Gross Income: Overview and Conceptual Aspects (Portfolio 501)

Tax Management Portfolio, Gross Income: Overview and Conceptual Aspects, No. 501-4th, serves three primary functions for the practitioner. First, it provides a conceptual framework for handling issues relating to the gross income concept. The Portfolio explores the nature, scope, significance, definition, and fundamental concepts of gross income. Topics discussed include imputed income, tax-deferred income, recapture income, the timing of income, the significance of the form of receipt, pass-through rules, foreign issues, compensation income, trade or business income, and investment income, as well as personal transactions and miscellaneous transactions.

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Tax Management Portfolio, Gross Income: Overview and Conceptual Aspects, No. 501-4th, serves three primary functions for the practitioner. First, it provides a conceptual framework for handling issues relating to the gross income concept. The Portfolio explores the nature, scope, significance, definition, and fundamental concepts of gross income. Topics discussed include imputed income, tax-deferred income, recapture income, the timing of income, the significance of the form of receipt, pass-through rules, foreign issues, compensation income, trade or business income, and investment income, as well as personal transactions and miscellaneous transactions.

Second, the Portfolio explains the basic rules of numerous specific provisions subsumed in the broad categories referred to above (for example, computation of gross income under the installment method).

Third, the practitioner can use the Portfolio as a tool for identifying Tax Management Portfolios that provide an in-depth treatment of specific topics discussed here. Cross references to applicable Portfolios appear in each section of this Portfolio. Also, the Working Papers include a Portfolio finding table.

Buy Gross Income: Overview and Conceptual Aspects (Portfolio 501) now


James Edward Maule, B.S., University of Pennsylvania (1973); J.D., Villanova University (1976); LL.M. (Taxation), George Washington University (1979); Lecturer, Villanova University Graduate Tax Program and Tax Forum CLE Programs; Lecturer, Philadelphia Tax Conference; former Lecturer, Philadelphia Bar Association Tax Section; former Lecturer, ALI-ABA; former Lecturer, Tax Management, Inc. & Continuing Legal Education Satellite Network; former Lecturer, Pennsylvania Bar Institute; former Lecturer, The Dickinson School of Law CLE Programs; member, American Bar Association, Section of Taxation, Committee on Formation of Tax Policy; member, American Bar Association, Section of Taxation, Committee on S Corporations (former Consultant and former Chair, Subcommittee on Subchapter S and State Law; former Chair, Subcommittee on Comparison of Partnerships and S Corporations; former member, Task Force on Legislative Recommendation No. 86-1); member, American Bar Association, Section of Taxation, Committee on Teaching Taxation (former Chair, Subcommittee on Manuscripts and Unpublished Teaching Materials); member, American Bar Association, Section of Taxation, Tax Practice Management Committee; former member, American Bar Association, Section of Taxation, Committee on Tax Structure and Simplification (former Chair and Reporter, Phaseout Tax Elimination Project); former member, American Bar Association Tax Section Task Force on Pass-Through Entities; former member, Philadelphia Bar Association Tax Section; author and owner, TaxJEM Inc., publisher of computer assisted legal instruction programs; owner and publisher, JEMBook Publishing Co.; former co-owner, StarJEM LLC; developer, TaxCruncherPro, income tax planning software; author of numerous books, monographs, and book chapters; contributor to various tax and legal periodicals.


Detailed Analysis

I. Introduction

A. Overview

1. The Nature of Gross Income

2. Significance of Gross Income

3. Concept and Scope of Gross Income

4. Applicability to Various Transactions

5. Assignment of Gross Income

B. Historical Background

1. Introduction

2. Early Federal Income Tax Statutes

a. The First Civil War Income Tax Act

b. The Second Civil War Income Tax Act

c. The Third Civil War Income Tax Act

d. The Reconstruction Era Income Tax Act

e. The Income Tax of 1894

f. The Corporate Excise Tax of 1909

3. Passage of the Sixteenth Amendment

4. Post-Sixteenth Amendment Income Tax Acts

a. Revenue Act of 1913

b. Subsequent Statutory Development

II. The Significance of Gross Income

A. In General

B. Tax Liability Computation

1. In General

2. Other Income Tax Liabilities

3. Other Federal Taxes

4. Impact on State and Local Income Taxes

C. Administrative Matters

1. Return Filing Requirements

2. Extended Statute of Limitations

3. Penalties

D. Measurement of Other Computation Steps

1. Gross Income Limitations

2. Modified and Adjusted Gross Income Limitations

3. Use as Computational Base or Eligibility Factor

III. Concept and Definition of Gross Income

A. Basic Concepts

1. Introduction

2. Accessions to Wealth

3. Clearly Realized Requirement

a. In General

b. Specific Situations

c. Form of Realization

d. Constructive Realization

(1) In General

(2) Dealer Securities Mark-to-Market Rules

(a) In General

(b) Dealer in Securities

(c) Security

(d) Exceptions

(3) Financial Contract Mark-to-Market Rules

(a) In General

(b) § 1256 Contract

(c) Exceptions

(i) Mixed Straddles

(ii) Hedging Transactions

(4) Constructive Sales of Appreciated Financial Positions

(a) In General

(b) Appreciated Financial Position

(c) Constructive Sale

B. Constitutional Issues

1. In General

2. General Constitutional Power to Tax

3. The Sixteenth Amendment

4. Intended Scope of Source

5. Realization as Constitutional Prerequisite

C. Imputed Income

1. In General

2. Services Performed and Goods Produced for One's Self

3. Owner Use of Property

4. Imputed Interest, Original Issue Discount, and Unstated Interest

a. Below Market Loans

(1) In General

(2) Definition

(3) Below Market Loans to Which Rules Apply

(4) Computation of Foregone Interest

b. Original Issue Discount (OID)

