Friday, May 22, 2015

Tax Class - Session 1: What is Gross Income

So I am back to school after a 3 week break. Summer classes are  in session and I have a required class: Taxation.  

Test your knowledge. Which is considered gross income? 

1.  a rebate check received after buying something and submitting the form

2.  being awarded/receiving punitive damages

3.  Buying something with cash and getting a good deal.  For example, getting a good deal on the purchase of an antique piano. You bought it for $300.  It's actually worth $3,000.  Is the $3,000 gross income?

4.  Finding an expensive watch on the street.

5.  An annual bonus received from your employer.

6.  A trip awarded to you by your employer as an award for making sales numbers.

7.  Barter transactions:  I will provide $1,000 in babysitting services to you if you, in exchange, give me your rare painting worth $1,500.

8.  You applied for and received a bank loan for $5,000 to buy a car.

9.  Receiving a security deposit from your new tenant.

10.  Advance Payments/prepayments, in general.

11.  Money you received by illegally embezzling.
Gross income vs net income

Answer:  There's a 3 step test to determine if something is considered gross income per caselaw.
Gross Income is:
1.  an accession to wealth,  
2. clearly realized, and
3. over which the taxpayer has complete dominion and control.
Is it gross income?
1. No.  it's a gimmick.
2.  Yes.
3.  No.  There's no realization event.
4.  Yes.
5.  Yes
6.  Yes.  The test is was it a required trip?  Was there any business purpose or meetings while on the trip?
7.  Yes.  How much in gross income?  Use the value of what you receive as gross income.
8.  No.  (there's no accession to wealth)
9.  No. (the test is can the transferor demand the return of the funds?)
10.  Yes.  An advance payment is a prepayment - the transferor has no right to demand return of funds.
11.  Embezzled money.  Even illegal money is subject to gross income.

How did you do?  Will you ace the midterm?

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