Internal Revenue Code section 61
Encyclopedia
Section 61 of the Internal Revenue Code (IRC 61) defines "gross income," the starting point for determining which items of income are taxable for federal income tax
purposes in the United States. Section 61 states that "except as otherwise provided in this subtitle gross income means all income from whatever source derived". The United States Supreme Court has interpreted this to mean that Congress intended to express its full power to tax incomes to the extent that such taxation is permitted under Article I, Section 8, Clause 1 (the Taxing and Spending Clause
) of the Constitution of the United States and under the Constitution's Sixteenth Amendment
.
. That is, the parenthetical phrase "but not limited to" redundantly intensifies the significance of the phrase "all income" and the phrase "from whatever source derived." Under ordinary rules of statutory construction the list of fifteen specific items of income would not, even in the absence of the parenthetical intensive, be considered a complete list of all items of income included in "gross income" under the definition. The use of the word "including" also highlights this expansive definition of "gross income." Under Internal Revenue Code , "[t]he terms 'includes' and 'including' when used in a definition contained in this title shall not be deemed to exclude other things otherwise within the meaning of the term defined." Under the 1959 U.S. Supreme Court case of Sims v. United States, the terms "includes" and "including" in section 7701 are terms of expansion, not terms of exclusivity.
The phrase "except as otherwise provided in this subtitle" generally refers to the items of income that are excluded from "gross income" under Internal Revenue Code sections 101 through 140. For example, excludes certain life insurance proceeds received by reason of the death of the insured. excludes certain gifts and inheritances. excludes interest income on state and municipal bonds. excludes certain amounts received on account of injuries or sickness.
, including fees, commissions
, fringe benefits, and similar items"; "Gross income derived from business"; and "Gains derived from dealings in property". Other examples of income listed in section 61 include interest
and dividends, rent
, royalty payments, alimony
payments; life insurance
, pensions, and inheritance
s. Eligible sources of gross income may be located in section 861.
include fees, commissions
, fringe benefits, and similar items. The employer may also compensate the employee-taxpayer indirectly.
A taxpayer may receive taxable income from the taxpayer's employer when the employer pays the taxpayer's taxes. In 1929, the United States Supreme Court decided the case of Old Colony Trust Co. v. Commissioner
. The employer paid incomes taxes on behalf of an employee, and the Court questioned whether that payment constituted additional taxable income to the employee. The Court decided that the payment constituted income to the employee because “the discharge
by a third person of an obligation
to him is equivalent to receipt
by the person taxed.” Thus, even when a taxpayer does not directly receive compensation for services, the compensation may be considered gross income if the payment releases the taxpayer from an obligation.
The issue of whether indirect payments for services should be included in gross income arose again in McCann v. United States. In McCann, the court had to decide whether travel expenses paid by an employer to enable an employee to attend a company conference were part of the employee’s gross income. The company provided the travel award
to the employee for good work in increasing net sales during 1972. The court held that the travel expenses were compensation to the employee for services rendered to the company during 1972 and should be included in gross income. Therefore, when a company pays travel expenses, a taxpayer must include such compensation in gross income when the excursion
is viewed as a reward for outstanding employee success within the company.
Similar to McCann, the issue in United States v. Gotcher involved an expense-paid trip. The employer paid for the employee to travel to Germany
to induce the employee to undertake further business
endeavors. The court held that the employee’s expenses paid by the employer were not gross income because the “indirect economic gain [to the employee was] subordinate to an overall business purpose.” However, the court found that the employee’s wife, who accompanied her husband on the trip, incurred gross income because the wife’s trip was primarily a vacation
. As such, a taxpayer does not acquire gross income from an expense-paid trip provided by the employer when the primary and overall purpose relates to business interests.
, interest
and dividends, royalty payments
, alimony
payments, pensions, and inheritance
s, rent
Income tax in the United States
In the United States, a tax is imposed on income by the Federal, most states, and many local governments. The income tax is determined by applying a tax rate, which may increase as income increases, to taxable income as defined. Individuals and corporations are directly taxable, and estates and...
purposes in the United States. Section 61 states that "except as otherwise provided in this subtitle gross income means all income from whatever source derived". The United States Supreme Court has interpreted this to mean that Congress intended to express its full power to tax incomes to the extent that such taxation is permitted under Article I, Section 8, Clause 1 (the Taxing and Spending Clause
Taxing and Spending Clause
Article I, Section 8, Clause 1 of the United States Constitution, is known as the Taxing and Spending Clause. It is the clause that gives the federal government of the United States its power of taxation...
) of the Constitution of the United States and under the Constitution's Sixteenth Amendment
Sixteenth Amendment to the United States Constitution
The Sixteenth Amendment to the United States Constitution allows the Congress to levy an income tax without apportioning it among the states or basing it on Census results...
