Chapter 5
Gross Income
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What is income?
What if II die and you receive $1,000,000 of life insurance proceeds What if die and you receive $1,000,000 of life insurance proceeds What if II give you $100,000? What if give you $100,000? What about the income from the gift? What about the income from the gift? What if you win the lottery? What if you win the lottery? What about frequent flier awards? What about frequent flier awards? What if II die and you inherit $100,000 from me? What if die and you inherit $100,000 from me? What if II buy coffee at drive-thru, set it between my legs, spill it, sue What if buy coffee at drive-thru, set it between my legs, spill it, sue and jury awards me a gazillion? and jury awards me a gazillion? What if you find $1 million buried in backyard? What if you find $1 million buried in backyard? Employer says you’re a woman so you get 10% less than the going Employer says you’re a woman so you get 10% less than the going rate: you win sex discrimination suit rate: you win sex discrimination suit National Enquirer say that you are married to an alien, you sue and National Enquirer say that you are married to an alien, you sue and are awarded $1 million are awarded $1 million You are a Tyco executive and take unlawfully gazillions from your You are a Tyco executive and take unlawfully gazillions from your company, including money spent on a $6,000 shower ring and $20 company, including money spent on a $6,000 shower ring and $20 million birthday party for your wife million birthday party for your wife Prepare my tax return and II give you a case of Jack Daniels Prepare my tax return and give you a case of Jack Daniels You owe me $1,000 and II settle the debt for $900 You owe me $1,000 and settle the debt for $900 Cash in a life insurance policy Cash in a life insurance policy Stock dividends Stock dividends
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Georgia Man Wins 26 Million Lottery Jackpot Using Same Number Twice
November 11, 2003. It was 60-year old Stephen Cooke’s lucky day, and then some. In an amazing stroke of luck, the Roswell, Georgia resident held 2 of the 3 winning tickets for the multi-state Mega Millions lottery game. Cooke walked out of lottery headquarters with 26.6 million dollars. Cooke didn't even realize when he walked into lottery headquarters to claim one winning ticket that he had another winning ticket in his possession. It was actually a mistake on his part that he ended up with two winning tickets. Cooke used a combination of his late mother's birthday, with his own birthday, and entered that combination on two separate playslips, when he only meant to enter it once. For 99.9% of us, that would mean we just wasted an extra dollar by playing the same losing numbers twice. But for Cooke, his "error" earned him 26.6 million dollars. 3
Oprah's Car Giveaway: Tax Consequences?
Income?
Anna Nicole Smith Awarded $474 Million Inheritance
(Santa Ana CA, 12/12/01) Playboy pinup and Guess? jeans model, Anna Nicole Smith (real name Vicki Lynn), won a bitter court fight Tuesday when she was awarded an inheritance worth $474 million from the estate of her late husband, J. Howard Marshall II. The 9th grade dropout and former chicken restaurant worker, met the billionaire Marshall in 1991 at a strip club where she worked as a lap dancer. Soon, she became "the light" of his life, as he showered her with more than $6 million in money, jewelry, real estate and clothing. And in 1994, after Smith made her own name as Playboy's Playmate of the Year, the 26-year-old model and Marshall--a spring chicken at age 89—married at a drive-in chapel in Houston "He wanted to make me happy," she told a Los Angeles judge last year. "My wish was his command." Marshall died one year later in 1995. Smith quickly spent the gifts, declaring bankruptcy in 1996. During the trial, Smith’s attorney refuted the allegation that she was just a gold-digging witch. Indeed, both sides agreed that Smith had played an important role in reinvigorating the tycoon who had lapsed into despondency after the 1991 death of his second wife.The award ended— at least temporarily—a bitter feud between Marshall’s son, Pierce Marshall, 63, who plans to appeal the decision.
What if I buy coffee at a drive-thru, set it between my legs, spill it, sue and a jury awards me a gazillion?
WAL-MART SEX DISCRIMINATION SUIT TO PROCEED Oct. 21, 2003 A lawsuit charging Wal-Mart with sex discrimination will move forward, a federal judge decided Tuesday, making it the largest private civil rights case in U.S. history. The lawsuit accuses Wal-Mart, the nation's largest private employer, of paying its female employees less than male workers who held the same jobs and bypassed women for promotions. U.S. District Judge Martin Jenkins in San Francisco certified the suit of roughly 1.6 million women who worked for Wal-Mart's U.S. stores since Dec. 26, 1998
National Enquirer say that you are married to an alien, you sue and are awarded $1 million
Jury awards woman $2.2B in diluted drug case
KANSAS CITY, Mo. (AP) — A jury awarded $2.2 billion Thursday to a cancer patient whose pharmacist watered down her chemotherapy drugs. Georgia Hayes was the first of the more than 400 lawsuits against former pharmacist Robert R. Courtney.. The award consists of $2 billion in punitive damages and more than $225 million in actual damages. Courtney pleaded guilty earlier this year to diluting the chemotherapy drugs he prepared for Hayes and other cancer patients. He faces up to 30 years in federal prison. The pharmacist who admitted watering down the drugs of 34 cancer victims has acknowledged he diluted dozens of drugs over the past decade, possibly affecting 4,200 patients, federal authorities said Friday.
