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Jewish World Review Feb. 14, 2001 / 21 Shevat, 5761

Tax Tales by A. J. Cook

A.J. Cook
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Consumer Reports

Distinguishing income from receipts confuses -- GEORGE and Dorothy Conner watched their Houston home go up in smoke but refused to sit by while the Internal Revenue Service burned them with more taxes.

The couple's case challenging the IRS shows how confusing it is to try to define income.

The Conners had leased a house nearby while their home was being rebuilt. They paid $4,200 rent for the time they leased. Their insurance company reimbursed them for that, plus almost $500 in living expenses.

The IRS said that's taxable income. It said all income is taxable unless specifically excluded, and the Conners haven't proved the reimbursement is excluded.

True, income is taxable unless excluded - but what's income?

The Tax Court said the agency confuses income with "receipts." The couple's reimbursements were receipts - not necessarily income. For example, the following are receipts but not income: loans, gifts and inheritances. Income includes receipts from rent, interest, royalties, dividends, alimony, compensation for services, profits from business activity, gains from dealing in property, etc.

Courts continue to search for the definition of income. The U.S. Supreme Court tried to give us a rule of thumb: If the receipt of money or assets increases a taxpayer's wealth (i.e. net worth), it's income.

Following the Supreme Court rule, the Conners' court said the reimbursement did not increase net worth. The money merely replaced what they paid so there was no wealth increase - so no income. And without income, it ruled, there was no income tax.

The definition of income should now be clear thanks to this case and the prior Supreme Court ruling, but it isn't. The Conners' case doesn't mean all reimbursements are tax exempt. If a company reimburses an employee for certain personal expenses, this is probably income and taxable as compensation.

The net worth definition isn't adequate, either: Your gift or inheritance increases your wealth, but it isn't income. Also, if your stock in Federal Express flies as high as its planes, your wealth increases. But this increase isn't taxable until Federal Express pays a dividend or you sell the stock.

The answer seems to be this: If what you receive isn't listed as income or not income, then it is or isn't income based on what the court says it is in the latest case.

The moral: If it walks like a duck and quacks like a duck, it's a duck most of the time.

A.J. Cook, lawyer and accountant, is counsel with the law firm of Pietrangelo Cook PLC. Comment by clicking here.


02/07/01: IRS sank its teeth into hunters' expenses
01/30/01: 'Match game' could mean big bucks for IRS
01/22/00: Getting the address right

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