.
Scope
Section 61 contains a rare example of intensive redundancy, or emphatic redundancy, in the Internal Revenue CodeInternal Revenue Code
The Internal Revenue Code is the domestic portion of Federal statutory tax law in the United States, published in various volumes of the United States Statutes at Large, and separately as Title 26 of the United States Code...
. That is, the parenthetical phrase "but not limited to" redundantly intensifies the significance of the phrase "all income" and the phrase "from whatever source derived." Under ordinary rules of statutory construction the list of fifteen specific items of income would not, even in the absence of the parenthetical intensive, be considered a complete list of all items of income included in "gross income" under the definition. The use of the word "including" also highlights this expansive definition of "gross income." Under Internal Revenue Code , "[t]he terms 'includes' and 'including' when used in a definition contained in this title shall not be deemed to exclude other things otherwise within the meaning of the term defined." Under the 1959 U.S. Supreme Court case of Sims v. United States, the terms "includes" and "including" in section 7701 are terms of expansion, not terms of exclusivity.
The phrase "except as otherwise provided in this subtitle" generally refers to the items of income that are excluded from "gross income" under Internal Revenue Code sections 101 through 140. For example, excludes certain life insurance proceeds received by reason of the death of the insured. excludes certain gifts and inheritances. excludes interest income on state and municipal bonds. excludes certain amounts received on account of injuries or sickness.
Types of § 61 income
Section 61 lists examples of items that are taxable under the Code, including "Compensation for servicesWage
A wage is a compensation, usually financial, received by workers in exchange for their labor.Compensation in terms of wages is given to workers and compensation in terms of salary is given to employees...
, including fees, commissions
Commission (remuneration)
The payment of commission as remuneration for services rendered or products sold is a common way to reward sales people. Payments often will be calculated on the basis of a percentage of the goods sold...
, fringe benefits, and similar items"; "Gross income derived from business"; and "Gains derived from dealings in property". Other examples of income listed in section 61 include interest
Interest
Interest is a fee paid by a borrower of assets to the owner as a form of compensation for the use of the assets. It is most commonly the price paid for the use of borrowed money, or money earned by deposited funds....
and dividends, rent
Renting
Renting is an agreement where a payment is made for the temporary use of a good, service or property owned by another. A gross lease is when the tenant pays a flat rental amount and the landlord pays for all property charges regularly incurred by the ownership from landowners...
, royalty payments, alimony
Alimony
Alimony is a U.S. term denoting a legal obligation to provide financial support to one's spouse from the other spouse after marital separation or from the ex-spouse upon divorce...
payments; life insurance
Life insurance
Life insurance is a contract between an insurance policy holder and an insurer, where the insurer promises to pay a designated beneficiary a sum of money upon the death of the insured person. Depending on the contract, other events such as terminal illness or critical illness may also trigger...
, pensions, and inheritance
Inheritance
Inheritance is the practice of passing on property, titles, debts, rights and obligations upon the death of an individual. It has long played an important role in human societies...
s. Eligible sources of gross income may be located in section 861.
Compensation for services
Income from Compensation for servicesWage
A wage is a compensation, usually financial, received by workers in exchange for their labor.Compensation in terms of wages is given to workers and compensation in terms of salary is given to employees...
include fees, commissions
Commission (remuneration)
The payment of commission as remuneration for services rendered or products sold is a common way to reward sales people. Payments often will be calculated on the basis of a percentage of the goods sold...
, fringe benefits, and similar items. The employer may also compensate the employee-taxpayer indirectly.
A taxpayer may receive taxable income from the taxpayer's employer when the employer pays the taxpayer's taxes. In 1929, the United States Supreme Court decided the case of Old Colony Trust Co. v. Commissioner
Old Colony Trust Co. v. Commissioner
Old Colony Trust Co. v. Commissioner, , was an income tax case before the Supreme Court of the United States.HELD:*When a third party purports to pay a person's income tax on his behalf, it must include the amount of the tax payment in the gross income on which it calculates his tax liability,...
. The employer paid incomes taxes on behalf of an employee, and the Court questioned whether that payment constituted additional taxable income to the employee. The Court decided that the payment constituted income to the employee because “the discharge
Discharge
Discharge in the context to expel or to "let go" may refer to:* A military discharge, issued when a member of the armed forces is released from service* Termination of employment, the end of an employee's duration with an employer...
by a third person of an obligation
Obligation
An obligation is a requirement to take some course of action, whether legal or moral. There are also obligations in other normative contexts, such as obligations of etiquette, social obligations, and possibly...
to him is equivalent to receipt
Receipt
A receipt is a written acknowledgment that a specified article or sum of money has been received as an exchange for goods or services. The receipt is evidence of purchase of the property or service obtained in the exchange.-Printed:...
by the person taxed.” Thus, even when a taxpayer does not directly receive compensation for services, the compensation may be considered gross income if the payment releases the taxpayer from an obligation.
