal taxation, divides it into keyconcepts, and concisely explains those concepts. To help you understand a particularaspect of federal taxation, each course includes special learning aids:

Examples - clarify what you have read.Observations - give you greater insight into the material discussed.Tests of Knowledge - help you remember what you have learned.

At the end of each course, there are questions covering the course material. Bysuccessfully completing this quiz, you can demonstrate mastery of the subject.

Learning Objectives

This course has been designed to help you understand what "gross income" is and what items of incomeare included in gross income. Items of income that are excluded from gross income are discussed in thecourse entitled "Gross Income—Exclusions." After completing this course, you should be able to:

Define "gross income"Differentiate "income" for tax purposes from economic income and accounting incomeIdentify which items are included in "gross income"Identify items that are not considered incomeDetermine to whom income is taxableDetermine when an item of income has to be included in "gross income"Understand the special rules for taxing property transferred as compensation for servicesUnderstand the special rules for taxing statutory and nonstatutory stock options

What Is "Gross Income"?

The first step in calculating how much income tax someone has to pay is to determine how much "gross income" that person receivedduring the tax year.

The Internal Revenue Code (the "Code") defines "gross income" broadly as "all income from whatever source derived."1 Reg. §1.61-1(a)adds the clarification "unless excluded by law." Code Sec. 61(a) lists certain types of items included in "gross income" (such as wages,interest, dividends, and gross income derived from a business) but makes it clear that the items listed are only examples of the types ofitems included in "gross income."

Certain items (such as alimony and prizes) are specifically included in "gross income." These items are discussed in Code Secs. 71-90.Other items (such as gifts and certain educational assistance) are specifically excluded from "gross income." These items are discussedin Code Secs. 101-139.

The Code provisions describing which items are specifically included or specifically excluded from "grossincome" are subject to numerous exceptions. These exceptions must be carefully read because anexception to an exclusion may be included in gross income, and an exception to an inclusion may beexcluded from gross income.

"Gross income" is not limited to cash received. It also may include the fair market value of property received.2

Aaron, an employee of Xi Corporation, receives a check for $100 plus two shares of transferable stock (with a fair marketvalue of $50) for services rendered. Aaron has received $150 (the $100 check plus the fair market value of the two shares ofstock) of gross income.

"Gross income" includes unlawfully, as well as lawfully, obtained income.

Baxter, a union official, embezzled more than $738,000 from B's employer union and from an insurance company with whichthe union was doing business. The amount of the funds embezzled has to be included in Baxter's gross income for the year inwhich they were misappropriated.3

"Income" for Income Tax Purposes Distinguished From Economic Income and Accounting Income

What the word "income" means for tax purposes differs from what that term means to economists and accountants.

The U.S. Supreme Court has defined "income" for tax purposes as including all accessions to wealth, clearly realized, over which thetaxpayer has complete dominion.4

Note that "income" for tax purposes must increase a taxpayer's net worth and must be "realized." Forexample, when a taxpayer's stock increases in value, the taxpayer's net worth increases. However, thatincrease in value is not "income" until the stock is sold.

By contrast, "economic income" has been defined as the dollar value of the goods and services that a person consumes during the year,increased by any increases in the person's net worth and decreased by any reductions in the person's net worth.

Barbara's tuition, housing expenses, and meals are paid for by Barbara's parents. The amounts paid by Barbara's parents fortuition, housing, and meals constitute economic income for Barbara. However, none of these items have to be included inBarbara's gross income.

Increases in the value of a person's property are included in the person's economic income whether or notthe property is sold or exchanged during the year.

Because economic income is difficult to measure, it has not been used to measure taxable income.

"Income" for accounting purposes has been defined as the difference between the amount of revenue realized and the amount of costsincurred to realize that revenue. As is true with "income" for tax purposes, there must be a realization event (e.g., a sale or exchange)before there can be any income.

Types of Items Included in Gross Income

The following are examples of the types of items included in "gross income":

Compensation for ServicesAmounts received as compensation for personal services (including wages, salaries, commissions, tips, and bonuses) have to beincluded in gross income.5 Fringe benefits received from an employer have to be included in gross income unless specifically excludedfrom gross income by a Code provision.

Noel Butts, who works for M&J Glass and Mirror, receives a salary of $30,000 and a year-end bonus of $1,000. Both thesalary and bonus are compensation for Noel's personal services and must be included in her gross income.

If there is a bartering transaction involving the exchange of one person's personal services for another's, the value of personal servicesreceived has to be included in gross income.

Ted, an attorney, agrees to write a will for Ralph, a plumber, in exchange for plumbing repairs. Ted has to include the value ofRalph's plumbing services in gross income, and Ralph has to include the value of Ted's legal services in gross income.

The value of personal services is the amount charged for those services.

Unemployment BenefitsUnemployment compensation received under a law of the United States or any state is includible in gross income.6

Christopher Boebel received $2,500 in unemployment benefits from the state during the year. He must include that $2,500 inhis gross income.

Special rule for 2009. Individuals can exclude from gross income up to $2,400 of unemployment compensation received during a taxyear beginning in 2009.7

Amounts received pursuant to a private, nongovernmental unemployment compensation program also have to be included in grossincome.8

Josephine Cooper received $1,000 in benefits from a fund financed by her former employer to supplement her stateunemployment benefits. The $1,000 is treated as wages rather than unemployment compensation and is included in her grossincome as wages.

Contributions by the beneficiary to the unemployment compensation program. If the beneficiary ofunemployment compensation benefits made nondeductible contributions to the program, no amounts receivedunder the program have to be included in gross income until the contributions have been recovered.9 InterestInterest received or credited to a taxpayer usually has to be included in the taxpayer's gross income.10

"Interest" Defined. "Interest" is an amount paid for the use of money. For example, when taxpayers borrowmoney to purchase a motor vehicle or home, the amount they pay their lender for the use of the money is "interest."

Amounts paid by money market funds that are regulated investment companies are treated as dividendsrather than as interest.

Interest on state and local debt obligations. Interest paid on state and local bonds and other debt obligations (usually referred to as"municipal bonds") can be excluded from gross income for federal income tax purposes unless the bond is a nonqualified private activitybond.11

Nonqualified private activity bond. A state or local debt obligation is a "private activity bond" if more than 10 percent of the proceeds areto be used for any private business use, if repayment of the principal of, or interest on, more than 10 percent of the proceeds is securedby any interest in property used or to be used for a private business use or payments with respect to such property, if repayment of theprincipal of, or interest on, more than 10 percent of the proceeds is to be derived from payments with respect to property, or borrowedmoney, used or to be used for a private business use, or if more than five percent of the proceeds (or, if less, $5,000,000) are to beused to finance loans to private persons. Interest on a private activity bond is exempt from federal income taxation only if it is a "qualifiedbond," such as an exempt-facility bond (e.g., a bond to finance an airport, water or sewage facilities, or residential rental projects), aqualified student loan bond, or a qualified redevelopment bond.

Interest paid on state and local debt obligations may or may not be subject to state income taxation. It ismore likely to be excepted from state income taxation if the state or local government paying the interest iswhere the taxpayer resides.

Interest on U.S. debt obligations. Interest on U.S. savings bonds, Treasury bills, and Treasury bonds is includible in gross income forfederal income tax purposes. However, cash basis taxpayers who own U.S. Series EE or Series I savings bonds do not have to includein their gross income the yearly increase in redemption price unless they elect to do so.12

James Ferrara received a U.S. Series EE savings bond as a gift. Unless James elects otherwise, the periodic increase invalue of the bond does not have to be included in his gross income until he redeems the bond.

Interest on federal debt obligations is not includible in a person's gross income for state income taxpurposes.

Bonds sold between interest dates. If a taxpayer sells a bond between interest payment dates, the portion of the sales price thatrepresents interest must be included in the seller's gross income as interest.

Howard Green owns a bond that pays $100 in interest on January 1 and July 1 each year. If he sells the bond on February 1,between interest payment dates, the price paid by the buyer will include interest earned between January 1 and February 1but not payable until July 1. That portion of the sales proceeds treated as interest has to be included in Howard's grossincome as interest.

Original issue discount (OID). If a taxpayer purchases a debt instrument for less than its stated redemption priceat maturity, the difference, referred to as "original issue discount" (OID), has to be included in gross income as itaccrues unless the term of the debt instrument is no more than one year, the debt instrument is a tax-exemptobligation or U.S. savings bond, or the OID is de minimis (i.e., less than 0.25 percent of the stated redemptionprice at maturity, multiplied by the number of complete years to maturity).13

At a time when bonds maturing in 10 years are paying 10 percent interest, M&M Learning Centers issuesa 10-year bond paying a coupon rate of 9.5 percent of its redemption price. To make the interest ratecomparable to other bonds on the market, M&M Learning Centers issues its bonds at $950, $50 less thanits stated redemption price at maturity of $1,000. If Gloria Hampton purchases the bond at $950, she hasto include the $50 OID in her gross income as it accrues.

Below-market interest rate loans. A below-market loan subject to Code Sec. 7872 is recharacterized as two transactions:

A transfer by the lender to the borrower of an amount equal to the foregone interest.A retransfer by the borrower to the lender of interest (in the amount of the foregone interest).

What is a "below-market loan." A loan payable on demand is a below-market loan if the interest rate on the loan is less than theapplicable federal short-term rate under Code Sec. 1274(d). A term loan (i.e., a loan payable by a specified date) is a below-market loanif the amount loaned is less than the present value (determined using the applicable federal rate for loans of that term) of all payments tobe made under the loan.