Aug. 19, 2005, ANGLETON, Texas - A Texas jury found pharmaceutical giant Merck liable Friday for the death of a man who took the once-popular painkiller Vioxx, awarding his widow $253.4 million in damages in the first of thousands of lawsuits pending across the country.. But the damage award is likely to be drastically cut to no more than $26.1 million because Texas law caps the punitive damages that made up the bulk of the total. Jurors in the semi-rural county rejected Merck’s argument that Robert Ernst, 59, died of clogged arteries rather than a Vioxx-induced heart attack that led to his fatal arrhythmia. Ernst, a produce manager at a Wal-Mart store, ran marathons and taught aerobics classes on the side. Merck said it plans to appeal. After news of the late-afternoon decision, Merck shares fell 7.7 percent to close at $28.06, wiping away almost $5.2 billion in market capitalization. The jury awarded $450,000 in economic damages for Ernst’s lost pay, $24 million for mental anguish and loss of companionship and $229 million in punitive damages. .But the punitive damage amount is likely to be reduced since state law caps punitive damages at twice the amount of economic damages — lost pay — and up to $750,000 on top of non-economic damages, which are comprised of mental anguish and loss of companionship.
Ex-smoker years awarded $28 billion in punitive damages LOS it will appeal 2002 Oct. 4, Calif. jury’s decision awarded a Philip Morris says ANGELES, $28 billion in— A jurydamages Friday to record-shattering punitive
a 64-year-old former smoker who sued Philip Morris Inc. for fraud and negligence. The jury awarded the amount to Betty Bullock, who started smoking when she was 17 and was diagnosed last year with lung cancer that has since spread to her liver. Last month, the jury ordered the tobacco company to pay Bullock $750,000 in damages and $100,000 for pain and suffering. Philip Morris said it would appeal. “This jury should have focused on what the plaintiff knew about the health risks of smoking, and whether anything the company ever said or did improperly influenced her decision to smoke or not to quit,” said William Ohlemeyer, the company’s counsel. “Testimony during the trial showed that Ms. Bullock was aware of the health risks of smoking and was warned repeatedly of those risks by her doctors over four decades, and her daughter also urged her to quit. Her response: ’I am an adult, this is my business.”’ Before Friday, the biggest verdict won by an individual against a tobacco company was $3 billion, awarded in June 2001. Philip Morris was ordered to pay the amount to Richard Boeken, a former heroin addict with cancer who died in January. The verdict was later reduced by a judge to $100 million.
Ex-Tyco Exec Get From 8 -25 Years In Prison
September 19, 2005 NEW YORK -- Former Tyco International CEO Dennis Kozlowski has been sentenced to 8-1/3 to 25 years for stealing hundreds of millions of dollars from the company. The judge also ordered him to pay a total of $134 million in restitution. The case exposed the executives' extravagant lifestyle after they pilfered some $600 million from the company, including a $2 million toga birthday party for Kozlowski's wife on a Mediterranean island that featured singer Jimmy Buffet and an ice sculpture of Michelangelo's David - which sprayed vodka from its penis. Headline-grabbing revelations were also made surrounding Kozlowski's $18 million Manhattan apartment with a $6,000 shower curtain. Kozlowski allegedly billed Tyco $72,042 for jewelry, $155,067 for clothing, $96,943 for flowers, $60,427 for club memberships, $52,334 for wine and $110,000 for corporate use of his personal yacht.
Definition of Gross Income
Section 61: Gross Income Defined
(a) 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: (1) Compensation for services, including fees, commissions, fringe benefits, and similar items; (2) Gross income derived from business; (3) Gains derived from dealings in property; (4) Interest; (5) Rent; (6) Royalties; (7) Dividends; (8) Alimony and separate maintenance payments; (9) Annuities; (10) Income from life insurance and endowment contracts; (11) Pensions; (12) Income from discharge of indebtedness; (13) Distributive share of partnership gross income; (14) Income in respect of a decedent; and (15) Income from an interest in an estate or trust
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“Except as otherwise provided…”
§101 Certain death benefits. §102 Gifts and inheritances. §103 Interest on State and local bonds. §104 Compensation for injuries or sickness. §105 Amounts received under accident and health plans. §106 Contributions by employer to accident and health plans. §107 Rental value of parsonages. §108 Income from discharge of indebtedness. §109 Improvements by lessee on lessor's property. §110 Qualified lessee construction allowances for short-term leases. §111 Recovery of tax benefit items §112 Certain combat zone compensation of members of Armed Forces §115 Income of states, municipalities, etc. §117 Qualified scholarships. §118 Contributions to the capital of a corporation. §119 Meals or lodging furnished for convenience of the employer §120 Amounts received under qualified group legal services plans. 21 §121 Exclusion of gain from sale of principal residence.
