Chapter I:3

Gross Income: Inclusions

Discussion Questions

I:3-1 The phrase "income from whatever source derived" appears in both the 16th Amendment to the Constitution and in Sec. 61(a). This overlapping terminology was adopted to assure the constitutionality of the income tax. p. I:32.

I:3-2 In economics, income is defined as the amount that an individual could consume during a period and remain as well off at the end of the period as he or she was at the beginning of the period. In accounting, income is measured by a transactions approach. Accountants measure income when it is realized in a completed transaction. pp. I:32 and I:33.

I:3-3 It is much easier to administer the tax law based on the accounting concept of income instead of the economic concept. Also, wherewithaltopay is greater when income is taxed as it is realized. pp. I:33 and I:3-4.

I:3-4 The concept of wherewithaltopay means that a tax should be imposed when the taxpayer can most easily pay. A taxpayer who owns property that has increased in value does not necessarily have the funds needed to pay any tax. Taxing the gain when it is realized often means that the tax becomes due at the same time the taxpayer collects the sales price. p. I:3-4.

I:3-5 A loan repayment is not consistent with the normal meaning given to the word income. A taxpayer is no better off because a loan is repaid. There has been no economic benefit. As a result the repayment of a loan is not taxable simply because it is not income. p. I:3-3.

I:3-6 Congress taxes prepaid rental income because of concern that taxpayers might otherwise spend the money and then be unable to pay the tax when it comes due. Taxing such amounts is to tax income when taxpayers have the greatest wherewithal to pay. The problem created for taxpayers is that they are taxed before they incur related expenses. Repairs,