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CHAPTER 4 GROSS INCOME: CONCEPTS AND INCLUSIONS LECTURE NOTES GROSS INCOME – WHAT IS IT? 1. What is Income ? a. Defined . Income is an increase in wealth realized by a taxpayer. b. Realization . Realization occurs when the taxpayer has a transaction with another entity . The transaction results in the taxpayer’s receipt of property or a reduction in the taxpayer’s liabilities, which changes his or her net worth. c. Type of property . The type of property received is generally irrelevant in determining whether the taxpayer receives income. However , the type of property received can affect the amount of the income recognized by a cash basis taxpayer (as will be discussed below). 2. Congressional Intent . Congress intended to use the full measure of its taxing power; thus, the meaning of income should be broadly construed . The courts and the IRS frequently rely on this broad construction concept to resolve close cases. ADDITIONAL LECTURE RESOURCE Unexpected Tax Consequences of the Sixty-Second Home Run . On September 8, 1998, when Mark McGwire hit his sixty-second home run of the year, a Busch Stadium grounds keeper, Tim Forneris, retrieved the ball. Before the big event, a collector had offered $1,000,000 for the home run ball. Mr. Forneris’ new possession raised some interesting tax issues. If the ball belonged to him, he experienced a $1,000,000 increase in his wealth, much the same as a person who discovers buried treasure, which the courts have held is a taxable event. When the grounds 4-1
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4-2 2009 Comprehensive Volume/Instructor’s Guide with Lecture Notes keeper gave the ball to Mark McGwire, this raised gift tax issues. The Commissioner of Internal Revenue knew these tax issues loomed and could result in a public relations disaster for the IRS. Therefore, before the tax issues could be seriously pursued, the Commission made the following announcement: “Sometimes pieces of the code can be as hard to understand as the infield fly rule. All I know is that the fan who gives back the home run ball deserves a round of applause, not a big tax bill.” Source: IRS News Release, September 9, 1998. REALIZATION 3. Significance of the Realization Requirement . a. Briefly consider how different tax practice would be if the economist’s concept of income had been adopted for our tax system . Instead of pinpointing when realization occurs and allocating costs over time, tax practice would largely be concerned with determining market values. b. The realization requirement provides an incentive for holding assets that have appreciated . That is, if the asset is sold, a tax usually is due. (1) Thus, for example, the realization requirement favors investments in appreciating land rather than in bonds. (2)
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