(1) In General

(2) Application

(3) Determination of Existence of OID

(a) In General

(b) Issue Price

(4) Computation of OID Gross Income Inclusion

c. Unstated Interest

(1) In General

(2) Application

(3) Determination of Unstated Interest

IV. The Scope of Gross Income

A. In General

B. Limitations on the Use of Receipts

1. In General

2. Beverage Container Deposits

3. Utility Rate Receipts and Security Deposits

4. Advance Trade Discounts

C. Receipt for Other Than Money or Services

D. Claim of Right

E. Tax Benefit Rule

F. Nonrecognition Transactions

1. In General

2. Deferral Concept

3. Types

4. Specific Provisions

a. Like-kind Exchanges

b. Involuntary Conversions

c. Transfers Between Spouses or Incident to Divorce

d. Dispositions by Transferees Where Loss Previously Disallowed to Transferor

e. Certain Reacquisitions of Real Property

f. Transfers to Controlled Corporations

g. Transfers to Partnerships

h. Corporation's Exchange of Its Stock

i. Exchange of Corporate Stock

j. Corporate Reorganizations

k. Distribution of Stock or Property by Corporation

l. Distribution of Stock and Securities of a Controlled Corporation

m. Liquidation of Subsidiary

n. Distributions of Property by Partnerships

o. Insurance Policy Exchanges

p. Certain Exchanges of U.S. Obligations

q. Transfers of Real Property with Special Use Estate Tax Value

r. Sales of ESOP Employer Securities

s. Rollover of Gain from Publicly Traded Securities

t. Rollover of Gain from Qualified Small Business Stock

u. Conflict-of-Interest Divestitures

v. SEC-Ordered Dispositions

w. Rollover of Gain from Empowerment Zone Assets

x. Dispositions of Qualifying Vessels

G. Gross Income from Recapture Provisions

1. In General

2. Specific Provisions

a. Alimony Recapture

b. Recapture of Depreciable Business Asset Expense Deduction

c. Recapture of Clean Fuel Vehicle and Refueling Property Deduction

d. Listed Property Business Use Depreciation Recapture

e. Recapture of Corporate Liquidation Loss

f. Recapture of Negative Amounts at Risk

g. Recapture of Prior Understated § 467 Rental Inclusions

h. Mining Exploration Expenditure Recapture

i. Section 1245 Depreciation Recapture

j. Section 1250 Depreciation Recapture

k. Farm Land Expenditure Recapture

l. Section 1254 Mineral Expenditure Recapture

m. Section 126 Property Recapture

n. Wetland and Cropland Recapture

o. C Corporation LIFO Recapture

p. Recapture of Empowerment Zone Property Deduction

V. Timing Rules

A. In General

B. Method of Accounting

1. In General

2. Principal Methods

3. Restrictions on Method

C. General Rule for Inclusion in Gross Income

D. Installment Method

1. In General

2. Installment Sale

3. Computation of Amount Included in Gross Income

4. Limitations and Accelerations

5. Interest Payable on Deferral Benefit

E. Obligations Issued at a Discount

F. Prepaid Income

1. Prepaid Subscription Income

2. Prepaid Membership Dues

G. Certain Returned Merchandise

VI. Foreign Issues

A. In General

B. Taxation of Nonresident Aliens

1. In General

2. Effectively Connected U.S. Business Income

3. Income from Sources Within the United States

4. Specific Exclusions

C. Foreign Corporations

1. In General

2. Effectively Connected U.S. Business Income

3. Income from Sources Within the United States

4. Specific Exclusions

D. Foreign Governments and International Organizations

1. Foreign Governments

2. International Organizations

E. Employees of Foreign Governments and International Organizations

F. Income Tax Treaties

G. Residents of Possessions and Puerto Rico

H. U.S. Taxpayers' Activities Abroad

1. Foreign Earned Income and Housing Expenses

2. Government Allowances for Employees Abroad

3. Controlled Foreign Corporations

4. Qualified Electing Funds

VII. The Passing Through of Gross Income

A. In General

B. Partnerships and S Corporations

C. Income in Respect of Decedent (IRD)

1. Definition

2. Affected Taxpayers

3. Transfer of Right to IRD

D. Income from an Estate or Trust Interest

1. In General

2. Simple Trusts

3. Estates and Complex Trusts

4. Grantor Trusts

E. Bankruptcy Estate

F. Activities of U.S. Persons Abroad

VIII. Compensation Transactions

A. In General

1. Scope of Compensation Transactions

2. Significance

3. Meaning of Employment Relationship

B. Wages and Other Remuneration

1. Wages, Salaries, and Other Direct Compensation

a. In General

b. Rendition of Services

c. Tips and Gratuities

d. Termination and Severance Pay

(1) In General

(2) Accumulated Leave and Pension Contributions

e. Employment Litigation

(1) Wrongful Discharge and Back Pay

(2) Discrimination Claims

(3) Other Claims Against Employer

f. Form of Payment

(1) In General

(2) Assignments of Property or Contract Rights

(3) Use of Employer's Property

g. Loans

h. Sales Proceeds