At a time when the applicable federal short-term rate is five percent, Barbara Jackson's employer loans her $15,000 at twopercent interest. The loan is a below-market loan.

Certain types of loans are excepted from the imputed transfer rules of Code Sec. 7872:

Loans between spouses.De minimis loans. A loan is considered de minimis if the aggregate amount outstanding between the borrower and the lenderdoes not exceed $10,000.A loan owed by a facility that is a qualified continuing care facility on the last day of a calendar year if the loan was madepursuant to a continuing care contract and the lender (or the lender's spouse) attained age 62 before the close of the calendaryear. A contract between an individual and a qualified continuing care facility is a "qualified continuing care contract" if under thecontract (1) the individual or the individual's spouse may use a qualified continuing care facility for their life or lives, (2) theindividual or the individual's spouse will be provided with housing, as appropriate for the health of that individual or individual'sspouse, in an independent living unit (with facilities outside the unit for meals and other personal care) and in an assisted livingfacility or nursing facility, and (3) the individual or the individual's spouse will be provided assisted living or nursing care as thehealth of the individual or the individual's spouse requires.Loans made available by the lender to the general public on the same terms and conditions.Employee-relocation loans. An "employee-relocation loan" is a loan by an employer to help an employee acquire a new principalresidence at the employee's new principal place of work.Loans that have no significant effect on the federal tax liability of the lender or borrower.

What is "foregone interest." "Foregone interest" is the additional interest that would have been paid if a loan had been made at aninterest rate equal to the applicable federal rate.

In the case of a gift loan between natural persons, the amount considered foregone interest may notexceed the borrower's net investment income if the aggregate amount of outstanding loans between theborrower and the lender does not exceed $100,000. If the net investment interest is $1,000 or less, theamount of foregone interest will be deemed zero.

How the transfer by the lender to the borrower is characterized. How the amount deemed transferred by the lender to the borrower andretransferred by the borrower to the lender is characterized depends on the nature of the transaction:

Compensation-related loans. If a loan is made in connection with the performance of services (e.g., between an employer andan employee or an independent contractor and the person for whom the independent contractor provides services), the amountof foregone interest deemed transferred by the lender to the borrower is treated as compensation paid by the lender to theborrower.Corporation-shareholder loans. If the lender is a corporation and the borrower is a shareholder, the corporation is deemed tohave made a distribution of money (in the amount of the foregone interest) to the shareholder. If the lender is a shareholder andthe borrower is a corporation, the shareholder is deemed to have made a contribution to capital (in the amount of the foregoneinterest) to the corporation.Gift loans. If the amount deemed transferred by the lender to the borrower is considered in the nature of a gift, the lender will bedeemed to have made a gift to the borrower of the amount of foregone interest.

DividendsDividends have to be included in gross income.14

"Dividend" defined. A "dividend" is a distribution by a corporation to its shareholders with respect to their stock of money or otherproperty (not including stock in the corporation making the distribution or rights to acquire such stock) out of the distributingcorporation's current year and/or accumulated earnings and profits. To the extent that a distribution exceeds the distributingcorporation's current year and accumulating earnings and profits, the distribution is treated as a return of the shareholder's investment.

Patricia Jackowniak owns 100 shares of I&M Transportation Services, Inc. If I&M Transportation Services, Inc. pays a $2dividend with respect to each share of its stock. Patricia has to include in her gross income the $2 × 100 = $200 dividend thatshe receives.

Stock dividends. When a corporation distributes its own stock (or rights to acquire such stock) to its shareholders with respect to theirstock, the value of the distribution does not have to be included in a shareholder's gross income unless one of the following applies.15

Distribution in lieu of money. Any shareholder may elect to receive money in lieu of stock(whether or not such an election actually is made).Disproportionate distribution. The distribution (or a series of distributions) results in someshareholders receiving money or other property and other shareholders increasing theirproportionate interests in the corporation's assets or earnings and profits.Distribution of common and preferred stock. The distribution (or series of distributions) resultsin some common shareholders receiving preferred stock and other common shareholdersreceiving common stock.Distributions on preferred stock. A distribution of stock to preferred shareholders, unless thedistribution is made to prevent dilution of the preferred shareholders' conversion rights (e.g.,because there has been a stock dividend, stock split, or similar event).Distributions of convertible preferred stock. A distribution of convertible preferred stock if the

distribution results in some shareholders receiving money or other property and other shareholders increasing theirproportionate interests in the corporation's assets or earnings and profits.

P&W Window Fashions, Inc. distributes half a share of its common stock to the record owner of each of its shares of commonstock. Jan Kusmierz, who owned 100 shares of common stock in P&W Window Fashions prior to the distribution, receives 50additional shares. The value of those 50 shares does not have to be included in Jan's gross income.

Consider the same facts as in the previous example, but the president of P&W Window Fashions, Inc. is given the option ofreceiving $10 in lieu of receiving half a share of common stock for each of her shares of common stock. The president's rightto receive cash in lieu of stock makes the distribution taxable for all shareholders. Therefore, Jan will have to include in hergross income the value of the stock that she receives.

Exception for dividends on life insurance and annuity contracts. Dividends paid on life insurance and annuity contracts do nothave to be included in gross income because they are considered a return of investment.

AlimonyAmounts received as alimony or separate maintenance payments have to be included in gross income.16

A payment qualifies as "alimony" or a "separate maintenance payment" if the following requirements aresatisfied.17

The payment is in cash (including checks and money orders).The payment is received by (or on behalf of) a spouse or ex-spouse pursuant to a divorce orseparation instrument.The divorce or separation instrument does not designate the payment as something other thanalimony or separate maintenance.If the payor and payee are legally separated under a decree of divorce or separate maintenance,the payor and the payee are not members of the same household at the time that the payment ismade.The payor is not required to make any payments after the payee's death or to make any payment as a substitute for suchpayments after the payee's death.The payor and payee do not file a joint income tax return.The payment has not been designated as child support.

Pursuant to a divorce decree, Peter Jabin is paid $500 a month by his ex-spouse, who lives in a different city. The payment isdesignated by the divorce decree as alimony, and payments are to continue for three years or, if sooner, Peter's death. Theamounts received each month have to be included in Peter's gross income as alimony.

Payments designed as child support by a divorce or separation decree are not includible in the recipient's gross income.18

Pursuant to a divorce decree, Roy Kuse pays his ex-wife, Lily Kuse, $1,000 in child support each month. The $1,000 that Lilyreceives each month as child support does not have to be included in her gross income.

Excessive payments during the first two post-separation years. If the amount of alimony or separate maintenance paymentsdecreases significantly from the first post-separation year to the second post-separation year and/or from the second post-separationyear to the third post-separation year, the amount considered excessive has to be included in the payor's gross income for the payor'stax year beginning during the third post-separation year, and the payee will be allowed a deduction that same year for the amountconsidered excessive.19 How to determine whether payments are excessive is explained in the course entitled "Deductions for anIndividual's Personal and Investment Expenses." Sales and Exchanges of PropertyGains realized from sales and exchanges of property have to be included in gross income unless a nonrecognition provision of theInternal Revenue Code applies.20

Joseph McWhirter sells 100 shares of stock in T.J. Supplies, Inc. for $1,000. After subtracting his selling expenses and theamount he originally paid for the 100 shares, Joseph has a gain of $350. He must include that $350 in his gross income as acapital gain.

The following are examples of nonrecognition provisions:

Taxpayers who sell their residence may exclude up to $250,000 of their gain from the sale if they owned and used the residenceas their principal residence for at least two years during the five years preceding the sale.21

No gain or loss is recognized when taxpayers sell property to their spouse, or to their former spouse incident to their divorce.22

No gain or loss is recognized when property held for productive use in a trade or business or for investment is exchanged solelyfor property of a like kind that is held either for productive use in a trade or business or for investment. If boot is received, gain isrecognized only up to the amount of the boot.23

If property is compulsorily or involuntarily converted (as a result of its destruction, theft, seizure, or condemnation) into propertysimilar or related in service or use to the property converted, no gain is recognized. Recognition also can be avoided whenmoney is received for converted property to the extent of the cost of property similar or related in service or use that ispurchased to replace the property converted.24

AnnuitiesWhen taxpayers receive annuity payments under an annuity contract that they have purchased, they can exclude from their grossincome the portion of each payment that represents a return of their investment. The remaining portion of each payment must beincluded in their gross income.25

The portion of each payment that represents a return of a taxpayer's investment is determined by multiplying the amount of the paymentby the exclusion ratio, which is calculated by dividing the taxpayer's investment in the contract by the expected return under the contract.

Investment in the contract. A taxpayer's "investment in the contract" is the total amount of premiums and any other consideration paidfor the annuity contract on or before the annuity starting date (minus any dividends received).

Expected return. The "expected return" is the amount of payments expected to be received. If the amount of payments expected to bereceived depends on the life expectancy of one or more individuals, the expected return is calculated by multiplying the amount of eachpayment by the number of payments expected to be received over that life expectancy (determined using tables prescribed by the IRS inReg. §1.72-9). If a fixed number of payments will be received, the expected return is calculated by multiplying the number of paymentsby the amount of each payment.

Florence Kush starts receiving annuity payments. Up to and including the annuity starting date, she had paid $10,000 inpremiums for her annuity contract. That $10,000 is her investment in the contract. If she will be receiving $1,000 in paymentseach year and the payments will continue until she dies (which, according to the IRS table is estimated to occur in 25 years),her expected return is $1,000 × 25 = $25,000. Therefore, her exclusion ratio is $10,000 ÷ $25,000 = 0.40, and she mayexclude 40 percent of each payment from her gross income.

