Gross Income - Exclusions
The IRS and the courts must interpret the tax law passed by Congress.
The efforts of the
IRS and the courts may result in broad definitions of certain exclusions.
Such broad definitions
may reasonably be termed administrative or judicial exclusions.
Administrative exclusions are
those that are developed by the Treasury Department and IRS through Regulation, rulings, etc.
Judicial exclusions are the result of court decisions.
The tax law specifically excludes gifts from the definition of gross income.
It is the
position of the IRS that welfare benefits are gifts.
Hence, such benefits are not taxable.
In Eisner v. Macomber
, the issue was whether a stock dividend was taxable.
Court sought to define income and concluded that realization must occur before income is
pp. I:4-2 and I:4-3.
Most exclusions exist for either reasons of benevolence (social generosity or sympathy) or
incentive (the desire to encourage or reward a particular type of behavior).
employee death benefits, life insurance benefits, and public assistance exist because of reasons of
benevolence while the foreign earned income exclusion and the exclusions for certain employee
benefits are intended to be economic incentives.
Income earned prior to the gift is taxable to the donor while income earned after the
gift is taxable to the donee.
The total tax liability can be reduced if the donee is in a lower income tax bracket
than the donor.
pp. I:4-4 and I:4-5.
Motive plays an important role.
For a transfer to be a gift, it must be made for
reasons such as love, affection, kindness, sympathy, generosity, or admiration.
Tips are considered to be compensation for services.
This is true even though
generosity or other motives may be present.
pp. I:4-4 and I:4-5.
The face amount of life insurance is excluded from the gross income of a beneficiary if the
amount is paid upon the death of the insured.
If the amount paid exceeds the face of the policy
then the excess is taxable.
For an award to be excluded under Sec. 74, it must be made for religious, charitable,
scientific, educational, artistic, literary, or civic achievement.
The recipient must be selected
without action on his or her part, and the recipient may not be required to perform any substantial
In addition, the recipient must contribute the proceeds to a charity.
The requirement that the recipient must donate the proceeds to charity severely limits the
use of Sec. 74.
The rule does benefit taxpayers who receive and donate to a charity awards that
exceed the ceiling limitation on the charitable contribution deduction (e.g., 50% of AGI).