i. Amounts Repaid, Withheld, or Not Received

(1) Amounts Not Received

(2) Amounts Withheld

(3) Amounts Repaid

j. Compensation Received in Advance

2. Indirect Compensation

a. In General

b. Spouses, Parents, and Children

c. Nature of Indirect Compensation

(1) Payment of Employee's Debt

(2) Payment of Employee's Taxes

(3) Employee's Legal Expenses

(4) Financial Counseling Fees

(5) Other Personal Expenditures

3. Services Performed Gratuitously

a. Services Rendered to Tax-Exempt Organization

b. Services Performed on Behalf of Charity

c. Qualified Foster Care Payments

(1) In General

(2) Qualified Foster Care Payment

(3) Qualified Foster Individual

(4) Qualified Foster Care Placement Agency

(5) Difficulty of Care Payments

(6) Limitations

d. Members of Charitable Religious Orders

4. Compensation of Aliens

a. In General

b. Aliens' Compensation from U.S. Sources

c. Employees of Foreign Governments and International Organizations

d. Residents of Possessions and Puerto Rico

5. U.S. Taxpayers' Activities Abroad

C. Fringe Benefits

1. In General

a. Scope

b. Fringe Benefit Exclusions

c. Persons Subject to Taxation

d. Amount Included in Gross Income

2. No-Additional-Cost Services

a. In General

b. Definition

c. Employees Defined

d. Nondiscrimination

e. Other Special Rules

3. Qualified Employee Discounts

a. In General

b. Definition

c. Excess Discounts

d. Employees Defined

e. Nondiscrimination

f. Other Special Rules

4. Working Condition Fringe

a. In General

b. Definition

c. Qualified Automobile Demonstration Use

d. Testing and Evaluation of Employer Products

e. On-Premises Athletic Facilities

f. Employees Defined

g. Other Special Rules

5. De Minimis Fringe Benefits

a. In General

b. Definition

c. Eating Facilities

d. Other Special Rules

6. Qualified Transportation Fringe

a. In General

b. Definition

c. Limitations

7. Qualified Moving Expense Reimbursements

8. Qualified Retirement Planning Services

9. Qualified Military Base Realignment and Closure Fringes

10. Employee Gifts and Awards

a. In General

b. Qualified Employee Achievement Awards

(1) In General

(2) Definition of Employee Achievement Award

(3) Amount Allowable as a Deduction

11. Meals and Lodging

a. In General

b. Exclusions

c. Meals and Lodging Furnished for Convenience of Employer

(1) In General

(2) Convenience of the Employer

(3) Business Premises of Employer

(4) Condition of Employment

(5) Fixed Charges for Meals

d. Campus Lodging

(1) In General

(2) Qualified Campus Lodging

(3) Limitation

12. Rental Value of Parsonage

a. In General

b. Rental Allowance

(1) In General

(2) Designation

(3) Use of Allowance

c. Employer

d. Minister of the Gospel

13. Foreign Housing

14. Accident and Health Insurance or Plan Benefits

a. Employer Contributions

b. Amounts Received for Personal Injuries or Sickness

c. Medical Expense Reimbursement Exclusion

(1) In General

(2) Nondiscrimination Requirements

d. Permanent Disability Exclusion

e. Received Through Accident and Health Insurance

f. Disability Payments for Terrorist Attack Injuries

15. Receipt of Restricted Property

a. In General

b. Gross Income When Property Substantially Vested

c. Election to Report Gross Income When Property Received

d. Substantially Vested and Restricted Property

e. Other Special Rules

16. Statutory Stock Options

17. Nonstatutory Stock and Other Options

a. Restricted Nonstatutory Options

b. Nonrestricted Nonstatutory Options

c. In Connection with the Performance of Services

18. Life Insurance

a. In General

b. Split Dollar Life Insurance

c. Group Term Life Insurance

(1) In General

(2) Nondiscrimination Requirements

19. Qualified Tuition Reduction

20. Educational Assistance Programs

a. In General

b. Educational Assistance Program

c. Educational Assistance

d. Other Exclusions

e. Special Rules

21. Dependent Care Assistance

a. In General

b. Limitations on Exclusion

c. Dependent Care Assistance Program

22. Adoption Assistance

a. In General

b. Limitations

(1) Dollar Limitation

(2) Income-Based Phase-out

c. Adoption Assistance Program

d. Qualified Adoption Expenses

e. Procedural Requirements

23. Cafeteria Plans

a. In General

b. Cafeteria Plan Defined

c. Restrictions on Highly Compensated Participants and Key Employees

d. Flexible Spending Accounts

24. Public Safety Officer's Survivors' Benefits

25. Employer-Paid Death Benefits to Terrorist Victims or Astronauts

D. Reimbursed Employee Business Expenses

1. In General

2. Adequate Accounting

3. Specific Types of Reimbursed Expenses

a. Meal Expenses

b. Per Diem and Mileage Allowances

c. Travel and Entertainment

d. Employment Agency Fees and Interview Expenses

e. Moving Expenses

f. Litigation Expenses

g. Foreign Currency Losses

E. Retirement Compensation and Similar Transactions