Once annuitants have recovered their investment in an annuity contract, they have to include the full amount of each annuity payment in

their gross income.

If, using the facts in the previous example, Florence lives 25 years, she will recover her $10,000 investment in the contract.Subsequent annuity payments will be fully includible in her gross income.

Distributions from IRAs and Employer-Sponsored Retirement Plans

Distributions from traditional IRAs and employer-sponsored retirement plans (other thandistributions that are rolled over to another traditional IRA or employer-sponsored retirement plan)are fully includible in the recipient's gross income if only deductible contributions were made to thetraditional IRA or employer-sponsored retirement plan.26

If nondeductible contributions were made to the traditional IRA or employer-sponsored retirement, aportion of each distribution is nontaxable (the portion representing a return of the nondeductiblecontribution), and the remainder is fully includible in gross income.

Social Security BenefitsUp to 85 percent of an individual's social security benefits may have to be included in theindividual's gross income. How much, if any, of the benefits has to be included in the recipient'sgross income depends on the amount of the recipient's benefits, the recipient's filing status, and theamount of the recipient's modified adjusted gross income.27

Supplemental security income (SSI) payments are not taxable.

Modified adjusted gross income. An individual's "modified adjusted gross income" is the individual's adjusted gross income with thefollowing modifications:

No social security benefits are included.Tax-exempt interest must be added.Income from U.S. savings bonds used to pay higher education tuition and fees cannot be excluded from adjusted gross income.Employer-provided adoption assistance benefits cannot be excluded from adjusted gross income.Interest on education loans cannot be deducted from adjusted gross income.Qualified tuition and related expenses cannot be deducted from adjusted gross income.Foreign earned income and foreign housing costs cannot be excluded from adjusted gross income.No deduction is allowed for income attributable to domestic production activities.

If the sum of a taxpayer's modified adjusted gross income plus half of the social security benefits received during the year exceeds thebase amount, but not the adjusted base amount, the amount that has to be included in the taxpayer's gross income is the lesser of:

Half the social security benefits received during the tax year.Half the difference between (1) the sum of the beneficiary's modified adjusted gross income plus half the beneficiary's socialsecurity benefits and (2) the base amount.

The base amount is:

$25,000 for taxpayers whose filing status is single, head of household, or qualifying surviving spouse.$32,000 for taxpayers who are married and filing a joint income tax return.$0 for taxpayers who are married and filing separate income tax returns (unless they lived together at any time during the year,in which case their base amount is $25,000).

The adjusted base amount is:

$34,000 for taxpayers whose filing status is single, head of household, or qualifying surviving spouse.

$44,000 for taxpayers who are married and filing a joint income tax return.$0 for taxpayers who are married and filing separate income tax returns (unless they lived together at any time during the year,in which case their adjusted base amount is $34,000).

Yolanda Norris, who is unmarried, received $10,000 in social security benefits during the year and had a modified adjustedgross income of $24,000. Because the sum of half of her social security benefits ($10,000 × 0.50 = $5,000) plus her modifiedadjusted gross income ($24,000), $5,000 + $24,000 = $29,000, exceeds $25,000, she must include the lesser of the followingamounts in her gross income:

Half her social security benefits: $10,000 × 0.50 = $5,000.1.Half the excess of (A) the sum of half her social security benefits (0.50 × $10,000 = $5,000) plus her modified adjustedgross income ($24,000), $5,000 + $24,000 = $29,000 over (B) the base amount ($25,000): 0.50 × ($29,000 - $25,000)= $2,000.

2.

Therefore, Yolanda must include $2,000 of her social security benefits in her gross income.

If the sum of a taxpayer's modified adjusted gross income plus half of the taxpayer's social security benefits received during the yearexceeds the adjusted base amount, the taxpayer must include the lesser of the following amounts in his or her gross income:

85 percent of the social security benefits received by the taxpayer during the year.The sum of:

85 percent of the difference between (A) the sum of the taxpayer's modified adjusted gross income plus half of thetaxpayer's social security benefits and (B) the adjusted base amount.

1.

The lesser of (A) half the taxpayer's social security benefits or, if less, half the difference between the sum of thetaxpayer's modified adjusted gross income and half the taxpayer's social security benefits and the base amount and (B)half the difference between the taxpayer's adjusted base amount and base amount.

2.

Jay Patel, who is unmarried, received $10,000 in social security benefits during the year and had a modified adjusted grossincome of $32,000. Because the sum of half of Jay's social security benefits (0.50 × $10,000 = $5,000) plus his modifiedadjusted gross income ($32,000), $5,000 + $32,000 = $37,000, exceeds the adjusted base amount ($34,000), he must includethe lesser of the following amounts in his gross income:

85 percent of his social security benefits: 85% × $10,000 = $8,500.1.The sum of:2.

85 percent of the difference between the sum of Jay's modified adjusted gross income ($32,000) plus half ofhis social security benefits ($5,000), $32,000 + $5,000 = $37,000, and the adjusted base amount ($34,000),85% × ($37,000 - $34,000) = $2,550.

A.

The lesser of (1) half of Jay's social security benefits, $5,000, or, if less, half the difference between the sum ofJay's modified adjusted gross income ($32,000), plus half his social security benefits ($5,000), and the baseamount ($25,000), 0.50 × ($32,000 + $5,000 - $25,000) = 0.50 × $12,000 = $6,000, and (2) half the differencebetween the taxpayer's adjusted base amount ($34,000) and the base amount ($25,000), 0.50 × ($34,000 -$25,000) = $4,500.

B.

The sum of A and B is $2,550 + $4,500 = $7,050. Therefore, Jay must include $7,050 in his gross income.

Rental IncomeAmounts received as rent for leasing real or personal property have to be included in gross income. 28

Robin Potter subleases an apartment for $500 a month. She must include that amount in her gross income.

Rental income must be included in gross income whether or not the person renting real or personalproperty is in the business of renting the property.

Advance rent. Rent paid in advance has to be included in gross income for the year it is received, regardless of the taxpayer's methodof accounting.29

On December 31, Colin makes a rental payment due by January 5. The lessor must include the payment in gross income forthe tax year including December 31.

Security deposits. Amounts received as a security deposit do not have to be included in the lessor's gross income for the year ofreceipt. However, if the lessor retains a portion of the security deposit because the tenant does not live up to the terms of the lease, thatportion has to be included in the lessor's gross income. Royalty IncomeRoyalties from copyrights, patents, and oil, gas, and mineral properties have to be included in gross income.30

Paul Kelly, a writer, received $200 in royalties from his publisher. The $200 has to be included in his gross income asroyalties.

Gross Income Derived From BusinessGross income derived from business is included in gross income.31

"Gross income derived from business" means total sales, less the costs of goods sold, plus any income from investments and incidentalor outside operations or sources. "Gross income derived from business" is not reduced by selling expenses and other items notordinarily used to compute the cost of goods sold.32

Partnership income. Partners must include in their gross income their distributive share of their partnership's income and gains.

Joseph Lask is a partner of H&P Computers. His distributive share of income from trade or business activities is $5,000, hisdistributive share of interest income is $1,000, and his distributive share of dividends is $500. He must include each of thoseitems in his gross income.

Partners may reduce their taxable income by their distributive share of partnership deductions and lossesand may reduce their tax liability by their distributive share of partnership credits.

Partners must include their distributive share of partnership income and gains in their gross income even though they do not actuallyreceive any distributions from their partnership.

Eula Mayfield's distributive share of her partnership's income from trade or business activities was $10,000, and herdistributive share of her partnership's interest and dividends was $2,000. She must include those amounts in her gross incomeeven though her partnership did not distribute any money to her during the year.

Partners should receive a Schedule K-1 (Partner's Share of Income, Credits, Deductions, Etc.) from each of their partnerships.Schedule K-1 reports a partner's distributive share of a partnership's income, deductions, and credits.

S corporation income. S corporation shareholders must include in their gross income their distributive share of their corporation'sincome and gains.

Sylvia Metrick is a shareholder of I&J Environmental Monitoring, Inc., an S corporation. Her distributive share of income fromtrade or business activities is $50,000, her distributive share of interest income is $4,000, and her distributive share ofdividends is $1,500. She must include each of those items in her gross income.

S corporation shareholders may reduce their taxable income by their distributive share of S corporationdeductions and losses and may reduce their tax liability by their distributive share of S corporation credits.

S corporation shareholders must include their distributive share of S corporation income and gains in their gross income even thoughthey do not actually receive any distributions from their S corporation.

James O'Donnell's distributive share of his S corporation's income from trade or business activities was $10,000, and hisdistributive share of his corporation's interest and dividends was $2,000. He must include those amounts in his gross incomeeven though the corporation did not distribute any money to him during the year.

S corporation shareholders should receive a copy of Schedule K-1 (Shareholder's Share of Income, Credits, Deductions, Etc.) fromeach of their S corporations. Schedule K-1 reports their distributive share of the corporation's income, deductions, and credits.

Prizes and AwardsPrizes and awards (not including qualified scholarships) generally have to be included in the recipient's gross income.33

Phoebe Ritter won a $250 award for one of her paintings. She must include that $250 in her gross income.

A prize or award does not have to be included in gross income if the recipient refuses to accept it.

If a prize or award is made in goods or services instead of in money, the fair market value of the goods or services has to be included inthe recipient's gross income.34

Portia Porter won an automobile while participating in a game show. She must include the fair market value of that automobilein her gross income.

