---
kind: "range"
citation: "26 C.F.R. §§ 1.61-1–1.61-15"
title: "26"
from: "1.61-1"
to: "1.61-15"
count: 15
url: "https://uscodex.org/cfr/26/1.61-1..1.61-15"
---

# §1.61-1. Gross income.

- (a) **General definition.** Gross income means all income from whatever source derived, unless excluded by law. Gross income includes income realized in any form, whether in money, property, or services. Income may be realized, therefore, in the form of services, meals, accommodations, stock, or other property, as well as in cash. [Section 61](/cfr/26/61.md) lists the more common items of gross income for purposes of illustration. For purposes of further illustration, [§ 1.61-14](/cfr/26/1.61-14.md) mentions several miscellaneous items of gross income not listed specifically in [section 61](/cfr/26/61.md). Gross income, however, is not limited to the items so enumerated.
- (b) **Cross references.** Cross references to other provisions of the Code are to be found throughout the regulations under [section 61](/cfr/26/61.md). The purpose of these cross references is to direct attention to the more common items which are included in or excluded from gross income entirely, or treated in some special manner. To the extent that another section of the Code or of the regulations thereunder, provides specific treatment for any item of income, such other provision shall apply notwithstanding [section 61](/cfr/26/61.md) and the regulations thereunder. The cross references do not cover all possible items.
  - (1) For examples of items specifically included in gross income, see Part II ([section 71](/cfr/26/71.md) and following), Subchapter B, Chapter 1 of the Code.
  - (2) For examples of items specifically excluded from gross income, see part III ([section 101](/cfr/26/101.md) and following), Subchapter B, Chapter 1 of the Code.
  - (3) For general rules as to the taxable year for which an item is to be included in gross income, see [section 451](/cfr/26/451.md) and the regulations thereunder.

