Gross Income Concepts and Elements

Concept of Gross Income

• Defined as the inflow of wealth to the taxpayer from any source, legal or illegal, increasing their net worth.
• Includes income from employment, trade, business, properties, and other sources.

Elements of Gross Income

• Return on Capital that Increases Net Worth:
  • Refers to any increase in the taxpayer's net worth due to a return on their capital.
  • Return on capital is subject to tax.
  • Return of capital, which maintains net worth, is not taxable.
  • Capital includes any wealth or property.
• Realized Benefit:
  • Represents any form of advantage derived by the taxpayer.
  • Increases net worth and indicates an ability to pay tax.
  • Examples of realized benefits include receiving income, donations, and inheritances.
• Not Exempted by Law, Contract, or Treaty:
  • This means that income must be subject to taxation unless specifically exempted by law, a contract, or a treaty.

Return on Capital that Increases Net Worth

• Examples of Capital Items with Infinite Value:
  • Life: Proceeds of life insurance to heirs or beneficiaries, employer provided.
  • Health: Compensation received for the loss of health.
  • Human Reputation: Indemnity received as compensation for its impairment.
• Examples of Return on Capital/ Insurance Policies - Taxable
  • Excess over premiums
  • Gains from assignment or sale of policy
  • Interest income from the unpaid insurance proceeds balance.
  • Excess of proceeds over acquisition costs and premiums.

Recovery of Lost Capital/ Lost Profit

• Recovery of lost capital maintains net worth and is not taxable.
• Recovery of lost profits increases net worth and is taxable.
• Examples of taxable lost profit recoveries:
  • Proceeds from crop or livestock insurance
  • Guarantee payments
  • Indemnity received from a patent infringement lawsuit

Realized Benefit

• Examples of Realized Benefits
  • Employee retaining a portion of a transportation advance after liquidating expenses.
  • Security agency receiving payment for services, where a portion is attributable to the agency's profit.
• Not Benefits:
  • Receipt of a loan
  • Discovery of lost properties
  • Money or property held in trust

The “Realized” Concept

• "Realized" means "earned."
• Requires some degree of undertaking or sacrifice from the taxpayer to be entitled to the benefit.