Exception for certain prizes and awards transferred to charity. A prize or award transferred to charity does not have to be includedin the recipient's gross income if all of the following conditions are satisfied.35

The prize or award was made primarily in recognition of religious, charitable, scientific, educational, artistic, literary, or civicachievement (such as a Nobel Prize).The recipient of the prize or award was selected without any action on his or her part to enter the contest or proceeding.The recipient is not required to render substantial services as a condition to receiving the prize or award.The prize or award is transferred to a governmental unit or qualified charitable organization.Within 45 days after the prize or award is granted, the recipient designates in writing which governmental unit or qualifiedcharitable organization will receive the prize or award.The prize or award is transferred by the due date (not including extensions) of the recipient's tax return for the year that the prizeor award otherwise would have to be included in the recipient's gross income.The recipient does not use the prize or award.

No charitable deduction is allowed for such a transfer to charity.

Exception for certain employee achievement awards. An employee achievement award that is not a qualified plan award may beexcluded from an employee's gross income if the total amount of such awards made by the employer to that employee during the yeardoes not exceed $400. An employee achievement award that is a qualified plan award may be excluded from an employee's grossincome if the total amount of qualified and nonqualified plan awards made by the employer to that employee during the year does notexceed $1,600.36 An employee achievement award for purposes of this exception must satisfy the following requirements.37

The award is an item of tangible personal property (not including cash) transferred to an employee in recognition of theemployee's length of service (at least five years) or safety record.The property is not disguised compensation.The property was awarded as part of a meaningful presentation.In the case of a safety achievement award, no more than 10 percent of eligible employees received such an award, and noemployee receiving an award is a manager or other professional employee.

A qualified plan award is an employee achievement award that is presented pursuant to an established written plan or program thatdoes not discriminate in terms of eligibility or benefits in favor of highly compensated employees.38

At an awards ceremony, Teresa Pyron was one of five employees (out of a total of 200 employed by H&R Plating Co.) whowere given watches in recognition of their safety record. Each watch cost the company $350 and had a fair market value of$375. The company has no established written plan or program for making awards based on an employee's safety record.The watch that Teresa received is a nonqualified employee achievement award and can be excluded from Teresa's grossincome.

Whether an award is excludable from an employee's gross income depends on the cost of the award to the employer, not the fair marketvalue of the award.

Y&H Women's Apparel gave Eugene O'Donnell a television set for 30 years of service with the company. The award is anonqualified plan award. The TV cost the company $350, but it had a fair market value of $475. Although the fair market valueof the TV exceeded $400, the entire amount is excludable from Eugene's gross income because its cost to the company wasless than $400.

However, if the fair market value of an award is disproportionate to the cost of the item to the employer, the award will be consideredpayment of disguised compensation, the award will not qualify as an employee achievement award, and the fair market value of theaward will have to be included in the recipient's gross income as compensation.

ABC Glass & Windows gives Richard Odem a computer for five years of service with the company. The computer cost thecompany $350 but has a fair market value of $900. Under such circumstances, the value of the award is so disproportionate tothe cost of the item to the company that the item will be considered payment of disguised compensation.39

If the cost of a nonqualified award, when added to the cost of all nonqualified awards made to an employee during the year, exceeds$400 or the cost of a qualified award, when added to the cost of all qualified and nonqualified awards made to an employee during theyear, exceeds $1,600, the employee will have to include the greater of the following amounts in his or her gross income:

The portion of the award's cost in excess of the $400 or $1,600 limit, whichever is applicable (but no more than the fair marketvalue of the award).The difference between the fair market value of the award and the applicable $400 or $1,600 limit.

B&C Screws and Hooks gives Sarah Potter a pearl necklace as a nonqualifying employee achievement award. The necklacecost the company $425 and has a fair market value of $475. The amount includible in Sarah's gross income is the greater of(1) the difference between the cost of the necklace ($425) and $400, $425 - $400 = $25 or (2) the fair market value of thenecklace ($475) and $400, $475 - $400 = $75. Therefore, Sarah has to include $75 in her gross income.

Lottery, Raffle, and Other Gambling WinningsTaxpayers must include gambling winnings (including lottery, raffle, and bingo winnings) in their gross income. However, they mayreduce their winnings by the amount of their losses for the year.

Laurie Rezek won $25 in the Quick Pick 3 Lottery. She must include that $25 in her gross income. If she purchased losinglottery tickets during the year, she may deduct the cost of those tickets (but not in excess of the amount of her winnings).

If a taxpayer wins goods or services instead of money, the fair market value of the goods or services has to be included in the taxpayer'sgross income.

Mitchell Rosner won two tickets to a Chicago Bulls basketball game at a raffle. He must include the fair market value of thosetickets in his gross income.

Income from the Discharge of IndebtednessIf a debt is discharged in whole or in part, the debtor's gross income includes the amount of debt discharged unless one of the

exceptions applies.40

Gabriela Mondregon, who owed $500 to Jack Kelly, painted his living room. In return for those services, Jack cancelledGabriela's debt. As a result, Gabriela realized $500 in income from the discharge of her indebtedness.

H&I Cleaners, Inc. cancelled a debt owed it by Eric Potis, one of its shareholders. The amount of the debt canceled is treatedas a distribution by the corporation to Eric and may be included in Eric's gross income as a dividend to the extent of thecorporation's current and accumulated earnings and profits.

Income is considered realized because the debtor's net worth is increased.

Exceptions

The discharge is in the nature of a gift or bequest.

Brenda O'Connor tells her daughter, Marie, that she does not have to repay the $2,000 she loaned her to help herpurchase a car. Marie does not have to include any of the $2,000 in her gross income.

A purchase-money debt is reduced. If a purchaser's debt to the seller of property is reduced (other than as part of a bankruptcycase or when the purchaser is insolvent), the reduction is treated as a purchase price adjustment, not a discharge ofindebtedness.41

David Odom purchased a computer on credit from E Z Computers, Inc. A day after the sale, E Z Computers ran a saleoffering its computers at a 10 percent discount and extended the offer to David. The 10 percent reduction in theamount that David owed E Z Computers is treated as a purchase price adjustment, not income from the discharge ofindebtedness.

Deductible debt. If a taxpayer's payment of a debt would be deductible and the taxpayer uses the cash method of accounting(requiring taxpayers to report income for the year it is actually or constructively received and to deduct expenses for the yearduring which they are actually paid), the taxpayer will not realize any income if the debt is discharged.

Kay Ross, who uses the cash method of accounting, owes Martie Siem $200 in salary. If Martie cancels the debt, Kaywill not have to include any of the $200 in her gross income because she could have deducted the $200 if she hadpaid it to Martie.

The discharge occurs in a bankruptcy case.42

Robert Potter filed a petition with the bankruptcy court and had $10,000 of his credit card debts discharged. None ofthe amount discharged has to be included in his gross income.

The discharge occurs when the debtor is insolvent. However, the amount excluded from a taxpayer's gross income may notexceed the amount by which the taxpayer is insolvent.43

"Insolvent." A taxpayer is "insolvent" if the taxpayer's liabilities exceed the fair market value of the taxpayer's assets.

Laura Renteria has assets of $50,000 and debts of $60,000. If her creditors forgive $25,000 of her debts, she mayexclude only the amount by which she is insolvent (i.e., $60,000 - $50,000 = $10,000). The remaining amount($25,000 - $10,000 = $15,000) must be included in Laura's gross income.

The indebtedness discharged is qualified farm indebtedness and the discharge is by a qualified person.44

"Qualified farm indebtedness." Indebtedness is "qualified farm indebtedness" if it was incurred directly orindirectly in connection with the operation by the taxpayer of the trade or business of farming and 50 percent ormore of the taxpayer's gross receipts for the three tax years preceding the tax year during which the debt wasdischarged is attributable to the trade or business of farming.

"Qualified person." A "qualified person" is any person who is actively and regularly engaged in the business oflending money and who is not related to the taxpayer, a person from whom the taxpayer acquired the property (orsomeone related to such a person), or a person who received a fee with respect to the taxpayer's investment inthe property (or a person related to such a person).

The indebtedness discharged is qualified principal residence indebtedness.45

"Qualified principal residence indebtedness." Indebtedness is "qualified principal residence indebtedness" if itwas incurred to acquire, construct, or substantially improve the taxpayer's principal residence and is secured bythe residence, The maximum amount that can be treated as "qualified principal residence indebtedness" is$2,000,000 ($1,000,00 in the case of a married individual filing a separate return).46

Exception for discharges not related to the taxpayer's financial condition. The exclusion is not available if thedischarge is on account of services performed for the lender or any other factor not directly related to the declinein the value of the taxpayer's residence or financial condition.47

The exclusion is available only for qualified principal residence indebtedness discharged beforeJanuary 1, 2013.

The indebtedness discharged is qualified real property business indebtedness (and the debtor is not a C corporation).48

"Qualified real property business indebtedness." Indebtedness is "qualified real property business indebtedness"if it was incurred or assumed by the taxpayer in connection with real property used in a trade or business, it was

incurred or assumed to acquire, construct, reconstruct, or substantially improve such real property, it is securedby that real property, and the taxpayer elects to have it treated as qualified real property business indebtedness.The term does not include "qualified farm indebtedness."

The debt is a student loan and the discharge is pursuant to a provision in the loan agreement permitting discharge because ofservice performed by the student in certain professions (e.g., teaching) or for any of a broad class of employers (e.g., nonprofitorganizations serving the poor).49

Carl Poticha, who had taken out a Federal Perkins Loan, was relieved from a portion of liability for each year that he worked inthe Head Start Program. The amount of debt discharged does not have to be included in his gross income.

