Introduction to Income Taxation

Gross Income• General rule…

• Exceptions

• Life insurance proceeds, municipal bond interest income, gifts

• Return of capital• Basis

• Buy building for $500,000. Take $200,000 of depreciation over 10 years. Sell building for $800,000.

Introduction to Income Taxation

Gross Income• General rule…

• Increase in value of asset

• Like kind exchanges of real estate

• Barter

Constructive receipt

Cash basis versus accrual basis Could I get it if I wanted it?

• Mutual fund dividends reinvested in additional shares

Substantial limitations or restrictions• $50,000 a year bonus for 10 years if…

Deferred compensation

Unfunded• Unsecured creditor of employer

• Deferred comp not taxable if

• Agreement reached before comp was earned

• Unsecured interest

• Rabbi trust

Funded• Taxable when:

• No longer risk of forfeiture

• Rights in deferred comp can be transferred

Economic benefit theory

Form of compensation doesn’t matter• Corn, hogs, life insurance policy

Assignment of income

Give tree to give apple• If transfer tree, apple is taxed to recipient