# §1.61-2. Compensation for services, including fees, commissions, and similar items.

- (a) **In general.**
  - (1) Wages, salaries, commissions paid salesmen, compensation for services on the basis of a percentage of profits, commissions on insurance premiums, tips, bonuses (including Christmas bonuses), termination or severance pay, rewards, jury fees, marriage fees and other contributions received by a clergyman for services, pay of persons in the military or naval forces of the United States, retired pay of employees, pensions, and retirement allowances are income to the recipients unless excluded by law. Several special rules apply to members of the Armed Forces, National Oceanic and Atmospheric Administration, and Public Health Service of the United States; see [paragraph (b)](#b) of this section.
  - (2) **The Code provides special rules including the following items in gross income—**
    - (i) Distributions from employees' trusts, see sections [72](/cfr/26/72.md), [402](/cfr/26/402.md), and [403](/cfr/26/403.md), and the regulations thereunder;
    - (ii) Compensation for child's services (in child's gross income), see [section 73](/cfr/26/73.md) and the regulations thereunder;
    - (iii) **Prizes and awards, see section 74 and the regulations thereunder.**
  - (3) Similarly, the Code provides special rules excluding the following items from gross income in whole or in part:
    - (i) Gifts, see [section 102](/cfr/26/102.md) and the regulations thereunder;
    - (ii) Compensation for injuries or sickness, see [section 104](/cfr/26/104.md) and the regulations thereunder;
    - (iii) Amounts received under accident and health plans, see [section 105](/cfr/26/105.md) and the regulations thereunder;
    - (iv) Scholarship and fellowship grants, see [section 117](/cfr/26/117.md) and the regulations thereunder;
    - (v) **Miscellaneous items, see section 122.**
- (b) **Members of the Armed Forces, National Oceanic and Atmospheric Administration, and Public Health Service.**
  - (1) Subsistence and uniform allowances granted commissioned officers, chief warrant officers, warrant officers, and enlisted personnel of the Armed Forces, National Oceanic and Atmospheric Administration, and Public Health Service of the United States, and amounts received by them as commutation of quarters, are excluded from gross income. Similarly, the value of quarters or subsistence furnished to such persons is excluded from gross income.
  - (2) For purposes of this section, quarters or subsistence includes the following allowances for expenses incurred after December 31, 1993, by members of the Armed Forces, members of the commissioned corps of the National Oceanic and Atmospheric Administration, and members of the commissioned corps of the Public Health Service, to the extent that the allowances are not otherwise excluded from gross income under another provision of the Internal Revenue Code: a dislocation allowance, authorized by [37 U.S.C. 407](/usc/37/407.md); a temporary lodging allowance, authorized by [37 U.S.C. 405](/usc/37/405.md); a temporary lodging expense, authorized by [37 U.S.C. 404a](/usc/37/404a.md); and a move-in housing allowance, authorized by [37 U.S.C. 405](/usc/37/405.md). No deduction is allowed under this chapter for any expenses reimbursed by such excluded allowances. For the exclusion from gross income of—
    - (i) Disability pensions, see [section 104(a)(4)](/cfr/26/104.md?p=a-4) and the regulations thereunder;
    - (ii) **Miscellaneous items, see section 122.**
  - (3) The per diem or actual expense allowance, the monetary allowance in lieu of transportation, and the mileage allowance received by members of the Armed Forces, National Oceanic and Atmospheric Administration, and the Public Health Service, while in a travel status or on temporary duty away from their permanent stations, are included in their gross income except to the extent excluded under the accountable plan provisions of [§ 1.62-2](/cfr/26/1.62-2.md).
- (c) **Payment to charitable, etc., organization on behalf of person rendering services.** The value of services is not includible in gross income when such services are rendered directly and gratuitously to an organization described in [section 170(c)](/cfr/26/170.md?p=c). Where, however, pursuant to an agreement or understanding, services are rendered to a person for the benefit of an organization described in [section 170(c)](/cfr/26/170.md?p=c) and an amount for such services is paid to such organization by the person to whom the services are rendered, the amount so paid constitutes income to the person performing the services.
- (d) **Compensation paid other than in cash—**
  - (1) **In general.** Except as otherwise provided in [paragraph (d)(6)(i)](#d-6-i) of this section (relating to certain property transferred after June 30, 1969), if services are paid for in property, the fair market value of the property taken in payment must be included in income as compensation. If services are paid for in exchange for other services, the fair market value of such other services taken in payment must be included in income as compensation. If the services are rendered at a stipulated price, such price will be presumed to be the fair market value of the compensation received in the absence of evidence to the contrary. For special rules relating to certain options received as compensation, see §§ [1.61-15](/cfr/26/1.61-15.md), [1.83-7](/cfr/26/1.83-7.md), and [section 421](/cfr/26/421.md) and the regulations thereunder. For special rules relating to premiums paid by an employer for an annuity contract which is not subject to [section 403(a)](/cfr/26/403.md?p=a), see [section 403(c)](/cfr/26/403.md?p=c) and the regulations thereunder and [§ 1.83-8(a)](/cfr/26/1.83-8.md?p=a). For special rules relating to contributions made to an employees' trust which is not exempt under [section 501](/cfr/26/501.md), see [section 402(b)](/cfr/26/402.md?p=b) and the regulations thereunder and [§ 1.83-8(a)](/cfr/26/1.83-8.md?p=a).
  - (2) **Property transferred to employee or independent contractor.**
    - (i) Except as otherwise provided in [section 421](/cfr/26/421.md) and the regulations thereunder and [§ 1.61-15](/cfr/26/1.61-15.md) (relating to stock options), and [paragraph (d)(6)(i)](#d-6-i) of this section, if property is transferred by an employer to an employee or if property is transferred to an independent contractor, as compensation for services, for an amount less than its fair market value, then regardless of whether the transfer is in the form of a sale or exchange, the difference between the amount paid for the property and the amount of its fair market value at the time of the transfer is compensation and shall be included in the gross income of the employee or independent contractor. In computing the gain or loss from the subsequent sale of such property, its basis shall be the amount paid for the property increased by the amount of such difference included in gross income
    - (ii)
      - (A) **Cost of life insurance on the life of the employee.** Generally, life insurance premiums paid by an employer on the life of his employee where the proceeds of such insurance are payable to the beneficiary of such employee are part of the gross income of the employee. However, the amount includible in the employee's gross income is determined with regard to the provisions of [section 403](/cfr/26/403.md) and the regulations thereunder in the case of an individual contract issued after December 31, 1962, or a group contract, which provides incidental life insurance protection and which satisfies the requirements of [section 401(g)](/cfr/26/401.md?p=g) and [§ 1.401-9](/cfr/26/1.401-9.md), relating to the nontransferability of annuity contracts. For example, if an employee or independent contractor is the owner (as defined in [§ 1.61-22(c)(1)](/cfr/26/1.61-22.md?p=c-1)) of a life insurance contract and the payments with regard to such contract are not split-dollar loans under [§ 1.7872-15(b)(1)](/cfr/26/1.7872-15.md?p=b-1), the employee or independent contractor must include in income the amount of any such payments by the employer or service recipient with respect to such contract during any year to the extent that the employee's or independent contractor's rights to the life insurance contract are substantially vested (within the meaning of [§ 1.83-3(b)](/cfr/26/1.83-3.md?p=b)). This result is the same regardless of whether the employee or independent contractor has at all times been the owner of the life insurance contract or the contract previously has been owned by the employer or service recipient as part of a split-dollar life insurance arrangement (as defined in § [1.61-22(b)(1)](/cfr/26/1.61-22.md?p=b-1) or [(2)](/cfr/26/1.61-22.md?p=b-2)) and was transferred by the employer or service recipient to the employee or independent contractor under [§ 1.61-22(g)](/cfr/26/1.61-22.md?p=g). For the special rules relating to the includibility in an employee's gross income of an amount equal to the cost of certain group term life insurance on the employee's life which is carried directly or indirectly by his employer, see [section 79](/cfr/26/79.md) and the regulations thereunder. For special rules relating to the exclusion of contributions by an employer to accident and health plans for the employee, see [section 106](/cfr/26/106.md) and the regulations thereunder.
      - (B) **Cost of group-term life insurance on the life of an individual other than an employee.** The cost (determined under [paragraph (d)(2)](/cfr/26/1.79-3.md?p=d-2) of § 1.79-3) of group-term life insurance on the life of an individual other than an employee (such as the spouse or dependent of the employee) provided in connection with the performance of services by the employee is includible in the gross income of the employee.
  - (3) **Meals and living quarters.** The value of living quarters or meals which an employee receives in addition to his salary constitutes gross income unless they are furnished for the convenience of the employer and meet the conditions specified in [section 119](/cfr/26/119.md) and the regulations thereunder. For the treatment of rental value of parsonages or rental allowance paid to ministers, see [section 107](/cfr/26/107.md) and the regulations thereunder; for the treatment of statutory subsistence allowances received by police, see [section 120](/cfr/26/120.md) and the regulations thereunder.
  - (4) **Stock and notes transferred to employee or independent contractor.** Except as otherwise provided by [section 421](/cfr/26/421.md) and the regulations thereunder and [§ 1.61-15](/cfr/26/1.61-15.md) (relating to stock options), and [paragraph (d)(6)(i)](#d-6-i) of this section, if a corporation transfers its own stock to an employee or independent contractor as compensation for services, the fair market value of the stock at the time of transfer shall be included in the gross income of the employee or independent contractor. Notes or other evidences of indebtedness received in payment for services constitute income in the amount of their fair market value at the time of the transfer. A taxpayer receiving as compensation a note regarded as good for its face value at maturity, but not bearing interest, shall treat as income as of the time of receipt its fair discounted value computed at the prevailing rate. As payments are received on such a note, there shall be included in income that portion of each payment which represents the proportionate part of the discount originally taken on the entire note.
  - (5) **Property transferred on or before June 30, 1969, subject to restrictions.** Notwithstanding [paragraph (d)](#d) (1), (2), or (4) of this section, if any property is transferred after September 24, 1959, by an employer to an employee or independent contractor as compensation for services, and such property is subject to a restriction which has a significant effect on its value at the time of transfer, the rules of [§ 1.421-6(d)(2)](/cfr/26/1.421-6.md?p=d-2) shall apply in determining the time and the amount of compensation to be included in the gross income of the employee or independent contractor. This (5) is also applicable to transfers subject to a restriction which has a significant effect on its value at the time of transfer and to which [§ 1.83-8(b)](/cfr/26/1.83-8.md?p=b) (relating to transitional rules with respect to transfers of restricted property) applies. For special rules relating to options to purchase stock or other property which are issued as compensation for services, see [§ 1.61-15](/cfr/26/1.61-15.md) and [section 421](/cfr/26/421.md) and the regulations thereunder.
  - (6) **Certain property transferred, premiums paid, and contributions made in connection with the performance of services after June 30, 1969—**
    - (i) **Exception.** [Paragraph (d)](#d) (1), (2), (4), and (5) of this section and [§ 1.61-15](/cfr/26/1.61-15.md) do not apply to the transfer of property (as defined in [§ 1.83-3(e)](/cfr/26/1.83-3.md?p=e)) after June 30, 1969, unless [§ 1.83-8](/cfr/26/1.83-8.md) (relating to the applicability of [section 83](/cfr/26/83.md) and transitional rules) applies. If [section 83](/cfr/26/83.md) applies to a transfer of property, and the property is not subject to a restriction that has a significant effect on the fair market value of such property, then the rules contained in [paragraph (d)](#d) (1), (2), and (4) of this section and [§ 1.61-15](/cfr/26/1.61-15.md) shall also apply to such transfer to the extent such rules are not inconsistent with [section 83](/cfr/26/83.md).
    - (ii) **Cross references.** For rules relating to premiums paid by an employer for an annuity contract which is not subject to [section 403(a)](/cfr/26/403.md?p=a), see [section 403(c)](/cfr/26/403.md?p=c) and the regulations thereunder. For rules relating to contributions made to an employees' trust which is not exempt under [section 501(a)](/cfr/26/501.md?p=a), see [section 402(b)](/cfr/26/402.md?p=b) and the regulations thereunder.

