WHAT IS INCOME?
Income has been determined to be, in the economic sense: All accession to wealth and, in the accounting and tax sense: All recognized accession to wealth.
In the judicial concept: "... not a gain accruing to capital, not a growth or increment of value in the investment: but a gain, a profit, something of exchangeable value proceeding from the property, severed from the capital however invested or employed, and coming in, being "derived", that is, received or drawn by the recipient (the taxpayer) for his separate use, benefit and disposal;-- that is derived from property. ... --- as clearly set forth in the Sixteen Amendment - "incomes from whatever source derived". Eisner v. Macomber, 252 U.S. 189, 207 (1920), and, "... undeniable accessions to wealth, clearly realized, and over which the taxpayers have complete dominion." Glenshaw Glass Co. v. Commissioner, 348 U.S. 426 (1955).
The essence of this is that income is any increase in wealth over which you have dominion and control. And Congress has the power to tax any of it. Thus, income subject to taxation includes: A $20 bill that you found on the street, a gift from your parents, a gain that you made when you sold an asset, the proceeds from your garage sale, your salary, all your lottery winnings, an inheritance, a forgiven debt through bankruptcy, interest payments received from a municipal bond, unless specifically excepted by Congress.
Misconception.
There is a misconception, a myth, that the Internal Revenue Service (IRS) creates the law. Most of us know that the tax law is created by Congress, but it is a lot easier to blame the IRS.
The tax laws are created by Congress, approved by the President, and codified in the Internal Revenue Code. IRC.
Administration and enforcement of the Internal Revenue laws are carried out by the Secretary of the Treasury. The Secretary in turn has delegated most revenue functions and authority to the Commissioner of Internal Revenue by means of Departmental Orders or Treasury Regulations and Decisions.
But the Treasury merely interprets what Congress has created. Not only interprets, but is obligated to enforce, no matter how onerous the law can be.
For example, we all realize that the estate tax, created by Congress, destroys many family businesses. But the IRS does not have a choice, it must apply that tax law as the Treasury sees it, even if businesses are destroyed by it. What we must contest in the face of an IRS audit, is not the law, but the interpretation of it. And for that, we need to appraise what Congress intended with such a law. Study the congressional history. The IRS is not concerned with fairness. It is concerned with carrying out the appropriate intent of Congress. If the IRS were concerned with fairness, it would be making the law, and making the law is not its function, nor do we want it to be.
The key to successful planning is to understand The Code. This code has close to 10,000 sections. Generally, it is published in microscopic letters and in language such as: "Substantially disproportionate redemption", "substituted basis", "Constructive receipt", "Constructive Ownership", "Qualified Acquisition indebtedness", "Accelerated Cost Recovery", "Effectively Connected", etc.
Fortunately, the IRS provides us with a myriad of information as to how it interprets The Code, and what we can expect from the IRS.
For this, please see our article Administration of federal tax law.
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