“Except as otherwise provided…”
§122 Certain reduced uniformed services retirement pay. §123 Amounts received under insurance contracts for certain living expenses §125 Cafeteria plans §126 Certain cost-sharing payments. §127 Educational assistance programs. §129 Dependent care assistance programs. §130 Certain personal injury liability assignments §131 Certain foster care payments. §132 Certain fringe benefits §134 Certain military benefits. §135 Income from U.S. savings bonds used to pay higher education tuition and fees. §136 Energy conservation subsidies provided by public utilities. §137 Adoption assistance programs. §138 Medicare + Choice MSA §139 Disaster relief payments 22
What is Income?
Historical Development
16th Amendment to Constitution (1913) Tax on “income” but not defined
Conceptual considerations
Economic concept of income Accounting concept of income Judicial concept
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What is Income?
Economic Concept
Ending net worth – Beginning net worth Change in net worth + Consumption expenditures = Income
Measured at FMV Imputed income
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What is Income?
Accounting concept
Realization must have occurred. External transaction Earnings process is complete Historical cost basis
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What is Income?
Judicial Concept of Income
Glenshaw Glass:
Supreme Court holds that punitive damages awarded under antitrust laws were income and creates all inclusive concept of income concept Income is any increase in wealth that has been realized.
All-inclusive approach
Everything is income except what’s not!
Form of income irrelevant
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Judicial Concept of Income
Everything is taxable!
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Income for Tax Purposes
1. 2. 3.
Is there any income? If there is income, was it realized? If there is income and it was realized, must it be recognized immediately?
1. 1. 2. 2. 3. 3.
Permanently excluded by the Code Postponed due to accounting method Nonrecognition provision provides deferral
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What Is Income? You make the call
1. T mows your lawn for $20 cash 2. T mows your lawn weekly for room and board all summer 3. T's tenant adds a porch to T's rental property 4. T finds a walkman while taking a stroll 5. T's house (cost $50,000) declared historical landmark, value now $90,000 6. T cashes in on house increase, borrows $20,000 secured by home
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What Is Income? You make the call
7. T discovers oil on his property, FMV increases by $500,000 8. T discovers gold coins buried in backyard worth $100,000 9. T embezzles $100,000 from his employer 10. T's dad says happy birthday and tells his son to forget his $5,000 debt 11. T buys stock for $1,000 and sells six months later for $3,000 12. T loses finger on job; sues employer; awarded $100,000 13. T's employer allows him to buy stereo worth $1,000 at a 10% discount
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I feel terrific!
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Principles Affecting Income Concept for Tax Purposes
General Rule: Recognize any realized income immediately, unless Code, Regs or courts say otherwise Principles affecting general rule:
Form of benefit principle Return of capital doctrine Indirect economic benefits Wherewithal to pay principle
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Form of Benefit
What about the benefits of EXTREME MAKEOVER? Will I have to pay taxes on the change? After Before
Principles Affecting Income Concept for Tax Purposes
Form of benefit principle
Form is irrelevant
"Gross income includes income realized in any form, income includes income realized in any form, whether in money, property or services." (Reg. § 1.61-1(a)). Noncash benefits are taxed under the cash equivalent doctrine (FMV of benefit received) Payment “in kind” Barter transactions Barter transactions Bargain sale Relief of debt Others
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Examples
Principles That Affect the Income Concept for Tax
Return of Capital Doctrine
Capital may not be taxed Sale CoGS is a return of capital Damages, depreciation “Open transaction” doctrine Many others
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Principles That Affect the Income Concept for Tax
Indirect Economic Benefit Exceptions
Some employer-provided benefits excluded Theory
Patterson v. Thomas: exclusion if demonstrate that it served a business purpose of the employer other than to compensate the employee.
• Business purpose other than compensation compensation • Serves the convenience of the employer convenience of the employer
Problem 5-6
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Problem 5-6
A, an assistant manager for a department store, often is required to work overtime to help mark down merchandise for special sales. On these occasions, her employer pays the cost of her evening meal. Does the meal constitute income?
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Principles Affecting the General Rule
Wherewithal-to-Pay Exceptions in the Code
Like-kind asset exchanges Replacement of casualty property Installment sales
Many others
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