No exclusion is available if the loan was made by a college and the discharge was on account of servicesperformed for the college or other organization that provided the funds.

The bankruptcy exclusion takes precedence over the insolvency exclusion, and the insolvency exclusion takes precedence over thequalified farm exclusion and qualified real property business exclusion.

Special Rule for Debt Instruments Reacquired in 2009 and 2010. Taxpayers who have income from the discharge of an applicabledebt instrument reacquired in 2009 or 2010 can irrevocably elect to include the income in their gross income ratably over a five-tax-yearperiod.50

Date the five-year period begins. The five-tax-year period begins the fifth tax year following the tax year in which thereacquisition occurs if the reacquisition occurs in 2009 and begins the fourth tax year following the tax year in which thereacquisition occurs if the reacquisition occurs in 2010.

Applicable debt instrument. An "applicable debt instrument" is any debt instrument issued by (1) a C corporation or (2)any other person in connection with the conduct of a trade or business by that person.51

Acceleration of deferred income. If the taxpayer dies, liquidates or sells substantially all of the taxpayer’s assets(including in a Title 11 bankruptcy or similar case), ceases business, or similar circumstances occur, any item of incomedeferred (and not previously taken into account) must be taken into account in the tax year in which the event occurs (orin the case of a Title 11 or similar case, the day before the petition is filed).52

Reduction in tax attributes. If the bankruptcy exclusion, insolvency exclusion, qualified farm indebtedness exclusion, or qualified realproperty business indebtedness exclusion applies, the amount excluded from gross income will reduce the taxpayer's tax attributes.53

Any amount excluded from gross income because of the qualified principal residence exclusion reduces (but not below zero) the amountof the basis in the taxpayer's principal residence.54

$100,000 of Delbert Moomaw's qualified principal residence exclusion was discharged and excluded from his gross income.He must reduce the basis in his home by $100,000.

The amount excluded from gross income by the qualified real property business indebtedness exclusion reduces the basis of thetaxpayer's depreciable real property.

$10,000 of Rebecca Porter's qualified real property business indebtedness is discharged and excluded from her gross income.She must reduce her basis in depreciable real property by that $10,000.

Unless taxpayers elect to reduce their depreciable property by the amount excluded from their gross income, the amount excluded bythe bankruptcy exclusion, insolvency exclusion, or qualified farm indebtedness exclusion will reduce their tax attributes in the followingorder.55

Any net operating loss for the tax year of the discharge and any net operating loss carryover to that year.Any carryover to or from the tax year of a discharge for purposes of determining the amount allowable as a general businesscredit.The amount of the minimum tax credit as of the beginning of the tax year immediately following the tax year of the discharge.Any net capital loss for the tax year of the discharge and any capital loss carryover to that tax year.The basis of the taxpayer's property.Any passive activity loss or credit carryover from the tax year of the discharge.Any carryover to or from the tax year of the discharge for purposes of determining the amount of the foreign tax credit.

The amount of the reduction generally is dollar for dollar. However, in the case of the reductions to the general business credit,minimum tax credit, passive activity credit carryover, and foreign tax credit carryover, the reduction is 33 1/3 cents for each dollarexcluded. Recoveries of Tax Benefit ItemsIf taxpayers recover an amount that they deducted for a prior tax year (e.g., a state income tax refund or medical expense that wasreimbursed), they must include the amount recovered in their gross income (but only to the extent that it reduced their tax for the prioryear).

For the 20X1 tax year, Jesus Salinas took an itemized deduction for $1,000 in state income taxes that he paid during the year.His itemized deductions for the year exceeded the standard deduction by more than $1,000. If he receives a $100 refund ofhis 20X1 state income taxes in 20X2, he must include that amount in his gross income for 20X2. If Jesus received $5 intereston that refund, he must include the amount of that interest in his gross income (as interest).

In 20X2, Elaine Siegel received an $800 refund of state income taxes that she had paid in 20X1. Because Elaine took thestandard deduction for the 20X1 tax year and did not itemize any of her deductions, she does not have to include any of the$800 refund in her gross income.

In 2010, Maria Unik received a $500 refund of state income tax withheld from her wages in 2009. Her standard deduction for2009 was $5,700, and she had $5,950 in itemized deductions. Because Maria benefited from only $250 of the refund in 2010(the amount in excess of the standard deduction), she has to include only that amount in her gross income.

Refunds of federal income taxes do not have to be included in a taxpayer's gross income because theynever were deducted from the taxpayer's gross income.

If taxpayers recover an amount for which they took a credit for a prior tax year (e.g., the price of an item for which a credit was claimedwas reduced), they must increase their tax liability by the amount that the credit reduced their tax for the prior year.

In 20X1, Timothy Stanley took a credit for expenditures he made to have his business comply with the Americans WithDisabilities Act. In 20X2, he received a $200 refund for an inadvertent overcharge. Because he took a $100 credit with respectto the amount overcharged, he must increase his tax liability for 20X2 by $100.

Income in Respect of a Decedent (IRD)

Income in respect of a decedent (IRD) has to be included in the gross income of a taxpayer who has theright to receive it if the taxpayer acquired that right by reason of someone's death or by bequest, devise,or inheritance from a decedent.56

"Income in respect of a decedent" is income that a decedent was entitled to receive but which was notproperly includible in the decedent's final income tax return or a prior tax return.57 The following areexamples of IRD:

Compensation payable for a decedent's personal services (e.g., a paycheck received after an individual's death)Interest earned prior to a decedent's death but paid after the decedent's deathDistributions from a traditional IRA or employer-sponsored qualified retirement planPast-due alimonyAccounts receivable collected after an individual's death

Persons who acquire the right to receive IRD by bequest, devise, or inheritance are taxed on IRD that they receive after their right toreceive IRD is distributed to them by the decedent's estate.

Julie Sunde is the beneficiary of her mother's traditional IRA. Julie must include amounts distributed to her from the IRA in hergross income.

IRD has to be included in gross income as it is received, no matter what accounting method the taxpayeruses.58

Court Awards and Settlement DamagesWhether an amount received as a court award or in settlement of a lawsuit has to be included in the recipient's gross income dependson what the amount received replaced.

Jim Underwood sued his employer for lost wages and was awarded $10,000 in damages. Because the amount awardedreplaced Jim's lost wages, it has to be included in his gross income.

The following are examples of amounts that must be included in gross income:

Compensation for lost wages.Compensation for lost profits.Interest on an award.Damages for breach of contract.Damages for patent or copyright infringement.Punitive damages.

Certain amounts may be excluded from gross income:

Damages (other than punitive damages) received on account of personal injuries or sickness.59

Workers' compensation received for personal injuries or sickness.60

Amounts received in settlement of a will contest.61

Damages received for emotional distress due to a physical injury or sickness are treated as received for the physical injury or sicknessand may be excluded from gross income. Damages received for emotional distress not due to a physical injury or sickness cannot beexcluded from gross income.

As part of his award of damages for employment discrimination, Louis Sibbie received $50,000 in damages for emotionaldistress. Because his emotional distress was not due to a physical injury or sickness, Louis cannot exclude the $50,000 fromhis gross income.

Union Strike and Lockout Benefits

Benefits paid by a union as strike or lockout benefits have to be included in the recipient's grossincome unless the facts clearly show that the union intended for the benefits to be a gift.

If property is received, its fair market value must be included in grossincome.

The following factors may lead to the conclusion that a union intended benefits to be a gift:

The benefits were paid based on the recipient's financial need.Benefits were paid to all workers, not merely union members.Benefits covered basic necessities.Recipients of benefits were not required (or under a moral obligation) to participate in union activities.The union had no legal or moral obligation to provide benefits.The amount of the benefits was insubstantial compared to the recipient's wages.Recipients would lose their benefits if they started working elsewhere.

The following factors indicate that no gift was intended:

The union was not authorized to make gifts.The union had a legal or moral obligation to provide benefits.Benefits were paid without regard to the recipient's financial need.Benefits were paid only to union members.Benefits were paid even though a recipient started other employment.Recipients were legally or morally obligated to participate in union activities.

Illegally Obtained GainsTaxpayers must include illegally obtained gains in their gross income.

Katherine Sorrell made $100,000 during the year from sales of cocaine. She must include that $100,000 in her gross income.

Test Your Knowledge

1. Yolanda and Zach are divorced. Pursuant to their divorce decree, Zach is obligated to pay Yolanda $300 in cash each

month until Yolanda's death. The divorce decree designates the payments as part of their property settlement. Can anyportion of the payments be treated as alimony?

a. Yes.

b. No.

2. At a special ceremony, Mary and two other employees of CRP Corporation each are awarded a watch worth $500 fortheir 30 years of service at CRP Corporation. No other employee achievement awards are made by CRP Corporationduring the year. The awards are made pursuant to an established program that does not discriminate in terms ofeligibility or benefits in favor of highly compensated employees. Does Mary have to include any of the $500 in grossincome?

a. Yes

b. No

Types of Items Not Treated as Gross Income

The following are examples of items that are not included in gross income because they are not considered income. They are notconsidered income because they do not increase a taxpayer's net worth.

These items should be distinguished from other items (such as gifts and inheritances) that are specificallyexcluded from gross income by Code Secs. 101-139.

Return of Capital or Investment"Gross income" does not include the return of a taxpayer's capital or investment. The principle that return of a taxpayer's capital orinvestment is not includible in income is not specifically mentioned in the Internal Revenue Code but is codified in the concept of basis.