# §1.61-3. Gross income derived from business.

- (a) **In general.** In a manufacturing, merchandising, or mining business, “gross income” means the total sales, less the cost of goods sold, plus any income from investments and from incidental or outside operations or sources. Gross income is determined without subtraction of depletion allowances based on a percentage of income to the extent that it exceeds cost depletion which may be required to be included in the amount of inventoriable costs as provided in [§ 1.471-11](/cfr/26/1.471-11.md) and without subtraction of selling expenses, losses or other items not ordinarily used in computing costs of goods sold or amounts which are of a type for which a deduction would be disallowed under section [162 (c)](/cfr/26/162.md?p=c), [(f)](/cfr/26/162.md?p=f), or [(g)](/cfr/26/162.md?p=g) in the case of a business expense. The cost of goods sold should be determined in accordance with the method of accounting consistently used by the taxpayer. Thus, for example, an amount cannot be taken into account in the computation of cost of goods sold any earlier than the taxable year in which economic performance occurs with respect to the amount (see [§ 1.446-1(c)(1)(ii)](/cfr/26/1.446-1.md?p=c-1-ii)).
- (b) **State contracts.** The profit from a contract with a State or political subdivision thereof must be included in gross income. If warrants are issued by a city, town, or other political subdivision of a State, and are accepted by the contractor in payment for public work done, the fair market value of such warrants should be returned as income. If, upon conversion of the warrants into cash, the contractor does not receive and cannot recover the full value of the warrants so returned, he may deduct any loss sustained from his gross income for the year in which the warrants are so converted. If, however, he realizes more than the value of the warrants so returned, he must include the excess in his gross income for the year in which realized.

# §1.61-4. Gross income of farmers.

- (a) **Farmers using the cash method of accounting.** A farmer using the cash receipts and disbursements method of accounting shall include in his gross income for the taxable year—
  - (1) The amount of cash and the value of merchandise or other property received during the taxable year from the sale of livestock and produce which he raised,
  - (2) The profits from the sale of any livestock or other items which were purchased,
  - (3) All amounts received from breeding fees, fees from rent of teams, machinery, or land, and other incidental farm income,
  - (4) All subsidy and conservation payments received which must be considered as income, and
  - (5) **Gross income from all other sources.**
- (b) **Farmers using an accrual method of accounting.** A farmer using an accrual method of accounting must use inventories to determine his gross income. His gross income on an accrual method is determined by adding the total of the items described in [subparagraphs (1) through (5)](#b-1..b-5) of this paragraph and subtracting therefrom the total of the items described in subparagraphs [(6)](#b-6) and [(7)](#b-7) of this paragraph. These items are as follows:
  - (1) The sales price of all livestock and other products held for sale and sold during the year;
  - (2) The inventory value of livestock and products on hand and not sold at the end of the year;
  - (3) All miscellaneous items of income, such as breeding fees, fees from the rent of teams, machinery, or land, or other incidental farm income;
  - (4) Any subsidy or conservation payments which must be considered as income;
  - (5) Gross income from all other sources;
  - (6) The inventory value of the livestock and products on hand and not sold at the beginning of the year; and
  - (7) The cost of any livestock or products purchased during the year (except livestock held for draft, dairy, or breeding purposes, unless included in inventory).
- (c) **Special rules for certain receipts.** In the case of the sale of machinery, farm equipment, or any other property (except stock in trade of the taxpayer, or property of a kind which would properly be included in the inventory of the taxpayer if on hand at the close of the taxable year, or property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business), any excess of the proceeds of the sale over the adjusted basis of such property shall be included in the taxpayer's gross income for the taxable year in which such sale is made. See, however, [section 453](/cfr/26/453.md) and the regulations thereunder for special rules relating to certain installment sales. If farm produce is exchanged for merchandise, groceries, or the like, the market value of the article received in exchange is to be included in gross income. Proceeds of insurance, such as hail or fire insurance on growing crops, should be included in gross income to the extent of the amount received in cash or its equivalent for the crop injured or destroyed. See [section 451(d)](/cfr/26/451.md?p=d) for special rule relating to election to include crop insurance proceeds in income for taxable year following taxable year of destruction. For taxable years beginning after July 12, 1972, where a farmer is engaged in producing crops and the process of gathering and disposing of such crops is not completed within the taxable year in which such crops are planted, the income therefrom may, with the consent of the Commissioner (see [section 446](/cfr/26/446.md) and the regulations thereunder), be computed upon the crop method. For taxable years beginning on or before July 12, 1972, where a farmer is engaged in producing crops which take more than a year from the time of planting to the time of gathering and disposing, the income therefrom may, with the consent of the Commissioner (see [section 446](/cfr/26/446.md) and the regulations thereunder), be computed upon the crop method. In any case in which the crop method is used, the entire cost of producing the crop must be taken as a deduction for the year in which the gross income from the crop is realized, and not earlier.
- (d) **Definition of “farm”.** As used in this section, the term “farm” embraces the farm in the ordinarily accepted sense, and includes stock, dairy, poultry, fruit, and truck farms; also plantations, ranches, and all land used for farming operations. All individuals, partnerships, or corporations that cultivate, operate, or manage farms for gain or profit, either as owners or tenants, are designated as farmers. For more detailed rules with respect to the determination of whether or not an individual is engaged in farming, see [§ 1.175-3](/cfr/26/1.175-3.md). For rules applicable to persons cultivating or operating a farm for recreation or pleasure, see sections [162](/cfr/26/162.md) and [165](/cfr/26/165.md), and the regulations thereunder.
- (e) **Cross references.**
  - (1) For election to include Commodity Credit Corporation loans as income, see [section 77](/cfr/26/77.md) and regulations thereunder.
  - (2) For definition of gross income derived from farming for purposes of limiting deductibility of soil and water conservation expenditures, see [section 175](/cfr/26/175.md) and regulations thereunder.
  - (3) For definition of gross income from farming in connection with declarations of estimated income tax, see [section 6073](/cfr/26/6073.md) and regulations thereunder.

# §1.61-5. Allocations by cooperative associations; per-unit retain certificates—tax treatment as to cooperatives and patrons.