1. Currently Funded Pensions

2. Unfunded Deferred Compensation

a. Unfunded Arrangements

b. Unfunded Plans

3. Funded Qualified Retirement Plans

a. Contributions and Fund Earnings

b. Distributions

4. Individual Retirement Accounts and Annuities

a. Earnings

b. Distributions

5. Simplified Employee Pension Plans

a. Contributions and Earnings

b. Distributions

6. Tax-Exempt and Public School Employee Annuities

a. Contributions and Earnings

b. Distributions

7. Funded Nonqualified Retirement Plans

a. Contributions and Fund Earnings

b. Distributions

8. Cash or Deferred Arrangements

F. Public and Institutional Employment Related Benefits

1. Unemployment Compensation

a. In General

b. Unemployment Compensation Defined

c. Training and Retraining Payments

d. Temporary Utilization of Unemployed Workers

2. Private and Institutional Unemployment Relief

a. Supplemental Unemployment Compensation

b. Unemployment Benefits from Union

c. Strike Benefits

d. Privately Funded Unemployment Compensation

3. Worker Compensation

4. Social Security and Similar Benefits

a. In General

b. Taxable Individual

c. Includible Portion

(1) In General

(2) Election for Special Treatment of Lump-Sum Payments

(3) Nonresident Aliens

d. Definition of Social Security Benefits

(1) In General

(2) Tier One Railroad Retirement Benefits

(3) Workmen's Compensation Substitutes

(4) Reduction for Repayments

(5) Withheld Amounts

(6) Benefits Received Early

(7) Foreign Social Security Benefits

5. Medicare+Choice MSA Contributions

6. Federal Prescription Drug Plan Subsidies

7. Property Tax Abatements Granted for Services

G. Compensation of Members of the Uniformed Services

1. In General

2. Members of the Uniformed Services

3. Members on Active Duty

a. Basic Active Duty and Re-enlistment Pay

b. Qualified Military Benefits

c. Combat Zone Compensation

(1) In General

(2) Hospitalization

(3) Effect of Marital Status

(4) Active Service

(5) Compensation

(6) Combat Zone

(7) Incurred While Serving in Combat Zone

d. Quarters, Subsistence, Family Separation, and Uniform Allowances

4. Retired and Disabled Members

a. In General

b. Basic Retirement Pay

c. Retirement Bonus

d. Veterans Benefits

e. Disability Benefits

(1) In General

(2) Disability Pay

f. Premium for Survivor and Retirement Protection Plan

IX. Trade or Business Operations

A. Scope of Trade or Business Income

1. In General

2. Independent Contractors

a. Similarity with Treatment of Employees

b. Form of Receipt

c. Services Performed Gratuitously

d. Independent Contractors' Fringe Benefits

B. Computational Concepts

1. Cost of Goods Sold

2. Dealers in Municipal Bonds

a. In General

b. Non-cost Inventory

c. Cost Inventory or No Inventory

d. Municipal Bond

3. Trade Discounts

4. Withdrawals from a Business

5. Contributions to Corporate Capital

a. Contributions by Shareholders or Members

(1) Equity Contributions

(2) Membership and Similar Fees

(a) Stock and Trading Exchanges

(b) Taxable Clubs

(c) Cooperative Membership Dues

(d) Mutual Benefit Associations

(3) Cooperative and Similar Assessments

(4) Indebtedness Exception

b. Contributions by Those Not Shareholders

(1) In General

(2) Nonshareholder Contribution to Capital

(a) In General

(b) Required Increase in Transferee's Capital Lacking

(c) Benefits to Transferor Precluding Exclusion

(d) Required Benefit to Transferee

(3) Contributions in Aid of Construction

(4) Qualified Contributions in Aid of Public Utility Construction

(a) In General

(b) Expenditure Test

(c) Contribution in Aid of Construction

(d) Regulated Public Utility

(e) Extension of Statute of Limitations

(5) Customer Contributions

(6) Intercorporate Transactions

6. Reimbursements

a. In General

b. Construction Allowances

C. Specific Trades or Businesses

1. Income from Farming

a. In General

(1) Cash Method Farmers

(2) Accrual Method Farmers

(3) Crop Method of Accounting

(4) Imputed Income and Unrealized Appreciation

(5) Farmer Defined

b. Sale of Items Raised by Farmer

(1) Cash Method Farmers

(2) Accrual Method Farmers

(3) Barter Exchanges

(4) Crop Insurance

c. Profits from Sale of Purchased Items

d. Subsidies and Conservation Payments

e. Other Sources

2. Income from Contracts with States and Municipalities

3. Income of States and Municipalities

a. In General

b. Political Subdivision

c. Essential Governmental Function

d. Public Utility

e. Income Accruing to State or Municipality

4. Income of Life Insurance Companies

a. In General

b. Premiums and Other Consideration

c. Net Decreases in Reserves

d. Life Insurance Company

5. Income of Insurance Companies Other Than Life Insurance Companies

a. In General

b. Investment and Underwriting Income

(1) Investment Income

(2) Underwriting Income

(a) Computation of Premiums Earned

