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income suggested analysis.pdf

income suggested analysis.pdf - SECTION II 61 THE MEANING...

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SECTION II § 61: THE MEANING OF INCOME SUGGESTED ANALYSIS 1. Jody purchased a painting for $1,000. Five years later she needed cash so she sold the painting for $1,000, its fair market value at the time of sale. Does Jody have gross income? Section 61(a)(3) says that gross income includes gains from dealings in property. It doesn't tell us what “gains” means. For that we need Treas. Reg. § 1.61-6 which defines gains as the excess of the amount realized over the unrecovered cost or other basis for the property sold or exchanged, cross- referencing § 1001. Here the amount realized is $1,000 and the unrecovered cost basis is $1,000. There is no gain and no gross income. 2. John bought a used piano for $10,000 and found $500 cash inside. Does he have gross income and, if so, when and how much? Glenshaw Glass provides the three-part definition of income. There must be: 1) an accession to wealth; 2) clearly realized; 3) over which the taxpayer exercises dominion and control. When dealing with individuals, the “clearly realized” event has historically required the sale, exchange, abandonment or other disposition of acquired property (although this principle is found in the Code only by implication). With minor exceptions, individuals are not taxed on the change in the value of property while it is owned. Note, however, that requiring a sale, exchange, abandonment or other disposition before taxing increases in value is not constitutionally required. Congress could tax individuals as if their property were sold (as it does with individuals who abandon their US citizenship). This problem focuses on the realization requirement - is found property realized income when found, or only when sold? Treas. Reg. § 1.61-14(a) provides that treasure trove, to the extent of its value in United States currency, constitutes gross income for the taxable year in which it is reduced to undisputed possession. In Cesarini the court determined that finding “old money” which was no longer legal tender but could be converted into “new” money resulted in gross income at the time the money was found (seven years after the piano was purchased), in an amount equal to its value in “new” money since the taxpayers were legally entitled to keep (and did keep) the found “old” money. Since Cesarini was wealthier after finding the money, and exercised dominion and control over
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the money by keeping it, they had income when they found the money. (Note that the Cesarinis argued that if they had income, the realization event happened when they purchased the piano with the money in it because the statute of limitations on that year had already closed.) John has $500 of income when he finds the money inside the piano. 3. John bought a used piano for $10,000 and immediately discovered that it was an antique worth $750,000. Does he have gross income and, if so, when and how much?
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  • Fall '10
  • West
  • Macroeconomics, Taxation in the United States, fair market value

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