- (a) **In general.** Amounts allocated on the basis of the business done with or for a patron by a cooperative association, whether or not entitled to tax treatment under [section 522](/cfr/26/522.md), in cash, merchandise, capital stock, revolving fund certificates, retain certificates, certificates of indebtedness, letters of advice or in some other manner disclosing to the patron the dollar amount allocated, shall be included in the computation of the gross income of such patron for the taxable year in which received to the extent prescribed in [paragraph (b)](#b) of this section, regardless of whether the allocation is deemed, for the purpose of [section 522](/cfr/26/522.md), to be made at the close of a preceding taxable year of the cooperative association. The determination of the extent of taxability of such amounts is in no way dependent upon the method of accounting employed by the patron or upon the method, cash, accrual, or otherwise, upon which the taxable income of such patron is computed.
- (b) **Extent of taxability.**
  - (1) Amounts allocated to a patron on a patronage basis by a cooperative association with respect to products marketed for such patron, or with respect to supplies, equipment, or services, the cost of which was deductible by the patron under [section 162](/cfr/26/162.md) or [section 212](/cfr/26/212.md), shall be included in the computation of the gross income of such patron, as ordinary income, to the following extent:
    - (i) If the allocation is in cash, the amount of cash received.
    - (ii) If the allocation is in merchandise, the amount of the fair market value of such merchandise at the time of receipt by the patron.
    - (iii) If the allocation is in the form of revolving fund certificates, retain certificates, certificates of indebtedness, letters of advice, or similar documents, the amount of the fair market value of such document at the time of its receipt by the patron. For purposes of this subdivision, any document containing an unconditional promise to pay a fixed sum of money on demand or at a fixed or determinable time shall be considered to have a fair market value at the time of its receipt by the patron, unless it is clearly established to the contrary. However, for purposes of this subdivision, any document which is payable only in the discretion of the cooperative association, or which is otherwise subject to conditions beyond the control of the patron, shall be considered not to have any fair market value at the time of its receipt by the patron, unless it is clearly established to the contrary.
    - (iv) If the allocation is in the form of capital stock, the amount of the fair market value, if any, of such capital stock at the time of its receipt by the patron.
  - (2) If any allocation to which [subparagraph (1)](#b-1) of this paragraph applies is received in the form of a document of the type described in [subparagraph (1)](#b-1) (iii) or (iv) of this paragraph and is redeemed in full or in part or is otherwise disposed of, there shall be included in the computation of the gross income of the patron, as ordinary income, in the year of redemption or other disposition, the excess of the amount realized on the redemption or other disposition over the amount previously included in the computation of gross income under such subparagraph.
  - (3)
    - (i) Amounts which are allocated on a patronage basis by a cooperative association with respect to supplies, equipment, or services, the cost of which was not deductible by the patron under [section 162](/cfr/26/162.md) or [section 212](/cfr/26/212.md), are not includible in the computation of the gross income of such patron. However, in the case of such amounts which are allocated with respect to capital assets (as defined in [section 1221](/cfr/26/1221.md)) or property used in the trade or business within the meaning of [section 1231](/cfr/26/1231.md), such amounts shall, to the extent set forth in [subparagraph (1)](#b-1) of this paragraph, be taken into account by such patron in determining the cost of the property to which the allocation relates. Notwithstanding the preceding sentence, to the extent that such amounts are in excess of the unrecovered cost of such property, and to the extent that such amounts relate to such property which the patron no longer owns, they shall be included in the computation of the gross income of such patron.
    - (ii) If any patronage dividend is allocated to the patron in the form of a document of the type described in [subparagraph (1)](#b-1) (iii) or (iv) of this paragraph, and if such allocation is with respect to capital assets (as defined in [section 1221](/cfr/26/1221.md)) or property used in the trade or business within the meaning of [section 1231](/cfr/26/1231.md), any amount realized on the redemption or other disposition of such document which is in excess of the amount which was taken into account upon the receipt of the document by the patron shall be taken into account by such patron in the year of redemption or other disposition as an adjustment to basis or as an inclusion in the computation of gross income, as the case may be.
    - (iii) Any adjustment to basis in respect of an amount to which subdivision (i) or (ii) of this subparagraph applies shall be made as of the first day of the taxable year in which such amount is received.
    - (iv) The application of the provisions of this subparagraph may be illustrated by the following examples:
- (c) **Special rule.** If, for any taxable year ending before December 3, 1959, a taxpayer treated any patronage dividend received in the form of a document described in [paragraph (b)](#b) (1) (iii) or (iv) of this section in accordance with the regulations then applicable (whether such dividend is subject to [paragraph (b)](#b) (1) or (3) of this section), such taxpayer is not required to change the treatment of such patronage dividends for any such prior taxable year. On the other hand, the taxpayer may, if he so desires, amend his income tax returns to treat the receipt of such patronage dividend in accordance with the provisions of this section, but no provision in this paragraph shall be construed as extending the period of limitations within which a claim for credit or refund may be filed under [section 6511](/cfr/26/6511.md).
- (d) **Per-unit retain certificates; tax treatment of cooperative associations; distribution and reinvestment alternative.**
  - (1)
    - (i) In the case of a taxable year to which this paragraph applies to a cooperative association, such association shall, in computing the amount paid or returned to a patron with respect to products marketed for such patron, take into account the stated dollar amount of any per-unit retain certificate (as defined in [paragraph (g)](#g) of this section)—

      (a) Which is issued during the payment period for such year (as defined in [subparagraph (3)](#d-3) of this paragraph) with respect to such products,

      (b) With respect to which the patron is a qualifying patron (as defined in [subparagraph (2)](#d-2) of this paragraph), and

      (c) Which clearly states the fact that the patron has agreed to treat the stated dollar amount thereof as representing a cash distribution to him which he has reinvested in the cooperative association.