(b) Special Computation Rules

(c) Unearned Premiums Defined

c. Mortgage Guaranty Account Subtraction

6. Income of Shipowners' Protection and Indemnity Associations

7. Cooperatives and Their Members

a. Gross Income of Cooperatives

(1) In General

(2) Computation of Gross Income

(3) Payment Period

(4) Cooperative Organizations

b. Patrons and Members

(1) In General

(2) Exclusion

8. Federal Government Business and Related Activities

a. Federal Banks and Similar Institutions

b. Federal Credit Assistance Corporations and Similar Funds

c. Federal Property Management and Public Service Entities

9. Income from Shipping

D. Miscellaneous Items

1. Business Insurance Proceeds

2. Damages for Business Injuries

a. In General

b. Lost Profits

c. Damage to Assets Other Than Goodwill

d. Damage to Goodwill

e. Punitive Damages

3. Antitrust Damages and Recoveries

a. Compensatory Damages

b. Punitive Damages

4. Nuclear Decommissioning Cost Recoveries

5. Alcohol and Biodiesel Fuel Credits

6. Maritime Administration Credits

7. Ship Contractor Reserve Funds

8. Manpower Act Payments

9. Clean Air Act Amendments

10. Energy Conservation Subsidies

X. Investment Transactions

A. Return on Capital

1. Taxable Interest

a. In General

b. Interest

(1) In General

(2) Expectations Concerning Repayment

(3) Timing

(4) Refinancing and Additional Loans

(5) Sale Proceeds Distinguished

(6) Payment of Taxes with Respect to Instrument

c. Particular Sources of Taxable Interest

(1) Bank and Other Institutional Deposits

(2) Coupon Bonds

(3) Open Accounts

(4) Promissory Notes

(5) Mortgages

(6) Corporate Bonds, Debentures, and Other Indebtedness

(7) U.S. Government Obligations

(a) Treasury Bonds and U.S. Savings Bonds

(b) Other U.S. Obligations and U.S. Guaranteed Obligations

(8) Legacies

(9) Trust Funds

(10) Life Insurance Proceeds

(11) Annuity and Life Insurance Policy Investments

(a) Dividends

(b) Premium Discounts and Returns

(12) Tax Refunds

(13) Condemnation Awards

(14) Judgments

(15) Usurious Interest

(16) Instruments Purchased When Interest in Arrears

(17) Sale of Instruments with Interest in Arrears

(18) Instruments Purchased Between Interest Dates

(19) Instruments Sold Between Interest Dates

(20) Foreclosures

2. Tax-Exempt Interest

a. In General

b. Interest on State and Local Bonds

(1) In General

(2) Interest

(3) State or Local Bond

(a) In General

(b) Reissuance Standards for State and Local Bonds

(1) In General

(2) Auction Rate Bonds

(c) Qualified Volunteer Fire Department Bonds

(d) Qualified Scholarship Funding Bonds

(4) Private Activity Bonds

(a) In General

(b) Private Loan Financing Test

(c) The Private Business Use Test

(d) The Private Security or Payment Test

(e) Qualified Bonds

(i) In General

(ii) Exempt Facility Bond

(iii) Qualified Mortgage Bond

(iv) Qualified Veterans' Mortgage Bond

(v) Qualified Small Issue Bond

(vi) Qualified Student Loan Bond

(vii) Qualified Redevelopment Bond

(viii) Qualified 501(c)(3) Bond

(ix) Volume Cap

(x) Substantial User Requirements

(xi) Average Maturity Restriction Requirements

(xii) Land Acquisition Restriction Requirements

(xiii) Existing Property Acquisition Restriction Requirements

(xiv) Luxury and Alcohol Sale Restriction Requirements

(xv) Public Approval Requirements

(xvi) Issuance Costs Restriction Requirements

(5) Arbitrage Bonds

(a) In General

(b) Rebate Requirement

(c) Higher Yielding Investment

(d) Exceptions

(6) Registration-Required Bonds

(7) Federally Guaranteed Bonds

(8) Exemption Must Be Found in Tax Law

(9) Disqualified Advance Refunding Bond

(10) Information Reporting Requirements

(11) Qualified Pooled Financing Bond

(12) Qualified Hedge Bond

c. U.S. Savings Bonds Used for Higher Education Expenses

(1) In General

(2) Excess Proceeds Limitation

(3) Modified Adjusted Gross Income Limitation

(4) Qualified U.S. Savings Bond

(5) Qualified Higher Education Expenses

d. U.S. Government Obligations-Related Interest

(1) Federal Reserve Bank Interest

(2) Other U.S. Government Obligation Interest

3. Dividends

a. In General

b. Nature of Distribution

c. Dividends on Stock That Is Sold or Contributed

d. Deemed Dividend from Foreign Tax Credit

e. Deemed Distributions Involving Foreign Operations

4. Rentals

a. Rent Receipts

b. Leasehold Improvements

c. De Minimis Rent on Dwelling Unit Used as Residence

5. Royalties

a. Mineral Royalties

b. Personal Service Royalties

c. Technology Royalties

B. Capital Transactions

1. In General

2. Receipt of Loan and Other Proceeds with Obligation to Repay

a. In General

b. Proof of Bona Fide Loan

c. Commodity Credit Corporation Loans

d. Discharge of Indebtedness

(1) In General

(2) Certain Disaster Exclusions

(3) Bankruptcy, Insolvency, Principal Residence Indebtedness, and Certain Farm Debt Exclusions