The issue of whether indirect payments for services should be included in gross income arose again in McCann v. United States. In McCann, the court had to decide whether travel expenses paid by an employer to enable an employee to attend a company conference were part of the employee’s gross income. The company provided the travel award
Award
An award is something given to a person or a group of people to recognize excellence in a certain field; a certificate of excellence. Awards are often signifiedby trophies, titles, certificates, commemorative plaques, medals, badges, pins, or ribbons...
to the employee for good work in increasing net sales during 1972. The court held that the travel expenses were compensation to the employee for services rendered to the company during 1972 and should be included in gross income. Therefore, when a company pays travel expenses, a taxpayer must include such compensation in gross income when the excursion
Excursion
An excursion is a trip by a group of people, usually made for leisure, education, or physical purposes. It is often an adjunct to a longer journey or visit to a place, sometimes for other purposes....
is viewed as a reward for outstanding employee success within the company.
Similar to McCann, the issue in United States v. Gotcher involved an expense-paid trip. The employer paid for the employee to travel to Germany
Germany
Germany , officially the Federal Republic of Germany , is a federal parliamentary republic in Europe. The country consists of 16 states while the capital and largest city is Berlin. Germany covers an area of 357,021 km2 and has a largely temperate seasonal climate...
to induce the employee to undertake further business
Business
A business is an organization engaged in the trade of goods, services, or both to consumers. Businesses are predominant in capitalist economies, where most of them are privately owned and administered to earn profit to increase the wealth of their owners. Businesses may also be not-for-profit...
endeavors. The court held that the employee’s expenses paid by the employer were not gross income because the “indirect economic gain [to the employee was] subordinate to an overall business purpose.” However, the court found that the employee’s wife, who accompanied her husband on the trip, incurred gross income because the wife’s trip was primarily a vacation
Tourism
Tourism is travel for recreational, leisure or business purposes. The World Tourism Organization defines tourists as people "traveling to and staying in places outside their usual environment for not more than one consecutive year for leisure, business and other purposes".Tourism has become a...
. As such, a taxpayer does not acquire gross income from an expense-paid trip provided by the employer when the primary and overall purpose relates to business interests.
Discharge of Indebtedness
One form of income listed in the Code, that of "discharge of indebtedness" is not often considered income by lay persons. If, however, a taxpayer owes a debt to any other party, and that debt is forgiven without being fully repaid, the taxpayer must as a general rule declare the forgiven amount as income, and must pay tax on it.Passive income
capital gainCapital gain
A capital gain is a profit that results from investments into a capital asset, such as stocks, bonds or real estate, which exceeds the purchase price. It is the difference between a higher selling price and a lower purchase price, resulting in a financial gain for the investor...
, interest
Interest
Interest is a fee paid by a borrower of assets to the owner as a form of compensation for the use of the assets. It is most commonly the price paid for the use of borrowed money, or money earned by deposited funds....
and dividends, royalty payments
Other
life insuranceLife insurance
Life insurance is a contract between an insurance policy holder and an insurer, where the insurer promises to pay a designated beneficiary a sum of money upon the death of the insured person. Depending on the contract, other events such as terminal illness or critical illness may also trigger...
, alimony
Alimony
Alimony is a U.S. term denoting a legal obligation to provide financial support to one's spouse from the other spouse after marital separation or from the ex-spouse upon divorce...
payments, pensions, and inheritance
Inheritance
Inheritance is the practice of passing on property, titles, debts, rights and obligations upon the death of an individual. It has long played an important role in human societies...
s, rent
Renting
Renting is an agreement where a payment is made for the temporary use of a good, service or property owned by another. A gross lease is when the tenant pays a flat rental amount and the landlord pays for all property charges regularly incurred by the ownership from landowners...
See also
- Internal Revenue ServiceInternal Revenue ServiceThe Internal Revenue Service is the revenue service of the United States federal government. The agency is a bureau of the Department of the Treasury, and is under the immediate direction of the Commissioner of Internal Revenue...
- Taxation in the United StatesTaxation in the United StatesThe United States is a federal republic with autonomous state and local governments. Taxes are imposed in the United States at each of these levels. These include taxes on income, property, sales, imports, payroll, estates and gifts, as well as various fees.Taxes are imposed on net income of...
- Zarin v. CommissionerZarin v. CommissionerZarin v. Commissioner, 916 F.2d 110 is a United States Third Circuit Court of Appeals decision concerning the cancellation of debt and the tax consequences for the borrower for U.S. federal income tax purposes.-Background:...