    - (ii) No amount shall be taken into account by a cooperative association by reason of the issuance of a per-unit retain certificate to a patron who was not a qualifying patron with respect to such certificate. However, any amount paid in redemption of a per-unit retain certificate which was issued to a patron who was not a qualifying patron with respect to such certificate shall be taken into account by the cooperative in the year of redemption, as an amount paid or returned to such patron with respect to products marketed for him. This subdivision shall apply only to per-unit retain certificates issued with respect to taxable years of the cooperative association to which this paragraph applied to the association (that is, taxable years with respect to which per-unit retain certificates were issued to one or more patrons who are qualifying patrons).
  - (2)
    - (i) A patron shall be considered to be a “qualifying patron” with respect to a per-unit retain certificate if there is in effect an agreement between the cooperative association and such patron which clearly provides that such patron agrees to treat the stated dollar amounts of all per-unit retain certificates issued to him by the association as representing cash distributions which he has constructively received and which he has, of his own choice, reinvested in the cooperative association. Such an agreement may be included in a by-law of the cooperative which is adopted prior to the time the products to which the per-unit retain certificates relate are marketed. However, except where there is in effect a “written agreement” described in subdivision (ii) of this subparagraph, a patron shall not be considered to be a “qualifying patron” with respect to a per-unit retain certificate if it has been established by a determination of the Tax Court of the United States, or any other court of competent jurisdiction, which has become final, that the stated dollar amount of such certificate, or of a similar certificate issued under similar circumstances to such patron or any other patron by the cooperative association, is not required to be included (as ordinary income) in the gross income of such patron, or such other patron, for the taxable year of the patron in which received.
    - (ii) The “written agreement” referred to in subdivision (i) of this subparagraph is an agreement in writing, signed by the patron, on file with the cooperative association, and revocable as provided in this subdivision. Unless such an agreement specifically provides to the contrary, it shall be effective for per-unit retain certificates issued with respect to the taxable year of the cooperative association in which the agreement is received by the association, and unless revoked, for per-unit retain certificates issued with respect to all subsequent taxable years. A “written agreement” must be revocable by the patron at any time after the close of the taxable year in which it is made. To be effective, a revocation must be in writing, signed by the patron, and furnished to the cooperative association. A revocation shall be effective only for per-unit retain certificates issued with respect to taxable years of the cooperative association following the taxable year in which it is furnished to the association. Notwithstanding the preceding sentence, a revocation shall not be effective for per-unit retain certificates issued with respect to products marketed for the patron under a pooling arrangement in which such patron participated before such revocation. The following is an example of an agreement which would meet the requirements of this subparagraph:
  - (3) For purposes of this paragraph and [paragraph (e)](#e) of this section, the payment period for any taxable year of the cooperative is the period beginning with the first day of such taxable year and ending with the 15th day of the 9th month following the close of such year.
  - (4) This paragraph shall apply to any taxable year of a cooperative association if, with respect to such taxable year, the association has issued per-unit retain certificates to one or more of its patrons who are qualifying patrons with respect to such certificates within the meaning of [subparagraph (2)](#d-2) of this paragraph.
- (e) **Tax treatment of cooperative association; taxable years for which paragraph (d) does not apply.**
  - (1) In the case of a taxable year to which [paragraph (d)](#d) of this section does not apply to a cooperative association, such association shall, in computing the amount paid or returned to a patron with respect to products marketed for such patron, take into account the fair market value (at the time of issue) of any per-unit retain certificates which are issued by the association with respect to such products during the payment period for such taxable year.
  - (2) An amount paid in redemption of a per-unit retain certificate issued with respect to a taxable year of the cooperative association for which [paragraph (d)](#d) of this section did not apply to the association, shall, to the extent such amount exceeds the fair market value of the certificate at the time of its issue, be taken into account by the association in the year of redemption, as an amount paid or returned to a patron with respect to products marketed for such patron.
  - (3) For purposes of this paragraph and [paragraph (f)(2)](#f-2) of this section, any per-unit retain certificate containing an unconditional promise to pay a fixed sum of money on demand or at a fixed or determinable time shall be considered to have a fair market value at the time of its issue, unless it is clearly established to the contrary. On the other hand, any per-unit retain certificate (other than capital stock) which is redeemable only in the discretion of the cooperative association, or which is otherwise subject to conditions beyond the control of the patron, shall be considered not to have any fair market value at the time of its issue, unless it is clearly established to the contrary.
- (f) **Tax treatment of patron.**
  - (1) The following rules apply for purposes of computing the amount includible in gross income with respect to a per-unit retain certificate which was issued to a patron by a cooperative association with respect to a taxable year of such association for which [paragraph (d)](#d) of this section applies.
    - (i) If the patron is a qualifying patron with respect to such certificate (within the meaning of [paragraph (d)](#d) (2) of this section), he shall, in accordance with his agreement, include (as ordinary income) the stated dollar amount of the certificate in gross income for his taxable year in which the certificate is received by him.
    - (ii) If the patron is not a qualifying patron with respect to such certificate, no amount is includible in gross income on the receipt of the certificate; however, any gain on the redemption, sale, or other disposition of such certificate shall, to the extent of the stated dollar amount thereof, be considered as gain from the sale or exchange of property which is not a capital asset.
  - (2) The amount of the fair market value of a per-unit retain certificate which is issued to a patron by a cooperative association with respect to a taxable year of the association for which [paragraph (d)](#d) of this section does not apply shall be included, as ordinary income, in the gross income of the patron for the taxable year in which the certificate is received. Any gain on the redemption, sale, or other disposition of such a per-unit retain certificate shall, to the extent its stated dollar amount exceeds its fair market value at the time of issue, be treated as gain on the redemption, sale, or other disposition of property which is not a capital asset.
- (g) **“Per-unit retain certificate” defined.** For purposes of paragraphs [(d)](#d), [(e)](#e), and [(f)](#f), of this section, the term “per-unit retain certificate” means any capital stock, revolving fund certificate, retain certificate, certificate of indebtedness, letter of advice, or other written notice—
  - (1) Which is issued to a patron with respect to products marketed for such patron;
  - (2) Which discloses to the patron the stated dollar amount allocated to him on the books of the cooperative association; and
  - (3) **The stated dollar amount of which is fixed without reference to net earnings.**
- (h) **Effective date.** This section shall not apply to any amount the tax treatment of which is prescribed in [section 1385](/cfr/26/1385.md) and [§ 1.1385-1](/cfr/26/1.1385-1.md). Paragraphs [(d)](#d), [(e)](#e), and [(f)](#f) of this section shall apply to per-unit retain certificates as defined in [paragraph (g)](#g) of this section issued by a cooperative association during taxable years of the association beginning after April 30, 1966, with respect to products marketed for patrons during such years.

# §1.61-6. Gains derived from dealings in property.

- (a) **In general.** Gain realized on the sale or exchange of property is included in gross income, unless excluded by law. For this purpose property includes tangible items, such as a building, and intangible items, such as goodwill. Generally, the gain is the excess of the amount realized over the unrecovered cost or other basis for the property sold or exchanged. The specific rules for computing the amount of gain or loss are contained in [section 1001](/cfr/26/1001.md) and the regulations thereunder. When a part of a larger property is sold, the cost or other basis of the entire property shall be equitably apportioned among the several parts, and the gain realized or loss sustained on the part of the entire property sold is the difference between the selling price and the cost or other basis allocated to such part. The sale of each part is treated as a separate transaction and gain or loss shall be computed separately on each part. Thus, gain or loss shall be determined at the time of sale of each part and not deferred until the entire property has been disposed of. This rule may be illustrated by the following examples:
- (b) **Nontaxable exchanges.** Certain realized gains or losses on the sale or exchange of property are not “recognized”, that is, are not included in or deducted from gross income at the time the transaction occurs. Gain or loss from such sales or exchanges is generally recognized at some later time. Examples of such sales or exchanges are the following:
  - (1) Certain formations, reorganizations, and liquidations of corporations, see sections [331](/cfr/26/331.md), [333](/cfr/26/333.md), [337](/cfr/26/337.md), [351](/cfr/26/351.md), [354](/cfr/26/354.md), [355](/cfr/26/355.md), and [361](/cfr/26/361.md);
  - (2) Certain formations and distributions of partnerships, see sections [721](/cfr/26/721.md) and [731](/cfr/26/731.md);
  - (3) Exchange of certain property held for productive use or investment for property of like kind, see [section 1031](/cfr/26/1031.md);
  - (4) A corporation's exchange of its stock for property, see [section 1032](/cfr/26/1032.md);
  - (5) Certain involuntary conversions of property if replaced, see [section 1033](/cfr/26/1033.md);
  - (6) Sale or exchange of residence if replaced, see [section 1034](/cfr/26/1034.md);
  - (7) Certain exchanges of insurance policies and annuity contracts, see [section 1035](/cfr/26/1035.md); and
  - (8) **Certain exchanges of stock for stock in the same corporation, see section 1036.**
- (c) **Character of recognized gain.** Under Subchapter P, Chapter 1 of the Code, relating to capital gains and losses, certain gains derived from dealings in property are treated specially, and under certain circumstances the maximum rate of tax on such gains is 25 percent, as provided in [section 1201](/cfr/26/1201.md). Generally, the property subject to this treatment is a “capital asset”, or treated as a “capital asset”. For definition of such assets, see sections [1221](/cfr/26/1221.md) and [1231](/cfr/26/1231.md), and the regulations thereunder. For some of the rules either granting or denying this special treatment, see the following sections and the regulations thereunder:
  - (1) Transactions between partner and partnership, [section 707](/cfr/26/707.md);
  - (2) Sale or exchange of property used in the trade or business and involuntary conversions, [section 1231](/cfr/26/1231.md);
  - (3) Payment of bonds and other evidences of indebtedness, [section 1232](/cfr/26/1232.md);
  - (4) Gains and losses from short sales, [section 1233](/cfr/26/1233.md);
  - (5) Options to buy or sell, [section 1234](/cfr/26/1234.md);
  - (6) Sale or exchange of patents, [section 1235](/cfr/26/1235.md);
  - (7) Securities sold by dealers in securities, [section 1236](/cfr/26/1236.md);
  - (8) Real property subdivided for sale, [section 1237](/cfr/26/1237.md);
  - (9) Amortization in excess of depreciation, [section 1238](/cfr/26/1238.md);
  - (10) Gain from sale of certain property between spouses or between an individual and a controlled corporation, [section 1239](/cfr/26/1239.md);
  - (11) **Taxability to employee of termination payments, section 1240.**

