Gross Income: Concepts & Limitations

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Old Colony Trust Company v. Commissioner

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"Did the payment by the employer of the income taxes assessable against the employee constitute additional taxable income to such employee? " Wood's company paid all income taxes, to the end that said persons and officers shall receive their salaries or other compensation in full without deduction on account of income taxes, which taxes are to be paid out of the treasury of this corporation.

The payment of the tax by the employers was in consideration of the services rendered by the employee and was a gain derived by the employee from his labor. The form of the payment is expressly declared to make no difference. It is therefore immaterial that the taxes were directly paid to the Government. The discharge by a third person of an obligation to him is equivalent to receipt by the person taxed. The certificate shows that the taxes were imposed upon the employee, that the taxes were actually paid by the employer and that the employee entered upon his duties in the years in question under the express agreement that his income taxes would be paid by his employer. The taxes were paid upon a valuable consideration, namely, the services rendered by the employee and as part of
the compensation therefor. We think therefore that the payment constituted income to the employee.

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Eisner v. Macomber (Realization Requirement)

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She and the other shareholders received a 50% stock dividend - a dividend in the form of additional corporate stock rather than a cash dividend. Under the Revenue Act of 1916, the stock dividend was taxable, but the Supreme Court held (5-4) that no gain and no income had been realized by reason of the stock dividend and Congress had no power to tax it under the Constitution. The majority opinion suggested realization is a constitutional requirement, i.e., Congress could not constitutionally tax unrealized gain.

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Cesarini u. United States

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In 195 7, the plaintiffs purchased a used piano at an auction sale for approximately $15.00, and the piano was used by their daughter for piano lessons. In 1964, while cleaning the piano, plaintiffs discovered the sum of $4, 4 67.00 in old currency, and since have retained the piano instead of discarding it as previously planned. Being unable to ascertain who put the money there, plaintiffs exchanged the old currency for new at a bank, and reported the sum of $4, 4 67.00 on their 1964 joint
income tax return as ordinary income from other sources. On October 18, 1965, plaintiffs filed an amended return with the District Director of Internal Revenue in Cleveland, Ohio, this second return eliminating the sum of $4, 4 67.00 from the gross income computation and requesting a refund in the amount of $836.51, the amount allegedly overpaid as a result of the former inclusion of $4, 4 67.00 in the original return for the calendar year of 1964.

This Court is of the opinion that Treas. Reg. Section 1.61-14(a) is dispositive of the major issue in this case if the $4, 4 67.00 found in the piano was "reduced to undisputed possession " in the year petitioners reported it, for this Regulation was applicable to returns filed in the calendar year of 1964.

This brings the Court to the second contention of the plaintiffs: that if any tax was due, it was in 1957 when the piano was purchased, and by 1964 the Government was blocked from collecting it by reason of the statute of limitations.
This Court finds that the $4, 4 67.00 sum was properly included in gross income for the calendar year of 1964. Problems of when title vests, or when possession is complete in the field of federal taxation, in the absence of definitive federal legislation on the subject, are ordinarily determined by reference to the law of the state in which the taxpayer resides, or where the property around which the dispute centers is located. Since both the taxpayers and the property in question are found within the State of Ohio, Ohio law must govern as to when the found money was "reduced to undisputed possession " within the meaning of Treas. Reg. Section 1.61-14 and Rev. Rul. 61, 1953-1 C.B. 17.

In the absence of such a statute the common law rule applies, so that "title belongs to the finder as against all the world except the true owner." Therefore, in the instant case if plaintiffs had resold the piano in 195 8, not knowing of the money within it, they later would not be able to succeed in an action against the purchaser who did discover it. Under Ohio law, the plaintiffs must have actually found the money to have superior title over all but the true owner, and they did not discover the old currency until 1964. Therefore, this Court finds that the $4, 4 67.00 in old currency was not "reduced to undisputed possession " until its actual discovery in 1964, and thus the United States was not barred by the statute of limitations from collecting the $836.51 in tax during that year.

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McCann v. United States

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The McCanns, who are husband and wife and residents of Shreveport, Louisiana, made a round trip between Shreveport and Las Vegas, Nevada, in 1973 for the purpose of attending a seminar (the term used by the witnesses) that was conducted in Las Vegas by Mrs. McCann's employer, Security Industrial Insurance Company ( Security). All the traveling and other expenses of Mr. and Mrs. McCann in connection with attendance at the Las Vegas seminar were paid by Security.

