Part A. Income

• Pages: 11-121
• Author: Marvin A. Chirelstein,Lawrence Zelenak

11

Part A

INCOME

Code § 61, which contains the definition of “gross income,” is the

starting point for a study of the federal income tax. The section

begins with a catch-all clause—“gross income means all income from

whatever source derived”—and then proceeds to enumerate fourteen

specific classes of receipts which are regarded as within the income

definition. The enumeration is extensive; it picks up most or all of the

common classes of income—salaries, wages, business profits,

dividends, interest, rents and royalties—and inc ludes as well a good

many special kinds of benefits, such as annuities, income from

discharge of indebtedness, and income in respect of a decedent. The

intent is plain: to the extent that there might be doubt about one or

another of the items enumerated, the desire of Congress to bring that

item within the definition of income is made clear and unmistakable.

But the enumeration is not designed to be exhaustive. The forms that

commercial dealings can take in the modern world, and the labels

that can be assigned to income from different sources, are simply too

various for any listing to fully comprehend. Accordingly, the catch-

all clause is expected to supplement the enumeration by including

any non-enumerated items which can properly be defined as

“income.” In that way it plays an important, if subordinate, role in

determining the scope of the provision.

Unavoidably, perhaps, the language employed by § 61 is

somewhat tautological—“. . . gross income means all inco me . . .”—

and in the old days, at least, there was considerable preocc upation

with the question of how much ground the catch-all clause was

actually intended to cover. Was the quo ted phrase—“all income

. . .”—as sweeping, as embracing as it sounded, or were there certain

inbuilt criteria w hich might actual ly operate to exclude some forms

of enrichment from the tax base? In Eisner v. Macomber,

1

decided in

1920, the Supreme Court stated that “income may be defined as the

gain derived from labor, from capital, or from both combined,” a

construction which co uld be taken to mean that unless the factor of

labor or capital were present in a given case, the income definition

would not encompass the item in question, and the income tax would

not apply to it. One was therefore inv ited to speculate about the

status under the law o f such things as “give-away” prizes ($25,000

for catching the fish with the advertiser’s identific ation tag on its

1

252 U.S. 189 (1920).

12

INCOME

PT. A

tail

2

); awards for civic ach ievement (the Peace Prize—Nobel or

Lenin); “subsidies” such as scholarships and fellowships for

deserving students; damages for breach o f promise or alienation of

affection; “found” property; and so on. Since these and various other

kinds of receipts were arguably unrelated either to personal services

or to capital investment (or both combined), might it not be said that

they fell outside the concept o f “inco me” which the Supreme Court

had approved in Macomber? Or could it be asserted that “labor” o r

“capital” somehow inheres in every human activity? The Macomber

definition apparently possessed metaphysical properties which made

it difficult to apply in an absolute fashion, and hence most

commentators contented themselves with the observation that close

cases would have to be resolved on an individual basis.

3

Happily, the Supreme Court in 1955 put an en d to much,

perhaps all, of the uncertainty which the Macomber decision had

generated by discarding the labor-capital formulation in favor of a

broader and simpler concept of “income.” In Commissi oner v.

Glenshaw Glass Co.,

4

the taxpayers had received treble damage

awards under the antitrust laws. Pointing out th at two-thirds of the

awards represented fines or penalties imposed on the wrongdoers for

violating federal laws, the taxpayers argued tha t only the basic one -

third portion which compensated for loss of profits could be treated

as derive d from labor or capital or both combined. Making no real

attempt to bring the p unitive damages within the Macomber

definition, the Court nevertheless held that the awards were taxable

in their entirety. “Here we have instances of undeniable accessions

to wealth, clearly realized, and over which the taxpayers have

complete dominion. The mere fact that the payments were extracted

from the wrongdoers as punishment for unlawful conduct cannot

detract from their character as taxable income to the recipients.”

Congress, the Court stated significantly, had applied “no limitations

as to the source of taxable receipts, nor restrictive labels a s to their

nature.” Macomber, it said, could not be regarded as the “touchstone”

to all questions of gross income.

The Court thu s resolved—more or less at a stroke —much of

what had seemed troublesome and tantalizing about the term

“income.” With “source” declared irrelevant, the “touchstone” to all

income questions becomes simple enrichment; all gains are taxable

(at least if “clearly realized”), whether traceable to labor, to capital,

or to mere good fo rtune. If punitive damages are within the scope of

2

Simmons v. U.S., 308 F.2d 160 (4th Cir. 1962).

3

Surrey and Warren, The Income Tax Project of the American Law Institute,

66 Harvard L.Rev. 761 (1953).

4

348 U.S. 426 (1955).

SEC. 1

NON-CASH BENEFITS: MEALS-AND-

LODGINGS; IMPUTED RENTS

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the income definition just because the recipient is made wealthier

thereby, then so are prizes and awards (lucky or deserved); so are

damages and subsidies of all sorts; and so are packets of cash found

in the backs of taxicabs. Each repre sents an “accession to wealth,”

and that factor by itself, under Glenshaw, justifies inclusion in the

tax base. The catch-all provision of § 61 is indeed as sweeping as it

seems to be; the income tax is source-blind, and any measurable gain

is within its reach.

The Glenshaw decision has survived the ensuing de cades

without material qualification, and it is altogether unlikely that the

Court will ever return to a narrower view of the meaning of “income.”

It is therefore fair to ask at this point whether there is anything still

left to debate under the heading “What is inco me?” The answer, of

course, is: just about everything. Apart from the taxability of

windfalls, pun itive damages and simi lar trivia, th e Glenshaw case

resolves none of the real difficulties in the field, though it does,

perhaps, help to sharpen the issues. The problems that survive the

Glenshaw decision are, and in the nature of things always were, the

critical ones from the standpoint of the structure of the tax law, and

their solutions are not greatly advanced by the assertion that all

realized gains are “income.” This is not to say that a contrary decision

in Glenshaw would not have been troublesome: if punitive damages

had been held non-taxable even though they plainly enriched the

recipient, Cong ress would presumably have had to extend the

enumeration in § 61 to include such receipts and then might have

had to resort to further enumeration if and when other unusual items

obtained exemption in the courts. Although Congre ss is still obliged

to explicitly exempt receipts it doesn’t wish to cover, e.g., college

tuition scholarships ( see Code § 117), this is done as a mat ter of

conscious legislative design rather than chance judicial action. Our

point, however, is that Glenshaw does not, and could not, reach the

technical questions with which the law is chiefly concerned in taxing

“income”; hence the decision, though important philosophically, has

little direct effect on the learning job that lies ahead.

The structural or technical issues to be examined in this Part

can very roughly be divided into three categories (implied by the

Glenshaw opinion itself, as a matter of fact). Since inc ome includes

all “gains” that are “clearly realized” regardless of “source,” the

relevant questions would seem to be:

(a) What constitutes a “gain”? Has the taxpayer enjoyed the

requisite “acce ssion to wealth” by reason of some particular event,

and if he has, in what amount? This question seems to have an

economic ring to it rather than an abstract legal quality; it calls for a

measurement of the taxpayer’s personal we alth, or at least the