# §1.61-7. Interest.

- (a) **In general.** As a general rule, interest received by or credited to the taxpayer constitutes gross income and is fully taxable. Interest income includes interest on savings or other bank deposits; interest on coupon bonds; interest on an open account, a promissory note, a mortgage, or a corporate bond or debenture; the interest portion of a condemnation award; usurious interest (unless by State law it is automatically converted to a payment on the principal); interest on legacies; interest on life insurance proceeds held under an agreement to pay interest thereon; and interest on refunds of Federal taxes. For rules determining the taxable year in which interest, including interest accrued or constructively received, is included in gross income, see [section 451](/cfr/26/451.md) and the regulations thereunder. For the inclusion of interest in income for the purpose of the retirement income credit, see [section 37](/cfr/26/37.md) and the regulations thereunder. For credit of tax withheld at source on interest on tax-free covenant bonds, see [section 32](/cfr/26/32.md) and the regulations thereunder. For rules relating to interest on certain deferred payments, see [section 483](/cfr/26/483.md) and the regulations thereunder.
- (b) **Interest on Government obligations—**
  - (1) **Wholly tax-exempt interest.** Interest upon the obligations of a State, Territory, or a possession of the United States, or any political subdivision of any of the foregoing, or of the District of Columbia, is wholly exempt from tax. Interest on certain United States obligations issued before March 1, 1941, is exempt from tax to the extent provided in the acts of Congress authorizing the various issues. See [section 103](/cfr/26/103.md) and the regulations thereunder.
  - (2) **Partially tax-exempt interest.** Interest earned on certain United States obligations is partly tax exempt and partly taxable. For example, the interest on United States Treasury bonds issued before March 1, 1941, to the extent that the principal of such bonds exceeds $5,000, is exempt from normal tax but is subject to surtax. See sections [35](/cfr/26/35.md) and [103](/cfr/26/103.md), and the regulations thereunder.
  - (3) **Fully taxable interest.** In general, interest on United States obligations issued on or after March 1, 1941, and obligations issued by any agency or instrumentality of the United States after that date, is fully taxable; but see [section 103](/cfr/26/103.md) and the regulations thereunder. A taxpayer using the cash receipts and disbursements method of accounting who owns United States savings bonds issued at a discount has an election as to when he will report the interest; see [section 454](/cfr/26/454.md) and the regulations thereunder.
- (c) **Obligations bought at a discount; bonds bought when interest defaulted or accrued.** When notes, bonds, or other certificates of indebtedness are issued by a corporation or the Government at a discount and are later redeemed by the debtor at the face amount, the original discount is interest, except as otherwise provided by law. See also [paragraph (b)](#b) of this section for the rules relating to Government bonds. If a taxpayer purchases bonds when interest has been defaulted or when the interest has accrued but has not been paid, any interest which is in arrears but has accrued at the time of purchase is not income and is not taxable as interest if subsequently paid. Such payments are returns of capital which reduce the remaining cost basis. Interest which accrues after the date of purchase, however, is taxable interest income for the year in which received or accrued (depending on the method of accounting used by the taxpayer).
- (d) **Bonds sold between interest dates; amounts received in excess of original issue discount; interest on life insurance.** When bonds are sold between interest dates, part of the sales price represents interest accrued to the date of the sale and must be reported as interest income. Amounts received in excess of the original issue discount upon the retirement or sale of a bond or other evidence of indebtedness may under some circumstances constitute capital gain instead of ordinary income. See [section 1232](/cfr/26/1232.md) and the regulations thereunder. Interest payments on amounts payable as employees' death benefits (whether or not [section 101(b)](/cfr/26/101.md?p=b) applies thereto) and on the proceeds of life insurance policies payable by reason of the insured's death constitute gross income under some circumstances. See [section 101](/cfr/26/101.md) and the regulations thereunder for details. Where accrued interest on unwithdrawn insurance policy dividends is credited annually and is subject to withdrawal annually by the taxpayer, such interest credits constitute gross income to such taxpayer as of the year of credit. However, if under the terms of the insurance policy the interest on unwithdrawn policy dividends is subject to withdrawal only on the anniversary date of the policy (or some other date specified therein), then such interest shall constitute gross income to the taxpayer for the taxable year in which such anniversary date (or other specified date) falls.

# §1.61-8. Rents and royalties.

- (a) **In general.** Gross income includes rentals received or accrued for the occupancy of real estate or the use of personal property. For the inclusion of rents in income for the purpose of the retirement income credit, see [section 37](/cfr/26/37.md) and the regulations thereunder. Gross income includes royalties. Royalties may be received from books, stories, plays, copyrights, trademarks, formulas, patents, and from the exploitation of natural resources, such as coal, gas, oil, copper, or timber. Payments received as a result of the transfer of patent rights may under some circumstances constitute capital gain instead of ordinary income. See [section 1235](/cfr/26/1235.md) and the regulations thereunder. For special rules for certain income from natural resources, see Subchapter I ([section 611](/cfr/26/611.md) and following), Chapter 1 of the Code, and the regulations thereunder.
- (b) **Advance rentals; cancellation payments.** Except as provided in [section 467](/cfr/26/467.md) and the regulations thereunder and except as otherwise provided by the Commissioner in published guidance (see [§ 601.601(d)(2)](/cfr/26/601.601.md?p=d-2) of this chapter), gross income includes advance rentals, which must be included in income for the year of receipt regardless of the period covered or the method of accounting employed by the taxpayer. An amount received by a lessor from a lessee for cancelling a lease constitutes gross income for the year in which it is received, since it is essentially a substitute for rental payments. As to amounts received by a lessee for the cancellation of a lease, see [section 1241](/cfr/26/1241.md) and the regulations thereunder.
- (c) **Expenditures by lessee.** As a general rule, if a lessee pays any of the expenses of his lessor such payments are additional rental income of the lessor. If a lessee places improvements on real estate which constitute, in whole or in part, a substitute for rent, such improvements constitute rental income to the lessor. Whether or not improvements made by a lessee result in rental income to the lessor in a particular case depends upon the intention of the parties, which may be indicated either by the terms of the lease or by the surrounding circumstances. For the exclusion from gross income of income (other than rent) derived by a lessor of real property on the termination of a lease, representing the value of such property attributable to buildings erected or other improvements made by a lessee, see [section 109](/cfr/26/109.md) and the regulations thereunder. For the exclusion from gross income of a lessor corporation of certain of its income taxes on rental income paid by a lessee corporation under a lease entered into before January 1, 1954, see [section 110](/cfr/26/110.md) and the regulations thereunder.

# §1.61-9. Dividends.

- (a) **In general.** Except as otherwise specifically provided, dividends are included in gross income under sections [61](/cfr/26/61.md) and [301](/cfr/26/301.md). For the principal rules with respect to dividends includible in gross income, see [section 316](/cfr/26/316.md) and the regulations thereunder. As to distributions made or deemed to be made by regulated investment companies, see [sections 851 through 855](/cfr/26/851..855.md), and the regulations thereunder. As to distributions made by real estate investment trusts, see [sections 856 through 858](/cfr/26/856..858.md), and the regulations thereunder. See [section 116](/cfr/26/116.md) for the exclusion from gross income of $100 ($50 for dividends received in taxable years beginning before January 1, 1964) of dividends received by an individual, except those from certain corporations. Furthermore, dividends may give rise to a credit against tax under [section 34](/cfr/26/34.md), relating to dividends received by individuals (for dividends received on or before December 31, 1964), and under [section 37](/cfr/26/37.md), relating to retirement income.
- (b) **Dividends in kind; stock dividends; stock redemptions.** Gross income includes dividends in property other than cash, as well as cash dividends. For amounts to be included in gross income when distributions of property are made, see [section 301](/cfr/26/301.md) and the regulations thereunder. A distribution of stock, or rights to acquire stock, in the corporation making the distribution is not a dividend except under the circumstances described in [section 305(b)](/cfr/26/305.md?p=b). However, the term “dividend” includes a distribution of stock, or rights to acquire stock, in a corporation other than the corporation making the distribution. For determining when distributions in complete liquidation shall be treated as dividends, see [section 333](/cfr/26/333.md) and the regulations thereunder. For rules determining when amounts received in exchanges under [section 354](/cfr/26/354.md) or exchanges and distributions under [section 355](/cfr/26/355.md) shall be treated as dividends, see [section 356](/cfr/26/356.md) and the regulations thereunder.
- (c) **Dividends on stock sold.** When stock is sold, and a dividend is both declared and paid after the sale, such dividend is not gross income to the seller. When stock is sold after the declaration of a dividend and after the date as of which the seller becomes entitled to the dividend, the dividend ordinarily is income to the seller. When stock is sold between the time of declaration and the time of payment of the dividend, and the sale takes place at such time that the purchaser becomes entitled to the dividend, the dividend ordinarily is income to him. The fact that the purchaser may have included the amount of the dividend in his purchase price in contemplation of receiving the dividend does not exempt him from tax. Nor can the purchaser deduct the added amount he advanced to the seller in anticipation of the dividend. That added amount is merely part of the purchase price of the stock. In some cases, however, the purchaser may be considered to be the recipient of the dividend even though he has not received the legal title to the stock itself and does not himself receive the dividend. For example, if the seller retains the legal title to the stock as trustee solely for the purpose of securing the payment of the purchase price, with the understanding that he is to apply the dividends received from time to time in reduction of the purchase price, the dividends are considered to be income to the purchaser.

# §1.61-10. Alimony and separate maintenance payments; annuities; income from life insurance and endowment contracts.

- (a) **In general.** Alimony and separate maintenance payments, annuities, and income from life insurance and endowment contracts in general constitute gross income, unless excluded by law. Annuities paid by religious, charitable, and educational corporations are generally taxable to the same extent as other annuities. An annuity charged upon devised land is taxable to the donee-annuitant to the extent that it becomes payable out of the rents or other income of the land, whether or not it is a charge upon the income of the land.
- (b) **Cross references.** For the detailed rules relating to—
  - (1) Alimony and separate maintenance payments, see [section 71](/cfr/26/71.md) and the regulations thereunder;
  - (2) Annuities, certain proceeds of endowment and life insurance contracts, see [section 72](/cfr/26/72.md) and the regulations thereunder;
  - (3) Life insurance proceeds paid by reason of death of insured, employees' death benefits, see [section 101](/cfr/26/101.md) and the regulations thereunder;
  - (4) Annuities paid by employees' trusts, see [section 402](/cfr/26/402.md) and the regulations thereunder;
  - (5) **Annuities purchased for employee by employer, see section 403 and the regulations thereunder.**

# §1.61-11. Pensions.

- (a) **In general.** Pensions and retirement allowances paid either by the Government or by private persons constitute gross income unless excluded by law. Usually, where the taxpayer did not contribute to the cost of a pension and was not taxable on his employer's contributions, the full amount of the pension is to be included in his gross income. But see sections [72](/cfr/26/72.md), [402](/cfr/26/402.md), and [403](/cfr/26/403.md), and the regulations thereunder. When amounts are received from other types of pensions, a portion of the payment may be excluded from gross income. Under some circumstances, amounts distributed from a pension plan in excess of the employee's contributions may constitute long-term capital gain, rather than ordinary income.
- (b) **Cross references.** For the inclusion of pensions in income for the purpose of the retirement income credit, see [section 37](/cfr/26/37.md) and the regulations thereunder. Detailed rules concerning the extent to which pensions and retirement allowances are to be included in or excluded from gross income are contained in other sections of the Code and the regulations thereunder. Amounts received as pensions or annuities under the Social Security Act (42 U.S.C. ch. 7) or the Railroad Retirement Act (45 U.S.C. ch. 9) are excluded from gross income. For other partial and total exclusions from gross income, see the following:
  - (1) Annuities in general, [section 72](/cfr/26/72.md) and the regulations thereunder;
  - (2) Employees' annuities, sections [402](/cfr/26/402.md) and [403](/cfr/26/403.md) and the regulations thereunder;
  - (3) References to other acts of Congress exempting veterans' pensions and railroad retirement annuities and pensions, [section 122](/cfr/26/122.md).