An agent qualifies to attend a seminar if he or she achieved a specified net increase in sales during the preceding calendar year. However, agents and other employees who qualify for seminars are not required to attend; and their promotional opportunities are not adversely affected if they fail to attend. Mr. and Mrs. McCann attended the Las Vegas seminar in 1973. Mrs. McCann qualified for attendance by achieving the required net increase in sales during the calendar year 197 2; and Mr. McCann went along as her guest in accordance with Security's policy of permitting a qualifying employee to take along a spouse or other family member. All the travel and other expenses of Mr. and Mrs. McCann were paid by Security.

Therefore, the reward to Mrs. McCann, although not in the form of money, was clearly compensation to her for the services that she had rendered to Security during 1972, and was within the meaning of income, as that term is used in 26 U.S.C. § 61(a). When services are paid for in a form other than in money, it is necessary to determine the fair market value of the thing received. Treas. Reg. § 1.61-2(d)(1).

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Roco v. Commissioner

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Whether the $1,568,087 payment that ptitioner received from the United States in 1997 is includable in gross income. We hold that it is. Petitioner sued the New York University Medical Center (NYUMC) in a qui tam action under the False Claims Act (FCA). In the qui tam action, petitioner claimed that NYUMC had submitted false information to the United States which resulted in a substantial overpayment of Federal funds to NYUMC. NYUMC agreed to pay $15,500,000 to the United States in settlement of the case. The United States paid petitioner $1,568,087 in 1997 as his share of the settlement proceeds.

The qui tam payment to petitioner was the equivalent of a reward for petitioner's efforts to obtain repayment to the United States of overcharges by NYUMC. Rewards are generally includable in gross income. Sec. 1.61-2(a), Income Tax Regs. Neither qui tam payments nor punitive damages are intended to compensate the recipient for actual damages. Punitive damages are includable in gross income

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Pellar v. Commissioner

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Whether or not petitioners received income by virtue of the construction of a residence for them where the cost of construction and the fair market value of the residence materially exceeded the agreed price paid to the contractor for such construction. [Petitioners entered into an agreement with a construction company for the erection of a dwelling on land previously purchased by petitioners. The actual cost of construction was substantially in excess of the price fixed in the agreement, the excess being in part due to "extras" requested by petitioners, and in part to increased labor costs and errors in construction work on the part of contractor. The fair market value of the dwelling (exclusive of the value of the land) at the time of completion was materially in excess of the price fixed in the agreement, but was materially less than the actual cost of construction. The contractor had never expected to make a profit on the construction work and was satisfied to take a small loss.

This was because Sam Briskin, father of Rosalie Pellar, one of the petitioners, had an interest in several corporations which had employed the contractor for construction work in amounts totaling in excess of a million dollars, and Briskin had likewise, at various times, recommended the contractor to others. The contractor agreed to do the work for petitioners at the arranged price to keep Briskin's goodwill in the hope of future business from the Briskin interests and from others to whom the contractor might be recommended by Briskin.]

We think there can be no doubt that the general rule is that the purchase of property for less than its value does not, of itself, give rise to the realization of taxable income. Such realization normally arises, and is taxed, upon sale or other disposition. No taxable income results from the purchase of property assuming that the transaction is one at arm's length and that the relationship of the parties does not introduce into the transaction other elements indicating that the transaction is not simply a purchase but involves an exchange of other considerations.

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Commissioner v. Glenshaw Glass

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Whether money received as exemplary damages for fraud or as the punitive two-thirds portion of a treble-damage antitrust recovery must be reported by a taxpayer as gross income under Section 22(a) of the Internal Revenue Code of 1939 [predecessor to I.R.C. § 61 of the Internal Revenue Code of 1986].

The Glenshaw Glass Company was engaged in protracted litigation with the Hartford-Empire Company, which manufactures machinery of a character used by Glenshaw. Among the claims advanced by Glenshaw were demands for exemplary damages for fraud and treble damages for injury to its business by reason of Hartford's violation of the federal antitrust laws. In December, 194 7, the parties concluded a settlement of all pending litigation, by which Hartford paid Glenshaw approximately $800, 000. It was ultimately determined that, of the total settlement, $324, 52 9.94 represented payment of punitive damages for fraud and antitrust violations.

Respondents contend that punitive damages, characterized as "windfalls " flowing from the culpable conduct of third parties, are not within the scope of the section. But Congress applied no limitations as to the source of taxable receipts, nor restrictive labels as to their nature. And the Court has given a liberal construction to this broad phraseology in recognition of the intention of Congress to tax all gains except those specifically exempted. Here we have undeniable accessions to wealth, clearly realized, and over which the taxpayers have complete dominion.