MGMT 127A Lecture Notes - Lecture 9: Term Life Insurance, Gross Income, Life Insurance

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8 May 2016
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1. Lecture 9: section 2 and part of section 3
Section 2: Income
Definition of income:
oSection 61: gross income is: except otherwise provided in this subtitle, gross income
means all income from whatever source derived, including (but not limited to) the following
items:
Compensation for services including fees, commissions, fringe benefits, and
similar items
Gross income derived from business
Gains derived from dealings in property
Interest
Rents
Royalties
Dividends
Alimony and separate maintenance payments
Annuities
Income from life insurance and endowment contracts
Pensions
Income from discharge of indebtedness
Distributive share of partnership gross income
Income in respect of a decedent
Income from an interest in an estate or trust
oGross income includes income realized in any form whether in money, property, or
services
oSupreme court decisions have made it clear- all sources of income are subject to tax
unless congress specifically excludes the type of income received
Income broadly conceived requires that:
oThere must be a market exchange
There is no market exchange if you are working for yourself (like mowing your
own lawn)
If you mow your neighbors lawn and your neighbor mows your lawn, there is an
exchange so this counts as income
oThe exchange must not be merely incidental
If you receive benefits as a condition of employment or for the convenience of
the employer, it is not considered income
If you are in New York for the week because of business and then your boss
decides to pay for you to stay the weekend for your leisure, now that is income
oRecovery of capital is not considered income
Collection on annuity contracts must be allocated between recovery of capital
and income
Example: you paid in $40 and you receive $50 back paid over time
So you receive $10 every year for 5 years- each time, 80% of that is recovery of
capital and the other 20% is counted income
oThere must be a realization
If you buy land for $1 million and now today it is worth $10 million, you still do
not have income- the mere appreciation in the market value of an asset before a sale
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