(4) Foregone Deduction Exclusion

(5) Purchase Price Reduction Exclusion

(6) Qualified Student Loan Exclusion

(7) Gift Exclusions

(8) Conrail Public Sale Exclusion

(9) Certain Terrorist Attack Exclusions

e. Mineral Production Payments

3. Receipt of Loan Repayments

4. Annuity Payments

a. In General

b. Amount Excluded

c. Limitation on Exclusion

d. Investment Not Recovered When Payments Cease

e. Amounts Not Received as Annuities

f. Other Rules

C. Dispositions of Property

1. Gain from Dealings in Property

2. Dealings

a. In General

b. Material Differences in Exchanged Property

(1) In General

(2) Debt Instruments

(a) In General

(b) Modification

(c) Significant Modification

(d) Change in Payment Expectations

(e) Tax-Exempt Bonds

c. Specific Transactions in Property

(1) Sales and Exchanges

(a) In General

(b) Transactions with State and Local Governments

(c) Transfers to Political Organizations

(d) Installment Obligations

(2) Easements

(3) Conveyance of Property to Satisfy Debt

(4) Abandonment

(5) Distributions with Respect to Property

(6) Gifts and Gratuitous Transfers

(7) Charitable Contribution of Property

(8) Collateral and Other Security Devices

(9) Title Changes

(10) Transactions with Agents

(11) Transaction as Agent

(12) Stock and Bond Conversions

3. Amount Realized

a. In General

b. Cash and Property Received

c. Fair Market Value of Property Received

d. Treatment of Liabilities

(1) In General

(2) Gifts

(3) Other Liabilities

(4) Partnerships

(5) Exceptions

(a) Discharge of Indebtedness Income

(b) Liability Not Reflected in Transferor's Basis at Time Property Acquired

(6) Foreclosure and Deeds in Lieu Thereof

(7) Real Estate Taxes

e. Other Economic Benefits from Disposition

f. Expenses That Reduce Amount Realized

(1) In General

(2) Credits Allowed to the Purchaser

(3) Year of Sale Price Adjustments

g. Expenses That Do Not Reduce Amount Realized

(1) Expenses to Enhance the Sale of Property

(2) Costs and Expenses Otherwise Deductible

(3) Personal Expenditures

h. Allocation of Amount Realized

(1) In General

(2) Manner of Allocation

4. Adjusted Basis

a. In General

b. Basis

(1) In General

(2) Acquisition Basis

(a) Cost Basis

(b) Property Included in Inventory

(c) Redeemable Ground Rents

(d) Certain Imported Property

(e) Property Acquired in an Exchange

(f) Special Cost Basis Rules

(3) Transferee Basis

(a) Property Acquired Through Gift

(b) Property Acquired Through a Decedent

(c) Property Acquired Through Contribution

(4) Property Acquired Through Distribution

(5) Property Acquired in Exchange for Contribution

(6) Special Basis Rules

(a) Basis Established Under Prior Law

(b) Property Acquired before Effective Date of Income Tax

c. Adjustments to Basis

(1) Increases for Expenditures

(a) Capital Expenditures and Similar Items

(b) Research and Experimental Expenditures

(c) Unamortized Soil and Water Conservation Expenditures

(d) Mine Development and Exploration Expenditures

(e) Discount Accrual on Debt Held by Life Insurance Company

(2) Increases for Included Income and Recognized Gain

(a) Depreciation Recapture

(b) Foreign Loss Recapture

(c) Gain from Distributions to Property-Contributing Partner

(d) Gain from Contributed Property Partnership Distribution

(e) Gain Recognized by RIC Shareholder

(f) Gain Recognized by RIC

(g) Gain Recognized by Qualified Electing Fund Shareholder

(h) Gain from Transfer of Passive Foreign Investment Company Stock

(i) Consent Dividends

(j) Gain From Foreign Corporation Transactions

(k) Compensation from Exercise of Employee Stock Option

(l) Gain on Reacquisition of Real Property

(m) Debt Instrument OID

(n) Market Discount on Bonds

(o) Acquisition Discount on Short-Term Obligations

(p) Accrued Interest and Market Discount on Stripped Bonds

(q) Discount on Stripped Preferred Stock

(r) Gain on Disposition of Market Discount Bond

(s) S Corporation Inventory LIFO Recapture

(t) Commodity Credit Corporation Loans

(u) Gain from Disposition of Mining Property

(v) Controlled Foreign Corporations

(3) Increases for Taxes Paid

(a) Additional Estate Tax for Specially Valued Property

(b) Gift Tax Paid with Respect to Gift

(c) Generation-Skipping Tax Paid on Generation-Skipping Transfers

(d) Qualified Electric Vehicle Credit Recapture

(e) Investment Credit Recapture

(4) Increases for Disallowed Deductions

(a) Real Property Reacquired by Seller's Estate

(b) Payments in Lieu of Dividends on Stock Used in Short Sale

(c) Unharvested Crop Sales

(d) Coal and Iron Ore Disposals

(e) Disallowed Cooperative Housing Corporation Payments

(f) Nonrecognized Loss on Partial Disposition of Intangibles

(g) Gifts of Activities with Passive Loss Carryovers

(h) Dispositions of Activities with Unused Passive Credits

(i) Passive Activities Distributed by Estate or Trust

(5) Reductions for Excluded Income or Gain

(a) Deferred Principal Residence Gain

(b) Excluded Discharge of Indebtedness Income

(c) Nontaxed Portion of Extraordinary Dividend

(d) Personal Injury Liability Qualified Funding Assets

(e) Qualified Retirement Plan Net Unrealized Appreciation

(f) ESOP Qualified Replacement Property

(g) Conflict-of-Interest Permitted Replacement Property

(h) Specialized Small Business Investment Company Interests

(i) Qualified Small Business Stock

(j) Qualified Empowerment Zone Assets

(k) Excluded Energy Conservation Subsidies

(l) Qualified Withdrawals from Merchant Marine Capital Construction Fund Accounts

