b. Ellis bought 100 shares of XYZ stock on August 1 for $21 per share.

Ellis sold
his XYZ shares on September 5 for $23 per share. Ellis received the $100
dividend on September 10 (note that even though Ellis didnt own the stock on
September 10, he still received the dividend because he was the shareholder on the
record date).

c. Ellis bought 100 shares of XYZ stock for $22 per share on August 20. Ellis
received the $100 dividend on September 10. Ellis still owns the shares at year-
end.
a. Ellis has $100 of economic income and includes the $100 dividend in gross
income.
b. Ellis has $200 of income from the sale of the stock ($2,300-$2,100) that is
included in gross income. Ellis also has $100 of income from the dividend, which
he also includes the $100 dividend in gross income [See Reg. 1.61-9(c).].
c. Ellis owns the XYZ shares on the record date, and received the $100 dividend.
Hence, Ellis is taxed on the entire dividend. [See Reg. 1.61-9(c).]
41. [LO 1] {Research} For the following independent cases, determine whether economic income
is present and, if so, whether it must be included in gross income. Identify a tax authority that
supports your analysis.
a. Hermione discovered a gold nugget (valued at $10,000) on her land.
b. Jay embezzled $20,000 from his employer and has not yet been apprehended.
c. Keisha found $1,000 inside an old dresser. She purchased the dresser at a
discount furniture store at the end of last year and found the money after the
beginning of the new year. No one has claimed the money.
a. Hermione must include the value of the nugget in her gross income. The value of
the nugget is realized income because gold is marketable in a nugget form and
easily valued. The authorities (Reg 1.61-14(a).; Rev. Rul. 61, 1953-1 CB 17)
refer to the finder of a treasure trove and hold that there is gross income (to
the extent of the ascertainable value in U.S. currency) in the tax year in which the
property is reduced to the taxpayers undisputed possession.
b. Jay might argue that no economic income is present because there is a liability to
return the embezzled funds. The IRS argues that Jay does not intend to return the
funds, so no liability exists at the time of the embezzlement, and therefore, income
is present in that period. The Supreme Court has held that embezzled money is
included in the embezzler's gross income if the funds are received without
restriction on the use of the funds and without a consensual recognition, express
or implied, of an obligation to repay the funds (see Eugene James v. U.S., (1961,
S.Ct.) 366 US 213). So, Jay is unlikely to win this argument.
c. The answer to this question depends on state law. If she is not required under
state law to search for the owner of money or give the money to authorities, she
must recognize gross income on the funds. If she is required under state law to
search for the owner or return the funds, she does not recognize the income. If
 she ignores the law, she must include the amount in gross income because she
has taken an undisputed claim on the income. When does she recognize the
income? When she bought the dresser (last year) or when she found the money
(this year)? In a Sixth Circuit case the taxpayer bought a piano for $15 at an
auction and seven years later discovered $4,467 hidden inside. The Court held
that the money was reduced to undisputed possession in the year of discovery and
not in the year the taxpayer bought the piano at an auction (Ermenegildo
Cesarini v. U.S., (1970, CA6) 428 F2d 812).

42. [LO 1] Although Hank is retired, he is an excellent handyman and often works part-time on
small projects for neighbors and friends. Last week his neighbor, Mike, offered to pay Hank
$500 for minor repairs to his house. Hank completed the repairs in December of this year.
Hank uses the cash method of accounting and is a calendar-year taxpayer. Compute Hanks
gross income for this year from each of the following alternative transactions:
a. Mike paid Hank $200 in cash in December of this year and promised to pay the
remaining $300 with interest in three months.
b. Mike paid Hank $100 in cash in December of this year and gave him a negotiable
promissory note for $400 due in three months with interest. Hank sold the note
in January for $350.
c. Mike gave Hank tickets in December to the big game in January. The tickets
have a face value of $50 but Hank could sell them for $400. Hank went to the
game with his son.
d. Mike bought Hank a new set of snow tires. The tires typically sell for $500, but
Mike bought them on sale for $450.
a. $200 this year.
b. $500 this year if the value of the note at the time of the exchange was $400. Note
the difference between a promise to pay in part a. (not gross income) and a
negotiable promissory note which is included in gross income.
c. $400 this year. The value of the tickets was $400 when Hank received them.
d. $450. This is the fair market value of the tires at the time Mike transferred them
to Hank.
43. [LO 1] Jim recently joined the Austin Barter Club, an organization that facilitates the exchange
of services between its members. This year Jim provided lawn-mowing services to other club
members. Jim received the following from the barter club. Determine the amount, if any Jim
should include in his gross income in each of the following situations:

a. Jim received $275 of car repair services from another member of the club.
b. Jim received a $150 credit that gave him the option of receiving a season pass at
a local ski resort from another member of the club. However, he forgot to request
the pass by the end of the ski season and his credit expired.
c. Jim received a $450 credit that can only be applied for goods or services from
club members next year.
a. In an exchange of services, income has been received in the amount of the value
of services received (gross income includes the receipt of services as well as
money and goods). Hence, Jim is taxed on the $275 of car repair services.
b. The issue is whether the "credit" represents a valuable right. Because the right
could be redeemed for property worth $150, then under constructive receipt Jim
should recognize income of $150.
c. If a barter credit can only be redeemed for future services, then the taxpayer
could argue that no realization has yet occurred. But, it would be included in his
gross income next year when the credit becomes a valuable right.
44. [LO 1] {Research} Last year Acme paid Ralph $15,000 to install a new air-conditioning unit at
its headquarters building. The air conditioner did not function properly, and this year Acme
requested that Ralph return the payment. Because Ralph could not repair one critical part in the
unit, he refunded the cost of the repair, $5,000, to Acme.
a. Is Ralph required to include the $15,000 payment he received last year in his
gross income from last year?
b. What are the tax implications of the repayment if Ralph was in the 35 percent tax
bracket when he received the $15,000 payment from Acme, but was in the 28
percent tax bracket when he refunded $5,000 to Acme?
c. How would you answer part b. if Ralph refunded $2,500 to Acme and not
$5,000?
a. Under the claim of right doctrine (North American Oil Consol. v. Burnet (1932,
S.Ct.) 286 US 417) Ralph has control over the property and an apparent claim of
right to the payment. Hence, gross income is realized this year even though it
may need to be repaid later.