Gross income
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Gross income is commonly defined as the amount of a company's or a person's income before all deductions or any taxpayer’s income, except that which is specifically excluded by the Internal Revenue Code, before taking deductions or taxes into account. For a business, this amount is pre-tax net sales less cost of sales. Section 61 of the Internal Revenue Code (Code) defines "gross income" as "all income from whatever source derived."[1] Section 61(a) of the Code lists fifteen examples of items included in gross income; however, the list is not exhaustive.[2] Therefore, unless the Code specifies that something is excluded from gross income, the assumption is that it is included. Exceptions to what is included in gross income can be found under §§ 101-140 of the Code. Each of these sections excludes a particular type of inflow if it meets the criteria stated.
For the purpose of a company's description of an employee's income, the term annual earnings may be used because a person may have other sources of taxable income in a year, apart from what is earned from the employer. For instance, cashing out a Canadian Registered Retirement Savings Plan results in additional income that must be claimed as part of total world income.
Further description of the items included in gross income per the IRS, are in Part II of Subchapter B of Chapter 1 of the Internal Revenue Code. Items specifically excluded from gross income are listed in Part III of the same subchapter.
In Commissioner v. Glenshaw Glass Co., the U.S. Supreme Court provided a standard for determining whether something is includable in gross income. [3] The court held that all amounts received by taxpayers which are “undeniable accessions to wealth, clearly realized, and over which the taxpayers have complete dominion” are includable in gross income. [4]
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[edit] Accounting methods
Three methods for determining when an inflow is included in gross income are the cash method, the accrual method, and the hybrid method. Under the cash method system a taxpayer reports gross income at the time of actual or constructive receipt of actual cash or cash equivalence. The accrual method requires taxpayers to report income when the recipient has a legal right to the gain, when the amount of the gain is reasonably certain to determine, and when the ultimate receipt is reasonably certain. The final method is the hybrid method which combines the cash method and the accrual method.
[edit] Accession
An undeniable accession to wealth requires an inflow of cash, noncash property, services, or other satisfaction in excess of the initial capital invested. For example, if David purchases a suitcase for $300 in October and sells it in November for $400, he has gross income of $100 (the $400 received minus his $300 basis).
[edit] Realization
Realization involves two components: severance, and dominion and control. Severance means that the gain is physically separable from the producer of the gain. For example, Sarah owns a house for which she paid $150,000 in 1995. In 2003, Sarah still owns the house buts its fair market value has increased to $400,000. Sarah does not realize the $250,000 increase because it is not physically separable from the house.
Dominion and control means that the amount is available for immediate use, benefit, or disposal by the taxpayer.
[edit] Items Excluded from Gross Income
Some items meet the Glenshaw Glass definition of gross income, but are nonetheless excluded from gross income by other provisions in the Internal Revenue Code.
For example, gifts are generally not considered income for the recipient. When a taxpayer receives a gift, the taxpayer has an “undeniable accession to wealth,” “clearly realized,” and has “complete dominion” over it. However, the Code specifically excludes gifts from gross income.[5]
Likewise, gross income does not include certain types of compensation for physical injuries.[6] Specifically, the following amounts are not considered gross income for tax purposes:
- amounts received under worker’s compensation acts for personal injuries or sickness;
- amounts received as damages (other than punitive damages) in a suit or settlement for personal physical injuries or physical sickness;
- amounts received through insurance for personal injuries or sickness;
- amounts received as a pension, annuity, or similar allowance for personal injuries or sickness resulting from active service in the armed forces; and
- amounts received by an individual as disability income attributable to injuries incurred as a direct result of a terroristic or military action.[7]
Unless there is a specific exclusion in the Code, however, all income, from whatever source derived, is gross income.[8]
[edit] Federal income tax implications of receipt of gold or silver coins
