Definition of Gross Income

Recovery of Capital Doctrine

The supreme court has held that there is no income subject to tax until the taxpayer ahs recovered the capital invested.

-This means that sellers can reduce their gross receipts (selling price) by the adjusted basis of the property sold. Thie net amount is "gross income"

Recovery of Capital

annuity contracts & installment pmts

Collections on annuity contracts and installment payments received from sales of property must be allocated between recover of capital and income

Realization Principal

the accounting model is founded on this principal-  Must have both

1. An exchange of goods or services

2. For assets capable of being objectively valued

Cash Receipts Method

-property or services rec'd are included in the year of actual or constructive receipt by the TP

-Income rec'd need not be reduced to cash that year

-Whats necessary for recognition: property or services received have a fair market value- a cash equivalent

N/R: have FMV

A/R: Do Not

Accrual Method

-items are generally included in the gross income for the year in which it is earned, regardless of when the income is collected

Income is earned when:

1. all events have occurred that fix the right to receive such income and 

2. the amount to be received can be determined with reasonable accuracy

Claim of Right Doctrine

If TP rights to income are being contested (lawsuit):

No pmt's rec'd: no income recognized until the claim is settled

Pmt Rec'd: TP is required to recognize the income in the year of receipt (thanks to claim of right doctrine)

Hybrid Method

Generally used when inventory is a material income producing factor.

-Accrual method MUST be used for Inventory (determining sales and cost of goods sold)

-TP uses the cash method for all other income and expense items.

_{Exceptions for Accrual Basis Taxpayers}

-prepaid income: must be taxed in year of receipt

-Advance payments from goods: can defer recognition of income. (ex. won't ship goods til paid, paid 12/12 but shipped goods 1/13, can defer recog. til 2013)

-Advance pmt's for services: the portion of adv. pmt for services to be performed before the end of the tax year of receipt go to that year, the portion that relates to services to be performed after can be claimed in the year following the receipt of cash.

Fruit and Tree Metaphor

Lucas v. Earl: Early was trying to slip his income with his wife.

The fruit (income) must be attributed to the tree from which it came (Mr. Earl's services)

Dividends rec'd post 2002 are taxed at what rate?

The same marginal rate that is applicable to a net capital gain (LT gain)

10-15% range paid $0 and the rates higher than that were subject to 15% on qualified dividends

1. certain dividends from foreign companies

2.dividends from tax-exempt entities

3.dividends that do not satisfy the holding period requirement.

Who is taxed on dividends?

generally, the person who is entitled to receive them- the shareholder of record as of the corporation's record date.

Once the stock is declared, ownership is fixed

Texas, Louisiana, Wisconsin, and Idaho- In these states, income produced from separate property belongs to the community so each spouse is taxed on one-half of the income

(In other states, the income is only taxed on the owner-spouse's return)

What declares property as separate?

1. Acquired before marriage or

2. Rec'd by gift or inheritence after marriage

Group Term Life Insurance

Each $1000 of coverage in excess of $50,000, the employee must include the calc'd amount in gross income. (the initial $50k is only excluded for employEE's)

Say you have $75,000 for year:

$75,000 - $50,000   * # * 12 months =

        $1000

# is found in table depending on age

Say the partner had a salary of $200,000

$200,000 - ZERO x # x 12

        $1,000