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Unformatted text preview: H Chapter Six H GROSS INCOME: INCLUSIONS AND EXCLUSIONS LECTURE OUTLINE I. GROSS INCOME A. Gross income includes all income unless specifically exempted by the U.S. Constitution, by statute, or by one of the several tax authorities (e.g., rulings and court cases). The taxpayer has the burden of proof for excluding and item. B. Income may be nontaxable in total or in part. 1. Examples of income that is nontaxable in total are most life insurance proceeds received on the death of the insured and interest received on state and local government obligations. Generally, items that are fully nontaxable never appear on the taxpayers return. However, beginning in 1987, taxpayers must show nontaxable municipal interest income on their returns. 2. Examples of income that is nontaxable in part are the sale of assets (i.e., the return of capital is nontaxable), and fellowships (i.e., nontaxable to the extent used for tuition, books, fees, supplies, and equipment required for courses of instruction at a qualified educational organization). These items are reported in full on the taxpayers return, and the nontaxable portion is subtracted. The net result is gross taxable income. II. INVESTMENTS A. Common examples of investment income, sometimes referred to as unearned income, include dividends, interests, annuities and rents. B. There are four common types of corporate distributions. 1. Cash and property distributions from a corporations current or accumulated earnings and profits (E&P) are ordinary dividend income. Prior to 1987, qualified dividends received by an individual shareholder were subject to a limited exclusion. Dividends received by a corporate shareholder are taxable income but are subject to a special deduction, discussed in Chapter 19. a. the 2003 Act reduces the tax rates imposed on dividends to what they are for capital gains. 1. Five percent for taxpayers in the 10%/15% tax brackets. 2. Fifteen percent for other taxpayers. 2. Distributions that are not from the corporations current or accumulated E&P are a return of capital. They are nontaxable to the extent of the taxpayers basis in the stock. Amounts received in excess of basis are capital gains. (Other corporate distributions that do not qualify as dividends are listed on page 6-6.) 3. In some instances, corporations may wish to pay dividends but have insufficient cash or other assets to distribute. One approach is to issue stock dividends to shareholders without giving them an opportunity to receive cash or other assets. There are three types of stock dividends. a. If the stock distribution is common stock to common shareholders, it is nontaxable. Shareholders increase the number of shares held, and their original basis is divided equally among all shares of common. The holding period for the new shares is the same as the holding period of the original common stock....
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- Spring '08