(m) Tax-Exempt Organizations Purchasing S Corporation Stock

(n) Controlled Foreign Corporations

(o) Deferred Qualifying Vessel Gain

(6) Reductions for Allowable Deductions

(a) Depreciation, Depletion, and Amortization

(b) Depreciation For Periods Taxpayer Not Subject to Tax

(c) Amortizable Bond Premium

(d) Mine Development and Exploration Expenditures

(e) Deferred Research and Experimental Expenditures

(f) Premium Amortization on Debt Held by Life Insurance Company

(g) Optional Ten-Year Tax Preference Write-Offs

(h) Elimination of Double Deductions

(i) Clean-Fuel Vehicles and Refueling Property

(7) Reductions for Credits and Credit Equivalents

(a) Credits for Certain Alternative or Electric Vehicles and Refueling Property

(b) Enhanced Oil Recovery Credit

(c) Disabled Access Expenditure Credit

(d) Investment Credits

(e) Qualified Clinical Testing Expenditure Credit

(f) Research Activity Expenditures

(g) Adoption Expenses

(h) Gas Guzzler Tax

(i) First-Time District of Columbia Homebuyer Credit

(j) New Markets Tax Credit

(k) Employer-Provided Child Care Credit

(l) Railroad Track Maintenance Credit

(m) Low Sulfur Diesel Fuel Production Credit

(n) New Energy Efficient Home Credit

(o) Nonbusiness Energy Property Credit

(p) Residential Energy Efficient Property Credit

(8) Reductions for Disallowed Deductions

(a) Amortizable Bond Premium

(b) Dealers' Municipal Bonds

(9) Reductions for Distributions

(a) Corporate Distributions

(b) S Corporation Distributions

(c) Partnership Distributions

(10) Reductions for Liability Relief

(a) Commodity Credit Corporation Loans

(b) Partnership Liabilities

(11) Reductions for Specific Purposes

(a) Loss Computation by Liquidating Corporation

(b) Research and Experimental Expenditures of CFC

(c) License Expenditures of CFC

(12) Miscellaneous Basis Adjustments

(a) Intragroup Stock Acquisitions

(b) Intragroup Stock Dispositions

(c) Interest Expense Allocation and Apportionment

(d) Insurance Company Variable Contracts

d. Special Basis Adjustments

(1) Substituted Basis Property

(2) Lessee Improvements

e. Exceptions

(1) Bargain Sales to Charity

(2) Certain Term Interests

(3) Certain Annuity Transfers

5. Exclusion of Gain

a. Exclusion of Gain Realized from Sale of Principal Residence

(1) In General

(2) Partial Exclusion

(a) In General

(b) Computation

(c) Qualified Reason

(3) Principal Residence

(a) Residence

(b) Vacant Land

(c) Principal

(4) Ownership and Use

(a) In General

(b) Use

(c) Ownership

(d) Partial Use

(5) Spousal Ownership and Divorce Transactions

(6) Tenant-Stockholders of Cooperative Housing Corporations

(7) Involuntary Conversions

(8) Interrelationship with Former § 1034

(9) Remainder Interests

(10) Partial Interests

(11) Property Acquired from a Decedent

(12) Absences During Military and Foreign Service

(13) Absences During Peace Corps Service

b. Exclusion of Gain Realized from Sale of Qualified Small Business Stock

(1) In General

(2) Limitation

(3) Qualified Small Business Stock

(a) In General

(b) Qualified Small Business

(c) Active Business Requirements

(i) In General

(ii) Special Rules

(A) Preliminary Activities

(B) Subsidiaries

(C) Working Capital

(D) Computer Software Royalties

(E) Specialized Small Business Investment Companies

(iii) Qualified Trade or Business

(iv) Eligible Corporation

(4) Treatment of Passthrough Entities

(5) Certain Offsetting Short Positions

c. Exclusion of Gain Realized from the Sale of Qualified Community Assets

(1) In General

(2) Qualified Capital Gain

(3) Qualified Community Asset

d. Exclusion of Gain Realized from the Sale of DC Zone Assets

(1) In General

(2) Qualified Capital Gain

(3) DC Zone Assets

6. Nonrecognition of Gain Realized

D. Life Insurance Proceeds

1. In General

2. Life Insurance Policy Proceeds

a. In General

b. Accelerated Death Benefits

(1) In General

(2) Special Rules for Payments to Chronically Ill Insureds

(3) Terminally Ill Individual

(4) Chronically Ill Individual

3. Transfers of Life Insurance Contracts

a. Gratuitous Transfers

b. Transfer for Valuable Consideration

(1) In General

(2) Exceptions

(3) Multiple Transfers

4. Payment at Date Later Than Death

a. Proration

b. Amount Held By Insurer

c. Multiple Beneficiaries

(1) In General

(2) Computations

(a) Independently Determined Amounts

(b) Dependently Determined Amounts

(c) Payments to Secondary Beneficiaries

(d) Nonperiodic Payments

d. Interest

5. Certain Flexible Premium Contracts

a. In General

b. Flexible Premium Life Insurance Contract

c. Guideline Premium Limitation

(1) In General

(2) Special Computational Rules

(3) Adjustments for Subsequent Changes

d. Premiums Paid

e. Applicable Percentage

f. Cash Value

g. Qualified Additional Benefits

XI. Non-Business Transactions

A. Divorce and Separation Payments

1. In General

2. Alimony or Separate Maintenance Payments

a. In General

b. Divorce or Separation Instrument

c. Child Support

3. Alimony Recapture