Xavier purchased 100 shares of ABC Corporation for $1,500. The $1,500 of capital invested in ABC Corporation is Xavier's"basis" in the property. If Xavier sells the 100 shares of ABC Corporation for $2,000, only $500, the difference between theamount received ($2,000) and the amount of capital invested ($1,500), has to be included in Xavier's gross income.

Property Insurance ProceedsInsurance proceeds received to compensate someone for property damage (other than the total destruction of the property) do not haveto be included in the recipient's gross income, except to the extent that the amount received exceeds the recipient's adjusted basis in theproperty.

Patricia Odom received $4,000 from her insurer to compensate her for wind damage to her home. She does not have toinclude the $4,000 in her gross income (but she does have to reduce the adjusted basis of her home by $4,000).

Lorna Lovemore received $100,000 from her insurer to compensate her for tornado damage to her home. If her adjusted basisin the home is $90,000, she may exclude $90,000 of the proceeds but must include $10,000 in her gross income.

If property is totally destroyed, its destruction will be treated as a disposition of the property, and gain will have to be recognized to theextent that the amount of the insurance proceeds exceeds the adjusted basis of the property.

Jason Klutznick received $200,000 from his insurer to compensate him for the total destruction of a vacation home. If hisadjusted basis in the vacation home was $150,000, he must recognize $50,000 of capital gain.

LoansAmounts received as a loan do not have to be included in gross income because the benefit is offset by theborrower's obligation to repay the amount borrowed.62

Discounts and Rebates on PurchasesLegal price discounts and rebates received by a purchaser are treated as an adjustment of the purchase price,not items of gross income, because they do not amount to an accession to the purchaser's wealth.63

Polly assigns a creditor the right to receive a portion of Polly's wages. Although Polly never receives that portion of Polly'swages, the entire amount of those wages is included in Polly's gross income.

To Whom Income Is Taxable

Income is taxed to the person who earns the income or owns the property that produces the income. Although the person who receivesan item of income usually is considered its owner, that is not always true.

Community Property IncomeIn states that have community property laws, half of the combined income earned by spouses and half of the income received fromproperty acquired by spouses (other than through inheritance) after their marriage is treated as received by each spouse.

Jackson and Kate are married and living in California. Jackson receives $50,000 in wages during the year, and Kate receives$100,000 in wages during the year. Although Jackson's wages are $50,000 and Kate's wages are $100,000, they each areconsidered to have received 1/2 x ($50,000 + $100,000 = $150,000) or $75,000 in wages during the year.

Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, and Washington have communityproperty laws. Wisconsin, which has adopted the Uniform Marital Property Act, is considered a communityproperty law state. Alaska has adopted the Uniform Marital Property Act, but it requires residents to elect tosubject themselves to the Act.

Income from property acquired before marriage (property acquired before marriage is referred to as separate property) or inherited byone or both spouses after their marriage may or may not be treated as community property. In Arizona, California, Nevada, New Mexico,and Washington, income from separate property is treated as the owner's separate property and taxed only to that spouse (this isreferred to as the "California Rule"). In Louisiana, Texas, and Idaho, income from separate property is treated as community propertyand split between the spouses (the "Texas Rule"). In states that have adopted the Uniform Marital Property Act, income from separateproperty is treated as community property unless the spouses have elected to treat the income as separate property.

Special rule for spouses who live apart during the year. If spouses live apart at all times duringthe calendar year, one or both have earned income (i.e., wages or other compensation received forpersonal services) that is community income, and no portion of that earned income is directly orindirectly transferred between the spouses before the close of the calendar year, their communityincome will be treated as follows.64

Earned income (other than trade or business income and a partner's distributive share ofpartnership income) will be treated as income of the spouse who rendered the personalservices.If income derived from a trade or business is community income under applicable communityproperty law, all of the gross income and deductions from that trade or business will be treatedas the gross income and deductions of the spouse who exercised substantially all of themanagement and control of the business.If any portion of a partner's distributive share of the ordinary income or loss from a partnership is community income or lossunder applicable community property law, all of that distributive share will be treated as the partner's income.Community income derived from separate property will be treated as the income of the spouse who owned the separateproperty.All other community income will be treated as provided by the applicable community property law.

Assignment of Income Doctrine

Dylan's employer, due to a miscalculation, pays Dylan too large a bonus. The full amount of the bonus has to be included inDylan's gross income even though a portion has to be returned to Dylan's employer the next year.

The assignment of income doctrine prevents taxpayers who have earned income or who have received income from property that theyown from avoiding tax on that income by assigning their right to receive that income to someone else.65

Although taxpayers cannot avoid paying tax on income received from property that they own by assigning their right to receive thatincome, they can avoid paying tax on that income by assigning not only the income but also the property itself.

Quinn rents a home that Quinn owns. Although Quinn cannot avoid paying tax on rental income by assigning Quinn's right toreceive that income, Quinn can remove that rental income from Quinn's gross income by selling the home.

Claim of Right Doctrine

Under the claim of right doctrine, taxpayers who receive money or other property under a claim of right without restriction as to itsdisposition have to include the amount received in their gross income for the year of receipt even though it may be claimed that they arenot entitled to retain the property and may have to return all or a portion of the property.66

If a taxpayer has to repay an item included in gross income under the claim of right doctrine, the taxpayermay deduct the amount repaid for the tax year that the taxpayer made the repayment (if the taxpayer is acash basis taxpayer) or the year that the taxpayer's liability to make the repayment became fixed (if thetaxpayer uses an accrual method of accounting).

Compensation Received by a Child

Amounts received as compensation for a child's services must be included in the child's gross income, not the parent's gross income,even though such amounts are not received by the child.67

Year That Income Has To Be Included in Gross Income

An item of gross income generally does not have to be included in a taxpayer's gross income until it is received.68 Although it wouldseem easy to determine when income is "received," the answer is not always clearcut.

Method of AccountingTo determine when someone "receives" income, the taxpayer's method of accounting must be identified.

Cash receipts and disbursements method of accounting. If the taxpayer uses the cash receipts and disbursements method ofaccounting, all items of gross income usually have to included in the taxpayer's gross income for the year during which they wereactually or constructively received.

Most individuals use this method of accounting. Such taxpayers usually are referred to as "cashbasis" taxpayers.

Gary, a cash basis taxpayer reporting income on a calendar basis, performs services for a client in November and billsthe client for those services in December. If the client pays the bill before the end of the year, the amount received willbe included in Gary's gross income for that year. If the client pays the bill after the close of the year, the amountreceived will be included in Gary's gross income for the next year.

Accrual method of accounting. If a taxpayer uses an accrual method of accounting, an item of income is included in thetaxpayer's gross income when all of the events have occurred which fix the taxpayer's right to receive the income and theamount of income can be determined with reasonable accuracy.

A taxpayer using an accrual method of accounting has to include an item of income in gross incomewhen the taxpayer has the "right" to receive the item, not when the item actually is received.

The cash receipts and disbursements method of accounting permits taxpayers to manipulate the time that income is received. Toprevent abuses, the government has developed the constructive receipt of income doctrine and the economic benefit doctrine.

Constructive Receipt of Income DoctrineThe constructive receipt of income doctrine was developed to limit the ability of cash basis taxpayers to select which year they includeitems of income in their gross income. Under the doctrine, taxpayers are considered to constructively receive an item of income in theyear during which the item is credited to their account, set apart for them, or otherwise made available so that they may draw on it at anytime.69

The constructive receipt of income doctrine affects only cash basis taxpayers.

Joe, a calendar year, cash basis taxpayer, receives a paycheck on December 31. Joe is considered to have constructivelyreceived compensation for that year, even though Joe received the check after banking hours.70

Income is not constructively received if the taxpayer's control of its receipt is subject to a substantiallimitation or restriction.71 That a taxpayer is required to give notice of the taxpayer's intention to withdrawfunds is not considered a substantial limitation or restriction.72

Income received by a taxpayer's agent is considered constructively received by the taxpayer.

Economic Benefit DoctrineUnder the economic benefit doctrine, taxpayers using the cash receipts and disbursements method of accounting are treated asreceiving income when an economic or financial benefit is irrevocably conferred on them.

The doctrine will apply when the following conditions have been satisfied:

There is a fund (such as a trust) into which property has been transferred for the taxpayer's benefit.The fund is managed by someone other than the taxpayer or the transferor.The fund is irrevocable and beyond the reach of the transferor's creditors.The taxpayer has a nonforfeitable right to the property in the fund. Receipt of the property may be conditioned only on thepassage of time.

Zelda's employer announces that it will place $1,000 in an irrevocable trust for Zelda's retirement. None of the trust assets canbe reached by the employer's creditors. If the $1,000 is nonforfeitable, it will have to be included in Zelda's gross income forthe year that it is placed in the trust.

Under the economic benefit doctrine, unlike the constructive receipt of income doctrine, the taxpayer is notrequired to have a right to withdraw or otherwise receive an amount set aside for the taxpayer's benefit.

Appreciation in the Value of PropertyAppreciation in the value of property does not have to be included in gross income until it is realized and recognized. Appreciation is not"realized" until property is sold or exchanged. Appreciation is "recognized" only if the sale or exchange is taxable, not an event for whichnonrecognition is provided by the Internal Revenue Code.

On January 1, Felicia purchased a house for $200,000, and it increased to value to $215,000 by December 31. AlthoughFelicia's net worth has increased by $15,000 ($215,000 - $200,000), none of that increase has to be included in Felicia'sgross income for the year.

