Chapter
17
Tax Consequences of
Personal Activities
Taxability of Non-business/investment receipts
General Rule: Gross Income includes all income “from whatever source
derived.”
 Includes all income unless specifically excluded by law.
Most government transfer payments are nontaxable
Unemployment insurance is replacement for wages and is taxable
Prizes & Awards are generally taxable
Prizes may be sought by recipient (e.g., competition, drawing, etc.) or
bestowed based on recipient’s accomplishments (e.g., employee of
the quarter, etc.)
May be cash or property
Example:
http://money.cnn.com/2004/09/22/news/newsmakers/oprah_car_tax/
 Audience members at Oprah’s Sep. 2004 show owed an estimated
$7,000 in income taxes on the car received for being in audience that day.
One exception: scholarship awards to extent of cost of tuition, fees,
books, supplies and equipment are not taxable
Taxability of Non-business/investment receipts (cont)
Gifts, unlike prizes and awards, are not taxable
The term “gift” implies an attitude of affection toward the recipient by
the donor
 Lack of charitable or affectionate motivation for payment suggests either
that payment is more akin to a prize or award or that payment is part of an
exchange
“Quid pro quo” payment from donor to recipient is not a gift
 Business, rather than a personal, relationship between donor and
recipient suggests quid pro quo (i.e., donor expecting something in return
for the “gift”)
 Alimony (as distinguished from child support) is also not a gift—it is
generally deductible by payer and taxable to recipient
Inheritances also excluded from income
Tax “basis” to recipient:
 Gift—carryover from donor
 Inheritance—fair value at date of death (with some exceptions)
Gift vs. Inheritance Example
Assume Mickey received 1,000 shares of stock from
his father. His father originally paid $60 per share for
the stock. Its fair value at the date of the transfer was
$105 per share. He subsequently sold the shares for
$125 per share:
If the shares were received by gift, Mickey will recognize a
capital gain of $65,000 when he sells the stock ($125 selling
price - $60 tax basis = $65 gain per share)
If they were received as an inheritance, he would recognize a
capital gain of only $20,000 upon sale of the stock ($125
selling price - $105 tax basis = $20 gain per share)