Introduction to Chapters 5 and 6

Author:Deborah A. Geier
Pages:125-126
 
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Unit II:
Two Types of Gross Income:
Compensation and Residual Gross Income
Introduction to Chapters 5 and 6
In Chapter 1, you learned that § 61(a) of the Code lists several items of Gross Income, including,
among other items, interest, rent, dividends, and “gains derived from dealings in property.” In
connection with that last item, you learned that “gain” was a precise term of tax art, defined in §
1001(a) as the excess of § 1001(b) “amount realized” over the property’s “adjusted basis.” You
will further explore the concept of § 1001 realized and recognized “gain” in Chapter 12. This unit
explores more closely two other types of § 61 gross income: § 61(a)(1) compensation for services
rendered and so-called residual gross income.
Chapter 5 will consider the scope of the compensation inclusion under § 61(a)(1). As you will
learn, all compensation for services rendered must be included in gross income under § 61(a)(1)
unless an express statutory exclusion applies. Though there were a few common law doctrines that
developed in the early days of the income tax, which allowed some forms of compensation paid in
kind to escape taxation (such as the convenience-of-the-employer doctrine that was eventually
codified in § 119 in 1954), Congress made its intent absolutely clear in 1984 when it enacted §
132 that no common law exclusions remain. To exclude compensation from gross income, the
payee must satisfy an express statutory exclusion.
The most important compensation exclusions today are (1) the exclusion for employer-provided
health care in §§ 105 and 106 (among the most expensive tax expenditures in the Code) and (2)
the exclusion for contributions to certain retirement accounts, which are accorded consumption-
tax treatment, such as IRAs, qualified pension plans, and § 401(k) plans. The former will be
discussed in Chapter 17, and the details of the latter are beyond the basic income taxation course,
though they will be mentioned again in connection with the cash method of accounting in Chapter
21. With our limited time, Chapter 5 will consider two statutory exclusions provisions, §§ 119 and
132, as well as the rules in § 83 that apply to property paid in kind as compensation that is subject
to a substantial risk of forfeiture. The interested student who wishes to learn about other
compensation exclusions can explore the exclusions for the rental value of parsonages (§ 107),
certain combat zone compensation of members of the Armed Forces (§ 112), so-called Cafeteria
Plans (§ 125), dependent-care assistance programs (§ 129), adoption assistance programs (§ 137),
employer-provided life insurance (§ 79), and more. (Alas, there are only so many classroom hours
in the basic tax course!)
Chapter 6 will then explore the contours of that terribly vague language found in what we can
call the “residual clause” i n § 61: “Gross Income means all income from whatever source derived. ”
We know that this language must contain positive content, i.e., that items of includable Gross
Income must be described b y that language, because the p arenthetical in § 61“(including but not
limited to)”states that the fifteen listed items do not exhaust the universe of Gross Income items.
The very vagueness of that language, however, means that both the administrators of the statute

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