Frank sells a house used as Frank's primary residence for the past two years. Frank purchased the house for $200,000 andsells it for $225,000. Frank "realizes" $25,000 ($225,000 - $200,000) on the sale, but does not have to "recognize" any of thegain because I.R.C. §121 permits such gain from the sale of a principal residence to be excluded from gross income.

Advance Payments

Advance payments of income have to be included in gross income for the year that they are received unless the recipient has a legalobligation to repay any advances that are not earned.73

Test Your Knowledge

1. Tami's children win a lottery worth $1,000,000. Because state law provides that the funds cannot be directly transferredto the children, the funds are transferred to a custodial account managed by Tami. The children have no right to receivethe money until they reach age 21, but Tami can use the money for their support. Will the income have to be included inthe children's gross income for the year that they won?

a. Yes.

b. No.

Special Rules for Property Transferred as Compensation for Services

If, in connection with the performance of services, property (not including a statutory option) is transferred to the service provider (or oneof the service provider's beneficiaries), the fair market value of that property, minus any amount paid for the property, has to be includedin the service provider's gross income for the first tax year in which the property becomes transferable or no longer subject to asubstantial risk of forfeiture. 74

Substantial Risk of ForfeitureThere is a substantial risk of forfeiture if the transferee's rights in property received are conditioned upon the future performance (orrefraining from performing) of substantial services by any person or if the possibility of forfeiture is substantial if a condition related to apurpose of the transfer is not satisfied.75

This rule applies even though the person making the transfer is not the person for whom the services wereperformed.

Election to Include Income in Gross IncomeA service provider may elect to include in gross income the fair market value of property received.76

Such an election can benefit a taxpayer because any appreciation in the property following the election istaxed as capital gain, not ordinary income. However, if the property declines in value, the taxpayer cannotdeduct the loss.

Special Rules for Stock Options

How stock options granted to an employee are taxed depends on whether the option is an incentive stock option (ISO), an optiongranted under an employee stock purchase plan, or a nonstatutory (nonqualified) stock option.

Incentive Stock OptionNo amount has to be included in gross income when an ISO is granted or exercised.

If stock acquired by exercising an ISO is not disposed of before the end of the two-year period beginning onthe date that the ISO was granted or, if later, the one-year period beginning on the date that the stock wasacquired, the difference between the amount realized and the exercise price is recognized as capital gain(or loss).

If a disqualifying disposition of the stock is made, the option will be taxed as a nonqualified stock option.77

Option Granted Pursuant to an Employee Stock Purchase Plan

No amount has to be included in gross income when the option is granted or exercised.

If stock acquired by exercising an option is not disposed of before the end of the two-year period beginning on thedate that the option was granted or, if later, the one-year period beginning on the date that the stock was acquired, anamount equal to the lesser of (1) the difference between the fair market value of the share at the time of the dispositionand the exercise price or (2) the difference between the fair market value of the share at the time that the option wasgranted and the exercise price has to be included in the holder's gross income as compensation (not as capital gain).Any additional gain realized is capital gain.

If a disqualifying disposition of the stock is made, the option will be taxed as a nonqualified stock option.78 Nonqualified Stock Option

If a nonqualified stock option has a readily ascertainable fair market value (e.g., because it is actively traded on a stock market) at thetime that it is granted, its recipient has to include in gross income the bargain element (i.e., the difference between the fair market valueof the stock subject to the option and the option exercise price) when the option becomes transferable or no longer subject to asubstantial risk of forfeiture.

The option holder may elect to be taxed on the bargain element at the time that the option is granted.79

If a nonqualified option does not have a readily ascertainable fair market value at the time that it is granted, the bargain element is notdetermined, and will not be included in gross income, until the option is exercised or otherwise disposed.80 Test Your Knowledge

1. Paul's employer grants Paul an option (traded on the New York Stock Exchange) to purchase 100 shares in the employerfor $50. The stock is trading at $60 on the day that Paul receives the option, which is not subject to any substantial risk offorfeiture but is not transferable. Has Paul received any item that has to be included in gross income for the year theoption is granted? How much, if any, income does Paul have to include in his gross income for the year that he isgranted the option?

a. $0

b. $1,000

c. $5,000

d. $6,000

Summary

"Gross income" is broadly defined as "all income from whatever source derived."

Items specifically included in "gross income" are described in Code Secs. 71-90.

Items specifically excluded from "gross income" are described in Code Secs. 101-139.

What the term "income" means for tax purposes differs from what that term means to economists and accountants.

Although the person who receives an item of income usually is considered its owner, that is not always true (e.g., when theincome is community property income).

The year that an item of income has to be included in gross income depends on the taxpayer's method of accounting.

Cash basis taxpayers are prevented from manipulating the date that they receive income by the constructive receipt of incomedoctrine and the economic benefit doctrine.

Amounts received as compensation for personal services (including wages, salaries, commissions, tips, and bonuses) have tobe included in gross income.

Unemployment compensation received under a law of the United States or any state is includible in gross income.

Interest received or credited to a taxpayer usually has to be included in the taxpayer's gross income. However, interest paid onstate and local bonds and other debt obligations can be excluded from gross income for federal income tax purposes unless thebond is a nonqualified private activity bond.

A below-market loan is recharacterized as two transactions: a transfer by the lender to the borrower of an amount equal to theforegone interest and a retransfer by the borrower to the lender of interest (in the amount of the foregone interest).

Dividends have to be included in gross income. However, a corporation's distribution of its own stock (or rights to acquire suchstock) to its shareholders with respect to their stock does not have to be included in a shareholder's gross income unless one ofthe exceptions applies.

Amounts received as alimony have to be included in gross income.

Gains realized from sales and exchanges of property have to be included in gross income unless a nonrecognition provision ofthe Internal Revenue Code applies.

When taxpayers receive annuity payments under an annuity contract that they have purchased, they can exclude from theirgross income the portion of each payment that represents a return of their investment. The remaining portion of each paymentmust be included in their gross income.

Distributions from traditional IRAs and employer-sponsored retirement plans (other than rollovers) are fully includible in therecipient's gross income if only deductible contributions were made to the IRA or plan. If nondeductible contributions were made,a portion of each distribution is nontaxable (the portion representing a return of the nondeductible contribution), and theremainder is fully includible in gross income.

Up to 85 percent of an individual's social security benefits may have to be included in the individual's gross income. How much, ifany, of the benefits has to be included in the recipient's gross income depends on the amount of the recipient's benefits, therecipient's filing status, and the amount of the recipient's modified adjusted gross income.

Amounts received as rent for leasing real or personal property have to be included in gross income.

Royalties from copyrights, patents, and oil, gas, and mineral properties have to be included in gross income.

Gross income derived from business is included in gross income. Partners must include in their gross income their distributiveshare of their partnership's income and gains. S corporation shareholders must include in their gross income their distributiveshare of their corporation's income and gains.

Prizes and awards (not including qualified scholarships) generally have to be included in the recipient's gross income. However,an employee achievement award that is not a qualified plan award may be excluded from an employee's gross income if the totalamount of such awards made by the employer to that employee during the year does not exceed $400. An employeeachievement award that is a qualified plan award may be excluded from an employee's gross income if the total amount ofqualified and nonqualified plan awards made by the employer to that employee during the year does not exceed $1,600.

Taxpayers must include gambling winnings (including lottery, raffle, and bingo winnings) in their gross income.

If a debt is discharged in whole or in part, the debtor's gross income includes the amount of debt discharged unless one of theexceptions applies.

If taxpayers recover an amount that they deducted for a prior tax year (e.g., a state income tax refund or medical expense thatwas reimbursed), they must include the amount recovered in their gross income (but only to the extent that it reduced their tax forthe prior year). If taxpayers recover an amount for which they took a credit for a prior tax year (e.g., the price of an item for whicha credit was claimed was reduced), they must increase their tax liability by the amount that the credit reduced their tax for theprior year.

Income in respect of a decedent (IRD) has to be included in the gross income of a taxpayer who has the right to receive it if thetaxpayer acquired that right by reason of someone's death or by bequest, devise, or inheritance from a decedent.

Whether an amount received as a court award or in settlement of a lawsuit has to be included in the recipient's gross incomedepends on what the amount received replaced. Compensation for lost wages or lost profits, interest on an award, damages forbreach of contract, damages for patent or copyright infringement, and punitive damages have to be included in gross income.Damages (other than punitive damages) received on account of personal injuries or sickness, workers' compensation receivedfor personal injuries or sickness, and amounts received in settlement of a will contest may be excluded from gross income.Damages received for emotional distress may be excluded from gross income only if they are due to a physical injury orsickness.

Benefits paid by a union as strike or lockout benefits have to be included in the recipient's gross income unless the facts clearlyshow that the union intended for the benefits to be a gift.

Taxpayers must include illegally obtained gains in their gross income.

"Gross income" does not include the return of a taxpayer's capital or investment.

Insurance proceeds received to compensate someone for property damage (other than the total destruction of the property) donot have to be included in the recipient's gross income, except to the extent that the amount received exceeds the recipient'sadjusted basis in the property. If property is totally destroyed, its destruction will be treated as a disposition of the property, andgain will have to be recognized to the extent that the amount of the insurance proceeds exceeds the adjusted basis of theproperty.

Amounts received as a loan do not have to be included in gross income.

Legal price discounts and rebates received by a purchaser are treated as an adjustment of the purchase price, not items ofgross income.

The fair market value of property transferred to a service provider (or one of the service provider's beneficiaries) in connectionwith the performance of services has to be included in the service provider's gross income when the property becometransferable or no longer subject to a substantial risk of forfeiture.