Some people have argued that with respect to the receipt of gold or silver coins, taxpayers need only report as income the "face value," and not the higher actual fair market value, of the coins. The courts have uniformly rejected these attempts. In the Joslin case, the United States Court of Appeals for the Tenth Circuit ruled that under and 26 C.F.R. 1.61-2(d)(1), a taxpayer who bargains to be paid for his services in legal tender (in this case, silver dollar coins) must report the income at the fair market value (numismatic value), and not at the lower face value.[9] Similarly, in the Cordner case, the United States Court of Appeals for the Ninth Circuit ruled that a taxpayer who receives Double Eagle gold coins as a distribution from a corporation must report as income the fair market value of the coins, not the lower face value.[10] In this case, where a coin, by reason of its value to collectors or by reason of the intrinsic worth of its contents, has a fair market value in excess of its face value, it is treated as "property other than money" for purposes of , resulting in taxation at fair market value.[11]
The Ninth Circuit Court has ruled that under , in the exchange of Swiss francs for U.S. Double Eagle gold coins, the taxpayer is taxed at the aggregate fair market value, and not the lower face value.[12] In this case, the taxpayer and the government argued about whether the Double Eagle coin was legal tender. The court stated that it would not have to decide the issue. The court stated: "Because the key element is the excess of market value over face value, it is immaterial that such coins may be legal tender at their face value."[13]
In still another case, a taxpayer’s argument – that gold and silver coins should, for Federal income tax purposes, be valued at their face value, while foreign coins, in general, should be valued according to their precious metal content – was rejected. The court stated: "Coins which are not currently circulating lender tender are property to be valued at their fair market value for purposes of section 1001(b) [. . . citation omitted . . .] This result is unaffected by the fact that such coins may still be used as legal tender at their face value."[14]
Taxpayers have attempted to argue that the Cordner Doctrine (see above) should not apply where the coins remain in circulation, as the coins in the Cordner case (gold coins) had been withdrawn from circulation. This argument has been rejected. In the Stoecklin case, the court ruled that the taxpayer who receives coins (in this case, silver dollar coins) as compensation for services is taxed at the fair market value of the coins, not the lower face value, regardless of whether or not the coins have been withdrawn from circulation.[15] Similarly, in the case of United States v. Kahre, the criminal defendants’ arguments -- that where gold or silver coins are currently circulating, the taxpayer may report the coins as income at their face value and not at the higher fair market value -– were rejected.[16] The Kahre case also made news because although the defendants lost their argument that the receipt of circulating coins could be taxed at the lower face value, the defendants were not convicted of the criminal charges against them, with the main defendant drawing a hung jury.[17]
[edit] Exchange of services/ Compensation paid other than in cash
Exchange of services and the exchanges of a service for a good are two transactions that are included as gross income to taxpayers.[18]
Internal Revenue Service regulations state that if services are exchanged for property, the fair market value of the property taken for the service is included as compensation income. [19] If there is an exchange of services by two or more parties, the fair market value or stipulated price of the services is included as income for compensation. [20] In Revenue Ruling 79-24, the Internal Revenue Service held that exchange of professional services and exchange of a service for a property right constituted income in two situations. [21] First, after a housepainter exchanged his painting services for legal services from a lawyer, both the lawyer and painter had to include the fair market value of the services performed as gross income. [22] Second, after a landlord provided rent-free housing to an artist/tenant in exchange for a painting, the Service held that the landlord and artist were responsible for the inclusion of the equivalent of six months rent in gross income.[23]
[edit] Notes
- ^ I.R.C. § 61(a)
- ^ See the language in I.R.C. § 61(a) which says "including (but not limited to) the following items."
- ^ Commissioner v. Glenshaw Glass Co., 348 U.S. 426 (1955)
- ^ Id.
- ^ IRC § 102. See also Commissioner v. Duberstein, 363 U.S. 278 (1960), and Helvering v. Horst
- ^ IRC § 104(a)(2).
- ^ IRC § 104(a)(1)-(5).
- ^ IRC § 61(a).
- ^ Joslin v. United States, 666 F.2d 1306, 81-2 U.S. Tax Cas. (CCH) paragr. 9813 (10th Cir. 1981).
- ^ Cordner v. United States, 671 F.2d 367, 82-1 U.S. Tax Cas. (CCH) paragr. 9275 (9th Cir. 1982).
- ^ Id.
- ^ California Federal Life Ins. Co. v. Commissioner, 680 F.2d 85, 82-2 U.S. Tax Cas. (CCH) paragr. 9464 (9th Cir. 1982).
- ^ Id.
- ^ Lary v. Commissioner, 842 F.2d 296, 88-1 U.S. Tax Cas. (CCH) paragr. 9279 (11th Cir. 1988) (per curiam).
- ^ Stoecklin v. Commissioner, 865 F.2d 1221, 89-1 U.S. Tax Cas. (CCH) paragr. 9177 (11th Cir. 1989).
- ^ United States v. Kahre, 2007-2 U.S. Tax Cas. (CCH) paragr. 50,548 (D. Nev. 2007).
- ^ Joan Whitely, "Four-month trial ends with no convictions," Sept. 20, 2007, Las Vegas Review-Journal, at [1].
- ^ IRC 1.161-2(d)(1).
- ^ Id.
- ^ Id.
- ^ Internal Revenue Ruling 79-24, 1719-1 C.B. 60.
- ^ Id.
- ^ Id.
