Tax Reporting Issues

Chapter 3 – Income Sources

§61(a) Gross Income Defined:

General definition. Except as otherwise provided in this subtitle, gross income means all income from whatever source derived, including (but not limited to) the following items:

– Compensation for services;

– Gross income derived from business;

– Gains derived from dealings in property;

– Interest and dividends;

– Rents and royalties

– Alimony and separate maintenance payments

– Annuities, pensions, and income from life insurance/endowment contracts

– Income from discharge of indebtedness;

– Distributive share of partnership gross income;

What is Income?

All-inclusive Income Concept

Judicial findings

Income is the gain derived from Labor and Capital

Any increase in wealth that has been Realized is Income

What is Realization?

Current View

A change in the form and/or substance of the taxpayer’s property, and

The involvement of a second party in the income process

Types of Income (Pg.38)

Earned Income

Compensation received for the provision of labor is earned income. Wages

Unearned Income

The earnings from investments and gains from the sale, exchange or disposition of investment assets is unearned income.

Transfer Income

Increases in wealth that have been realized that are not the result of labor (earned) or capital (unearned).

Imputed Income

Increases in wealth that have NOT been realized and are typically not taxed due to the administrative convenience concept.

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Unearned Income

Annuities (Constant Payment- Ex. Pension, Retirement)

The original investment is excluded from gross income (Capital Recovery Concept)

Must spread the recovery over the time period of receipt

Each payment includes

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