Special tax rules apply to statutory and nonstatutory options.

Final Exam

Test Exam Instructions:Choose the best answer for each question below based upon the information provided in the course content. Then submit youranswers.

You can change your answers any time prior to clicking the submit test button.

You have three (3) chances to submit the exam for a passing grade. Each time you click the Submit button is considered an attempt.

Expiration: This course must be completed within one year of enrollment.

1. Which one of the following statements about "gross income" is incorrect?a. "Gross income" includes all income from whatever source derived, unless excluded by law.

b. The Internal Revenue Code specifically excludes certain items from "gross income."

c. "Gross income" does not include unlawfully obtained income.

d. The fair market value of property received may be included in "gross income."

2. Paul's economic income can include all of the following except:a. The value of food that Paul eats during the year.

b. The value of the time Paul saves by purchasing a dishwasher.

c. Appreciation in the value of Paul's home.

d. Paul's college tuition paid for by Paul's parents.

3. Which one of the following types of interest payments may be excluded from gross income for federal income taxpurposes?

a. Interest on a loan made by a parent to a child.

b. Interest on a state income tax refund.

c. Interest on a state bond.

d. Interest on a Treasury bill.

4. Upon which of the following events may a taxpayer not receive interest includible in gross income?a. Carl sells a bond between interest payment dates.

b. Carl pays $900 for a newly issued bond that will be redeemed at maturity for $1,000.

c. Carl makes a zero interest loan to Carl's child.

d. Carl receives a distribution from a money market fund.

5. Quinn and Reba are married and living together in a community property law state that has adopted the California Ruleregarding income from separate property. Quinn earns $50,000 in wages and $20,000 from separate property. Rebaearns $30,000 in wages and $50,000 from separate property. How much of that income is treated as each spouse's?

a. Each is treated as receiving $75,000 in income.

b. Quinn is treated as receiving $60,000 in income, and Reba is treated as receiving $90,000 in income.

c. Quinn is treated as receiving $85,000 in income, and Reba is treated as receiving $65,000 in income.

d. Quinn is treated as receiving $70,000 in income, and Reba is treated as receiving $80,000 in income.

6. Peter receives $10,000 in wages from a corporation, and $20,000 in dividends from stock owned in the corporation. Theassignment of income doctrine will prevent Peter from avoiding tax on any of that income unless Peter does which oneof the following?

a. Peter signs an agreement assigning the $10,000 in wages to Peter's child.

b. Peter signs an agreement assigning the $20,000 in dividends to Peter's child.

c. Peter signs an agreement assigning both the $10,000 in wages and the $20,000 in dividends to Peter's child.

d. Peter transfers stock in the corporation to Peter's child.

7. Which of the following does not affect what year an item of income has to be included in a cash basis taxpayer's grossincome?

a. The date that the taxpayer actually receives the item of income.

b. The date that the taxpayer constructively receives the item of income.

c. The date that a taxpayer's agent receives an item of income belonging to the taxpayer.

d. The date that the taxpayer gives notice required before a person holding an item of income payable to the taxpayer maydistribute the item to the taxpayer.

8. Which one of the following items may be excluded from gross income?a. Wages.

b. Interest on a federal income tax refund.

c. Lottery winnings.

d. The proceeds of a loan received by an employer.

9. Which one of the following items does not have to be included in gross income?a. Stock distributed to an employee as a bonus.

b. Profits from sales of illegal drugs.

c. The yearly increase in the redemption price of a U.S. Series EE savings bond.

d. The value of work performed by a carpenter that Don receives in exchange for Don's plumbing repairs.

10. Which one of the following items does not have to be included in gross income?a. Unemployment compensation received under federal or state law.

b. A corporation's distribution of its common stock to all common shareholders.

c. Unemployment compensation received pursuant to a private, nongovernmental unemployment compensation program.

d. Tips.

11. Which one of the following items does not have to be included, in whole or in part, in gross income?a. Dividends paid on a life insurance contract.

b. Dividends paid on common stock.

c. Gain realized when a person not in the business of selling furniture sells a chair on a website.

d. $10,000 in social security benefits received by a single individual with modified adjusted gross income of only $20,500.

12. A payment will not qualify as "alimony" for which of the following reasons?a. The payment is made by check.

b. The payment is not required by a divorce or separation instrument.

c. The payor is not required to make any payments after the recipient's death.

d. The payor and payee do not file a joint income tax return.

13. Which one of the following items does not have to be included in the recipient's gross income?a. A rental payment received before its due date.

b. Money paid to a parent for work performed by a child.

c. A distribution from a traditional IRA made to the beneficiary after the account owner's death.

d. Amounts received as a security deposit.

14. Which of the following circumstances can prevent property transferred in connection with the performance of services

from having to be included in the service provider's gross income for the year of receipt?a. The property is transferred to the service provider's child instead of to the service provider.

b. The property is transferable but subject to a substantial risk of forfeiture.

c. The property is not transferable and not subject to a substantial risk of forfeiture.

d. The property is not transferable but is subject to a substantial risk of forfeiture.

15. Which one of the following statements about the taxation of incentive stock options is not true?a. No income has to be included in the option holder's gross income when the ISO is granted.

b. No income has to be included in the option holder's gross income when the ISO is exercised.

c. If stock acquired by exercising an ISO is not disposed of within two years after the date that the ISO was granted or, if later,within one year after the stock was acquired, the difference between the amount realized on the disposition and the exerciseprice may be recognized as capital gain (or loss).

d. If stock acquired by exercising an ISO is disposed of within two years after the date that the ISO was granted or, if later, withinone year after the stock was acquired, the entire amount realized on the disposition has to be included in gross income ascompensation income.

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Certificate of Completion

You have not yet passed this course. Once you have passed the final exam for this course, your certificate validating your successfulcompletion of the course will be available at this location.

To take the final exam for this course, use the Table of Contents to go to the corresponding page. Answer each of the questions, andsubmit the test. Your answers will be graded online and, if you achieve a passing score, your certificate will become available.

1. Code Sec. 61(a).2. Reg. §1.61-1(a).3. See E.C. James, 61-1 USTC ¶9449, 366 US 213, 81 SCt 1052 (1961).4. Glenshaw Glass Company, 55-1 USTC ¶9308, 348 US 426, 75 SCt 473.5. Code Sec. 61(a)(1); Reg. §1.61-2(a)(1).6. Code Sec. 85.7. Code Sec. 85(c).8. Reg. §1.85-1(b)(1).9. Reg. §1.85-1(b)(1).10. Code Sec. 61(a)(4).11. Code Sec. 103.12. Code Sec. 454(a).13. Code Sec. 1272.14. Code Sec. 61(a)(7).15. Code Sec. 305; Reg. §1.305-1.16. Code Sec. 61(a)(8).17. Code Sec. 71(b).18. Code Sec. 71(c).19. Code Sec. 71(f).20. Code Sec. 61(a)(3).21. Code Sec. 121.22. Code Sec. 1041.23. Code Sec. 1031.24. Code Sec. 1033.25. Code Sec. 72.26. Code Secs. 402 and 408.27. Code Sec. 86.28. Code Sec. 61(a)(5).29. Reg. §1.61-8(b).30. Code Sec. 62(a)(6).31. Code Sec. 61(a)(2).32. Reg. §1.61-3.33. Code Sec. 74(a).34. Reg. §1.74-1(a).35. Code Sec. 74(b).36. Code Secs. 74(c), 274(j).37. Code Secs. 74(c), 274(j)(3).38. Code Sec. 274(j)(3).39. Reg. §1.74-2(c) (Example 2).40. Code Sec. 61(a)(12).41. Code Sec. 108(e)(5).42. Code Sec. 108(a)(1)(A).43. Code Sec. 108(a)(1)(B).44. Code Sec. 108(a)(1)(C), (g)(1).45. Code Sec. 108(a)(1)(E).46. Code Sec. 108(h)(2).47. Code Sec. 108(h)(3).48. Code Sec. 108(a)(1)(D).49. Code Sec. 108(f).50. Code Sec. 108(i)(1), (5).51. Code Sec. 108(i)(3)(A).52. Code Sec. 108(i)(5)(D).53. Code Sec. 108(b).54. Code Sec. 108(h)(1).55. Code Sec. 108(b).56. Code Sec. 691.57. Code Sec. 691.58. Reg. §1.691(a)-2(a).59. Code Sec. 104(a)(2).60. Code Sec. 104(a)(1).61. Code Sec. 102.62. J.F. Tufts, 83-1 USTC ¶9328, 461 US 300, 103 SCt 1826.63. Rev. Rul. 76-96, 1976-1 CB 23.64. Code Secs. 66(a)and 879(a).65. P.R.G. Horst, 40-2 USTC ¶9787, 311 US 112, 61 SCt 144.66. North American Oil Consolidated, 3 USTC ¶943, 286 US 417, 53 SCt 613 (1932).67. Code Sec. 73(a).68. Code Sec. 451(a).69. Reg. §1.451-2(a).70. C.F. Kahler, 18 TC 31, CCH Dec. 18,884 (1952).71. Reg. §1.451-2(a).

72. Reg. §1.451-2(a)(4).73. Rev. Rul. 68-239, 1968-1 CB 414.74. Code Sec. 83(a).75. Code Sec. 83(c)(1).76. Code Sec. 83(b).77. Code Sec. 422.78. Code Sec. 423.79. Code Sec. 83(b).80. Temp. Reg. §1.83-7T(a).