Principles for Measuring Income

Ability to pay

Income as what "comes in", less the cost of getting it

Secs. 61, 162, 212, 262

But note an opposing concept: fring benefit rules encourage certain forms of receipt over cash

The "Aggregative" principle:

all income is combined into 1 number taxed alike, regardless of source

Very important exception to aggregation: gains and losses from sales of "capital assets"

Interaction: an interest in an entity is generally a capital asset

How distinguish a dividend from a pro-rata stock buyback?

Requires the "substance over form" principle

Definitional issues in measuring income

Family transfers:

 gifts, inheritances and life insurance

Secs. 101, 102

Alimony and child support Sec. 71

Social Transfer payments

Welfare & food stamps traditionally not income

Unemployment Compensation (Sec 85)

Social Security political compromise: Sec. 86

Employment transfers

Meals and lodging: Sec. 119

Stock for services Sec. 83

Fringe benefit exclusions: Secs. 79, 106, 125, 127, 132

The Administrative Convenience Principle

Receipts without capital or labor

Windfalls

Prizes sec. 74

Lawsuits for physical injury (Sec. 104)

Intergovernmental immunities: Sec. 103, 141 ff

Expenses allowed in measuring income

Concept of Legislative grace: Deductions must be specifically authorized by Congress

but note how broad 162 and 212 are

The "business purpose" concept

Interpretation of "costs of doing business"

• State/local income and property taxes: Sec. 164
• Interest on business and investment debt 163
• retirement savings plans: 219, 402 ff
• individual job relocation expenses; 217
• Mixed activities: home offices, vacation homes, hobbies, business auto, meals and entertainment 

Individual Deductions that (usually) aren't costs of income

Taken "from", not "for arriving at" Adjusted Gross Income

Often limited or threshhold by % of AGI

Administrative Convenience

A "standard" deduction alternative

Medical (213)

Home interest 163(h)

personal taxes

charitable gifts (170)

major casualties (165(c )(3))

out of pocket  costs of employment / investment income

Cost recovery

When asset sold, subtract cost to arrive at income.

So need tax accounting for inventory costs

Cost of a multi-year business asset is not expensed, but amortized / depreciated

So need tax depreciation rules

Cost is only recovered once per taxpayer

So need to track asset "basis", with depreciation adjustments, to measure result of any sale

Interaction w/ the capital asset principle: does a depreciable asset produce a capital gain (special, low tax on sale)?

Interaction w/ the entity principle:

is a stock share a capital asset?

What if all the entity owns is depreciable property