a. In General

b. Post-separation Years

c. Excess Alimony Payments

(1) In General

(2) Excess Alimony Payments for the Second Post-separation Year

(3) Excess Alimony Payments for the First Post-separation Year

d. Exceptions

B. Gifts

1. In General

2. Gifts of Income from Property

3. Definition of Gift

a. In General

b. Factors

(1) Intention to Make Gift

(2) Obligation to Make Transfer

(3) Personal Affection

c. Special Situations

(1) Governmental Grants and Payments

(2) Political Contributions

C. Bequests, Devises, and Inheritances

1. In General

2. Bequests of Income from Property

a. In General

b. Income from Property

3. Characterization as Bequest, Devise, or Inheritance

a. Settlements

b. Commissions

c. Care of Decedent

d. Legal Services

D. Damages for Personal Injury

1. In General

2. Punitive Damages

3. Earnings on Damage Award

4. Medical Expense Limitation

5. Smallpox Emergency Personnel Protection Act Payments

E. Windfalls

1. In General

2. Treasure Trove

3. Unclaimed Funds

4. Unsolicited Acquired Property

5. Bargain Purchases

F. Illegal Gains

1. In General

2. Embezzlement

a. In General

b. Subsequent Actions

3. Extortion, Bribes, and Kickbacks

4. Fraudulent Schemes and Devices

5. Misappropriation and Illegally Diverted Funds

6. Illegal Activities

7. Gambling Winnings

G. Scholarships

1. In General

2. Qualified Scholarship

a. In General

b. Scholarship or Fellowship Grant

c. Qualified Tuition and Related Expenses

3. Candidate for Degree

4. Compensation Limitation

H. Coverdell Education Savings Account Distributions

1. In General

2. Qualified Education Expenses

a. In General

b. Qualified Higher Education Expenses

c. Qualified Elementary and Secondary Education Expenses

I. Qualified Tuition Program Distributions

1. In General

2. Qualified Higher Education Expenses

3. Eligible Educational Institution

4. Eligible Student

5. Qualified Tuition Program

J. Distributions from Health Savings Accounts

1. In General

2. Health Savings Account

3. Qualified Medical Expenses

K. Prizes and Awards

1. In General

2. Inclusion in Gross Income

a. Scope

b. Valuation

c. Rejected Prizes and Awards

d. Delayed Receipt

3. Prizes and Awards Transferred to Charities

a. In General

b. Qualified Purposes

c. Selection Without Recipient Action

d. Performance of Substantial Future Services

L. Reimbursements for Certain Excess Living Expenses

1. In General

2. Amounts Included as Reimbursements

3. Qualified Loss of Use or Occupancy

4. Exclusion Limitation

XII. Miscellaneous Transactions

A. Income of Native Americans

1. In General

a. Absence of Treaty or Special Provision

b. Impact of Treaties and Special Provisions

2. Income Directly Derived from Allotted Lands

a. In General

b. Unallotted Lands and Unrestricted Native Americans

c. Directly Derived

(1) In General

(2) Logging

(3) Fishing

(4) Reindeer Products

(5) Other Animal and Plant Products

(6) Retail Businesses

(7) Personal Service Income

(8) Income from Reinvestment

(9) Income from Gambling

d. Persons Within Scope of Exemption

e. Source of Land Interest

3. Special Exclusion Provisions

a. Judgments Against United States

b. Distributions of Native American and Tribal Assets

c. Acquisition of Native American Lands by United States

d. Acquisition of Lands on Behalf of Native Americans

e. Alaska Native Claims Settlement Act Trusts

f. Other Assistance

B. Certain Cost-Sharing Payments

1. In General

2. Excludible Portion

3. Amount Included in Gross Income

a. In General

b. Section 126 Improvement

c. Value of § 126 Improvement

d. Cost of the Improvement

e. Computation of Excludible Portion

4. Qualifying Conservation Programs

a. In General

b. Small Watershed Programs

C. Social Welfare Payments

1. Welfare and Job Training Programs

a. Public Welfare

b. Job Training

c. Anti-poverty and Similar Programs

d. Housing and Related Assistance

(1) Mortgage and Interest Payment Assistance

(2) Energy Conservation Assistance

(3) Rehabilitation Assistance

(4) Relocation Assistance Payments

(5) Miscellaneous

2. Disaster Relief and Crime Victim Programs

a. Disaster Relief

(1) Qualified Disaster Relief Payments

(2) Qualified Disasters

(3) Form of Payment and Expense Accounting

(4) Floods

(5) September 11, 2001 Attacks

(6) Other Disasters

b. Air Transport Disaster Payments

c. Crime Compensation

3. Miscellaneous Programs

a. Older Americans Act of 1965

b. Domestic Volunteer Service Act of 1973

c. Hostage Relief Act of 1980

d. International Boundary and Water Commission Awards

e. Hokie Spirit Memorial Fund Act

D. Reparations for Deprivation of Rights

E. Illegal Irrigation Subsidies

F. Qualified Zone Academy Bond Credit

G. Gulf Tax Credit Bonds Credit


Working Papers

Table of Worksheets

Worksheet 1 Finding List of Related Tax Management Portfolios




Internal Revenue Code:

Public Laws:

United States Code:

State Statutes:


Legislative History:

Treasury Rulings and Procedures: