Gross Income

<div class="Section1">For tax purposes, a &ldquo;capital asset&rdquo; is any property that, in the hands of the taxpayer, is not: (1) property (including inventory and stock in trade) held primarily for sale to customers; (2) real or depreciable property used in his trade or business; (3) copyrights and literary, musical, or artistic compositions (or similar properties) created by the taxpayer, or merely owned by him, if his tax basis in the property is determined (other than by reason of IRC Section 1022, which governs the basis determination of inherited property) by reference to the creator&rsquo;s tax basis; (4) letters, memoranda, and similar properties produced by or for the taxpayer, or merely owned by him, if his tax basis is determined by reference to the tax basis of such producer or recipient; (5) accounts or notes receivable acquired in his trade or business for services rendered or sales of property described in (1), above; (6) certain publications of the United States government; (7) any commodities derivative financial instrument held by a commodities derivatives dealer; (8) any hedging instrument that is clearly identified as such by the required time; and (9) supplies of a type regularly used or consumed by the taxpayer in the ordinary course of his trade or business.<a href="#_ftn1" name="_ftnref1">¹</a><div class="Section1"><br /> <br /> Generally, any property held as an investment is a capital asset, except that rental real estate is generally not a capital asset because it is treated as a trade or business asset (<em><em>see</em></em> Q <a href="javascript:void(0)" class="accordion-cross-reference" id="7791">7791</a>).<a href="#_ftn2" name="_ftnref2">²</a><br /> <br /> </div><div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.&nbsp;IRC &sect; 1221; Treas. Reg. &sect; 1.1221-1.<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.&nbsp;See IRS Pub. 544.<br /> <br /> </div></div><br />

<div class="Section1">Generally, an interest surcharge is an interest charge payable by the seller to the IRS with respect to a portion of a tax liability that is deferred as a result of installment reporting. In other words, installment reporting allows the taxpayer to defer the gain realized from the installment over time rather than in the year of sale. The tax on that gain is considered a deferred tax liability. The interest surcharge applies to all installment obligations held by the taxpayer (meaning it applies to multiple installment sales) in which deferred payments for sales during the taxable year exceed $5,000,000. There is an exception to the surcharge with respect to: (1) property used or produced in the trade or business of farming, (2) timeshares and residential lots, and (3) personal use property.<a href="#_ftn1" name="_ftnref1">¹</a></div><br /> <div class="Section1"><br /> <br /> The amount of the interest surcharge is determined by multiplying the “applicable percentage” of the deferred tax liability by the underpayment rate in effect at the end of the taxable year (with respect to tax deficiencies). The “applicable percentage” is determined by dividing the portion of the aggregate obligations for the year that exceeds $5,000,000 by the aggregate face amount of such obligations that are outstanding at the end of the taxable year. If an obligation remains outstanding in subsequent taxable years, interest must be paid using the same percentage rate as in the year of the sale.<a href="#_ftn2" name="_ftnref2">²</a> In addition, if the installment obligation is pledged as security for a loan, the net proceeds of the loan will be treated as a payment received on the installment obligation (up to the total contract price); however, no additional gain is recognized on subsequent payments of such amounts already treated as received. The date of such constructive payment will be (a) the date the proceeds are received <em>or</em> (b) the date the indebtedness is secured, whichever is later.<a href="#_ftn3" name="_ftnref3">³</a><br /> <br /> </div><br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%" /><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>. IRC § 453A(b).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>. IRC § 453A(c).<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>. IRC § 453A(d)(1). <em><em>See</em></em> Revenue Act of 1987 Conf. Rept., at pages 22-23.<br /> <br /> </div>

<div class="Section1">If an installment sale between related parties is canceled or payment is forgiven, the <em>seller</em> must recognize gain in an amount equal to the difference between the fair market value of the obligation on the date of cancellation (but in no event less than the face amount of the obligation) and the seller&rsquo;s basis in the obligation.<a href="#_ftn1" name="_ftnref1">¹</a> The seller&rsquo;s basis in the obligation is the difference between the face value of the obligation less the amount of income that would be includible in gross income had the obligation been actually satisfied.<a href="#_ftn2" name="_ftnref2">²</a><br /> <blockquote><em>Example:</em> Asher sells a tractor to Samuel for $10,000 with an adjusted basis of $2,000. In exchange, Samuel conveys five installment notes ($2,000 each). Asher&rsquo;s gross profit ratio would be 80 percent (see Q <a href="javascript:void(0)" class="accordion-cross-reference" id="666">666</a>) meaning that 80 percent of each payment would be included in gross income ($1,600) and 20 percent ($400) would be tax-free return of basis. Therefore, each note would have a basis of $400 ($2,000 face value less $1,600 income). So, if Asher were to forgive a $2,000 installment note, he would recognize a gain of $1,600 (the difference between the face amount of the note and his basis in the note). In other words, a forgiven note is essentially taxed in the same way as it would have been had the seller actually received payment.</blockquote><br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.&nbsp;IRC &sect; 453B(f).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.&nbsp;IRC &sect; 453B(b).<br /> <br /> </div></div><br />

<div class="Section1">A rollover from one ESA to another ESA is not treated as a distribution (that would be potentially taxable) provided the beneficiaries of both ESAs are the same, or members of the same family. The new beneficiary must be under 30 years old as of the date of such distribution or change, except in the case of a special needs beneficiary.<a href="#_ftn1" name="_ftnref1">¹</a> The rollover contribution must be made no later than 60 days after the date of the distribution from the original ESA. However, no more than one rollover may be made from an ESA during any 12-month period.<a href="#_ftn2" name="_ftnref2">²</a> Similarly, the beneficiary of an ESA may be changed without taxation or penalty if the new beneficiary is a member of the family of the previous ESA beneficiary and has not attained age 30 or is a special needs beneficiary.<a href="#_ftn3" name="_ftnref3">³</a> Transfer of an individual’s interest in an ESA can be made from one spouse to another pursuant to a divorce (or upon the death of a spouse) without changing the character of the ESA.<a href="#_ftn4" name="_ftnref4">⁴</a> Likewise, non-spouse survivors who acquire an original beneficiary’s interest in an ESA upon the death of the beneficiary will be treated as the original beneficiary of the ESA as long as the new beneficiary is a family member of the original beneficiary.<a href="#_ftn5" name="_ftnref5">⁵</a></div><br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%" /><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>. IRC § 530(b)(1).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>. IRC § 530(d)(5).<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>. IRC §§ 530(b)(1), 530(d)(6).<br /> <br /> <a href="#_ftnref4" name="_ftn4">4</a>. IRC § 530(d)(7).<br /> <br /> <a href="#_ftnref5" name="_ftn5">5</a>. IRC § 530(d)(7).<br /> <br /> </div>

<div class="Section1">Renewal commissions payable after the death of an insurance agent are “income in respect of a decedent” for income tax purposes. Additionally, the value of the right to the commissions is includable in the agent’s gross estate for estate tax purposes. As income in respect of a decedent, the renewal commissions are taxable to the ultimate recipient of the commissions (e.g., the agent’s estate, beneficiaries, or a trust) in the year in which they are received.<a href="#_ftn1" name="_ftnref1">¹</a> However, the person who reports such commissions as income is entitled to an income tax deduction (an itemized deduction) for the portion of federal estate taxes and generation-skipping transfer taxes attributable to their inclusion in the decedent’s gross estate. If the decedent has purchased renewal commissions from another agent, the recipient will be allowed to amortize any portion of the decedent’s cost unrecovered at death.<a href="#_ftn2" name="_ftnref2">²</a></div><br /> <div class="Section1"><br /> <br /> If prior to receipt of the renewal commissions, the recipient sells or otherwise disposes of the right to commissions, all income is accelerated as the recipient must include the entire fair market value of the right to the commissions in the year of sale or other disposition (e.g., the recipient gifted the right to another person). On the other hand, if the recipient dies prior to receiving the commissions, the fair market value of the right to commissions will not be included on the final income tax return. In that case, the person who receives the income right from the second decedent by will or inheritance must include such commissions in gross income (as income in respect of a decedent) as they are received.<a href="#_ftn3" name="_ftnref3">³</a><br /> <br /> </div><br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%" /><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>. <em>Latendresse v. Commissioner</em>, 243 F.2d 577 (7th Cir. 1957); <em>Estate of Goldstein v. Commissioner</em>, 33 TC 1032 (1960), <em>aff’d</em>, 340 F.2d 24 (2d Cir. 1965); <em>Estate of Remington v. Commissioner</em>, 9 TC 99 (1947).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>. <em>Latendresse v. Commissioner, supra.</em><br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>. IRC § 691(a); Treas. Reg. § 1.691(a)-1.<br /> <br /> </div>

<div class="Section1">A taxpayer&rsquo;s tax basis in property acquired by purchase or in a taxable exchange is its cost (money paid or the fair market value exchanged).<a href="#_ftn1" name="_ftnref1">¹</a><div class="Section1"><br /> <br /> Special rules apply to stock exchanges made pursuant to a plan of corporate reorganization.<a href="#_ftn2" name="_ftnref2">²</a> For the final regulations under IRC Section 358 providing guidance regarding the determination of the basis of stock or securities received in exchange for, or with respect to, stock or securities in certain transactions, <em><em>see</em></em> Q <a href="javascript:void(0)" class="accordion-cross-reference" id="7517">7517</a>. For the rules applicable to stock received in a demutualization, <em><em>see</em></em> Q <a href="javascript:void(0)" class="accordion-cross-reference" id="7517">7517</a>. Proposed regulations relating to redemptions of stock in which the redemption proceeds are treated as a dividend distribution have been withdrawn.<a href="#_ftn3" name="_ftnref3">³</a><br /> <br /> </div><div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.&nbsp;IRC &sect; 1012.<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.&nbsp;See IRC &sect; 354.<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>.&nbsp;See 71 Fed. Reg. 20044 (4-19-2006).<br /> <br /> </div></div><br />

<div class="Section1">Where property is transferred between spouses, or former spouses incident to a divorce, after July 18, 1984 pursuant to an instrument in effect after that date, the transferee&rsquo;s basis in the property is generally the adjusted basis of the property in the hands of the transferor immediately before the transfer and no gain or loss is recognized at the time of transfer (unless, under certain circumstances, the property is transferred in trust).<a href="#_ftn1" name="_ftnref1">¹</a> These rules may apply to transfers made after 1983 if both parties elect.<a href="#_ftn2" name="_ftnref2">²</a> <em><em>See</em></em> Q <a href="javascript:void(0)" class="accordion-cross-reference" id="789">789</a> regarding transfers incident to divorce.<div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.&nbsp;IRC &sect;&sect; 453B(g), 1041; Temp. Treas. Reg. &sect; 1.1041-1T, A-1.<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.&nbsp;Temp. Treas. Reg. &sect; 1.1041-1T, A-16.<br /> <br /> </div></div><br />

<p>An insurance premium rebate, which is illegal in most states, is a transaction in which a life insurance agent returns all or a portion of a commission to the purchaser, or simply pays the policy&rsquo;s first-year premium without contribution from the purchaser. The transaction is economically feasible to the insurance agent because the commission, allowance and/or bonus paid by the insurance company to the agent for the sale of the policy often exceeds the policy premium. As a result, the purchaser may ultimately receive free or less expensive life insurance coverage. See Q <a href="javascript:void(0)" class="accordion-cross-reference" id="659">659</a> and Q <a href="javascript:void(0)" class="accordion-cross-reference" id="660">660</a> for the tax consequences of insurance premium rebating to the insurance agent and the purchaser, respectively.</p><br />

<div class="Section1">If the property was acquired by gift after 1920, the basis for determining gain is generally the same as in the hands of the donor. However, in the case of property acquired by gift after September 1, 1958 and before 1977, this basis may be increased by the amount of any gift tax paid, but total basis may not exceed the fair market value of the property at the time of gift. In the case of property received by gift after 1976, the donee takes the donor’s basis plus a <em>part</em> of the gift tax paid. The added fraction is the amount of the gift tax paid that is attributable to appreciation in the value of the gift over the donor’s basis. The amount of attributable gift tax bears the same ratio to the amount of gift tax paid as net appreciation bears to the value of the gift.<a href="#_ftn1" name="_ftnref1">¹</a></div><br /> <div class="Section1"><br /> <br /> For the purpose of determining loss, the basis of property acquired by gift after 1920 is the foregoing substituted basis or the fair market value of the property at the time of gift, whichever is lower.<a href="#_ftn2" name="_ftnref2">²</a> As to property acquired by gift before 1921, basis is the fair market value of the property at time of acquisition.<a href="#_ftn3" name="_ftnref3">³</a><br /> <br /> </div><br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%" /><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>. IRC § 1015.<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>. IRC § 1015(a).<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>. IRC § 1015(c).<br /> <br /> </div>

<div class="Section1">Under prior law, dividends were treated as ordinary income and, thus, were subject to ordinary income tax rates. Under JGTRRA 2003, &ldquo;qualified dividend income&rdquo; (see Q <a href="javascript:void(0)" class="accordion-cross-reference" id="706">706</a>) is treated as &ldquo;net capital gain&rdquo; ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="706">706</a>) and is, therefore, subject to capital gains tax rates. This treatment continues after the 2017 tax reform law was enacted, but the income thresholds for determining which rate applies were changed. For capital gains rates, see Q <a href="javascript:void(0)" class="accordion-cross-reference" id="704">704</a>.<div class="Section1"><br /> <br /> The preferential treatment of qualified dividends as net capital gains was scheduled to &ldquo;sunset&rdquo; (expire) on December 31, 2012, after which time the prior treatment of dividends was to become effective.<a href="#_ftn1" name="_ftnref1">¹</a> In other words, dividends were once again to be taxed at ordinary income tax rates. The American Taxpayer Relief Act of 2012 prevented this sunset and made the treatment of qualified dividend income as net capital gain permanent.<a href="#_ftn2" name="_ftnref2">²</a><br /> <br /> </div><div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.&nbsp;IRC &sect; 1(h)(1); TIPRA 2005 &sect; 102, <em>amending</em> JGTRRA 2003 &sect; 303.<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.&nbsp;ATRA 2012, Pub. Law No. 112-240.<br /> <br /> </div></div><br />