# §1.61-12. Income from discharge of indebtedness.

- (a) **In general.** The discharge of indebtedness, in whole or in part, may result in the realization of income. If, for example, an individual performs services for a creditor, who in consideration thereof cancels the debt, the debtor realizes income in the amount of the debt as compensation for his services. A taxpayer may realize income by the payment or purchase of his obligations at less than their face value. In general, if a shareholder in a corporation which is indebted to him gratuitously forgives the debt, the transaction amounts to a contribution to the capital of the corporation to the extent of the principal of the debt.
- (b) **Proceedings under Bankruptcy Act.**
  - (1) Income is not realized by a taxpayer by virtue of the discharge, under section 14 of the Bankruptcy Act ([11 U.S.C. 32](/usc/11/32.md)), of his indebtedness as the result of an adjudication in bankruptcy, or by virtue of an agreement among his creditors not consummated under any provision of the Bankruptcy Act, if immediately thereafter the taxpayer's liabilities exceed the value of his assets. Furthermore, unless one of the principal purposes of seeking a confirmation under the Bankruptcy Act is the avoidance of income tax, income is not realized by a taxpayer in the case of a cancellation or reduction of his indebtedness under—
    - (i) A plan of corporate reorganization confirmed under Chapter X of the Bankruptcy Act (11 U.S.C., ch. 10);
    - (ii) An “arrangement” or a “real property arrangement” confirmed under Chapter XI or XII, respectively, of the Bankruptcy Act (11 U.S.C., ch. 11, 12); or
    - (iii) A “wage earner's plan” confirmed under Chapter XIII of the Bankruptcy Act (11 U.S.C., ch. 13).
  - (2) For adjustment of basis of certain property in the case of cancellation or reduction of indebtedness resulting from a proceeding under the Bankruptcy Act, see the regulations under [section 1016](/cfr/26/1016.md).
- (c) **Issuance and repurchase of debt instruments—**
  - (1) **Issuance.** An issuer does not realize gain or loss upon the issuance of a debt instrument. For rules relating to an issuer's interest deduction for a debt instrument issued with bond issuance premium, see [§ 1.163-13](/cfr/26/1.163-13.md).
  - (2) **Repurchase—**
    - (i) **In general.** An issuer does not realize gain or loss upon the repurchase of a debt instrument. However, if a debt instrument provides for payments denominated in, or determined by reference to, a nonfunctional currency, an issuer may realize a currency gain or loss upon the repurchase of the instrument. See [section 988](/cfr/26/988.md) and the regulations thereunder. For purposes of this [paragraph (c)(2)](#c-2), the term repurchase includes the retirement of a debt instrument, the conversion of a debt instrument into stock of the issuer, and the exchange (including an exchange under [section 1001](/cfr/26/1001.md)) of a newly issued debt instrument for an existing debt instrument.
    - (ii) **Repurchase at a discount.** An issuer realizes income from the discharge of indebtedness upon the repurchase of a debt instrument for an amount less than its adjusted issue price (within the meaning of [§ 1.1275-1(b)](/cfr/26/1.1275-1.md?p=b)). The amount of discharge of indebtedness income is equal to the excess of the adjusted issue price over the repurchase price. See [section 108](/cfr/26/108.md) and the regulations thereunder for additional rules relating to income from discharge of indebtedness. For example, to determine the repurchase price of a debt instrument that is repurchased through the issuance of a new debt instrument, see [section 108(e)(10)](/cfr/26/108.md?p=e-10).
    - (iii) **Repurchase at a premium.** An issuer may be entitled to a repurchase premium deduction upon the repurchase of a debt instrument for an amount greater than its adjusted issue price (within the meaning of [§ 1.1275-1(b)](/cfr/26/1.1275-1.md?p=b)). See [§ 1.163-7(c)](/cfr/26/1.163-7.md?p=c) for the treatment of repurchase premium.
    - (iv) **Effective date.** This [paragraph (c)(2)](#c-2) applies to debt instruments repurchased on or after March 2, 1998.
- (d) **Cross references.** For exclusion from gross income of—
  - (1) Income from discharge of indebtedness in certain cases, see sections [108](/cfr/26/108.md) and [1017](/cfr/26/1017.md), and regulations thereunder;
  - (2) Forgiveness of Government payments to encourage exploration, development, and mining for defense purposes, see [section 621](/cfr/26/621.md) and regulations thereunder.
- (e) **Cross reference.** For rules relating to the treatment of liabilities on the sale or other disposition of encumbered property, see [§ 1.1001-2](/cfr/26/1.1001-2.md).

# §1.61-13. Distributive share of partnership gross income; income in respect of a decedent; income from an interest in an estate or trust.

- (a) **In general.** A partner's distributive share of partnership gross income (under [section 702(c)](/cfr/26/702.md?p=c)) constitutes gross income to him. Income in respect of a decedent (under [section 691](/cfr/26/691.md)) constitutes gross income to the recipient. Income from an interest in an estate or trust constitutes gross income under the detailed rules of Part I ([section 641](/cfr/26/641.md) and following), Subchapter J, Chapter 1 of the Code. In many cases, these sections also determine who is to include in his gross income the income from an estate or trust.
- (b) **Creation of sinking fund by corporation.** If a corporation, for the sole purpose of securing the payment of its bonds or other indebtedness, places property in trust or sets aside certain amounts in a sinking fund under the control of a trustee who may be authorized to invest and reinvest such sums from time to time, the property or fund thus set aside by the corporation and held by the trustee is an asset of the corporation, and any gain arising therefrom is income of the corporation and shall be included as such in its gross income.

# §1.61-14. Miscellaneous items of gross income.

- (a) **In general.** In addition to the items enumerated in [section 61(a)](/cfr/26/61.md?p=a), there are many other kinds of gross income. For example, punitive damages such as treble damages under the antitrust laws and exemplary damages for fraud are gross income. Another person's payment of the taxpayer's income taxes constitutes gross income to the taxpayer unless excluded by law. Illegal gains constitute gross income. Treasure trove, to the extent of its value in United States currency, constitutes gross income for the taxable year in which it is reduced to undisputed possession.
- (b) **Cross references.**
  - (1) Prizes and awards, see [section 74](/cfr/26/74.md) and regulations thereunder;
  - (2) Damages for personal injury or sickness, see [section 104](/cfr/26/104.md) and the regulations thereunder;
  - (3) Income taxes paid by lessee corporation, see [section 110](/cfr/26/110.md) and regulations thereunder;
  - (4) Scholarships and fellowship grants, see [section 117](/cfr/26/117.md) and regulations thereunder;
  - (5) Miscellaneous exemptions under other acts of Congress, see [section 122](/cfr/26/122.md);
  - (6) **Tax-free covenant bonds, see section 1451 and regulations thereunder.**
  - (7) Notional principal contracts, see [§ 1.446-3](/cfr/26/1.446-3.md).

# §1.61-15. Options received as payment of income.

- (a) **In general.** Except as otherwise provided in [§ 1.61-2(d)(6)(i)](/cfr/26/1.61-2.md?p=d-6-i) (relating to certain restricted property transferred after June 30, 1969), if any person receives an option in payment of an amount constituting compensation of such person (or any other person), such option is subject to the rules contained in [§ 1.421-6](/cfr/26/1.421-6.md) for purposes of determining when income is realized in connection with such option and the amount of such income. In this regard, the rules of [§ 1.421-6](/cfr/26/1.421-6.md) apply to an option received in payment of an amount constituting compensation regardless of the form of the transaction. Thus, the rules of [§ 1.421-6](/cfr/26/1.421-6.md) apply to an option transferred for less than its fair market value in a transaction taking the form of a sale or exchange if the difference between the amount paid for the option and its fair market value at the time of transfer is the payment of an amount constituting compensation of the transferee or any other person. This section, for example, makes the rules of [§ 1.421-6](/cfr/26/1.421-6.md) applicable to options granted in whole or partial payment for services of an independent contractor. If an amount of money or property is paid for an option to which this paragraph applies, then the amount paid shall be part of the basis of such option.
- (b) **Options to which paragraph (a) does not apply.**
  - (1) **Paragraph (a) of this section does not apply to—**
    - (i) An option which is subject to the rules contained in [section 421](/cfr/26/421.md); and
    - (ii) An option which is not granted as the payment of an amount constituting compensation, such as an option which is acquired solely as an investment (including an option which is part of an investment unit described in [paragraph (b)](/cfr/26/1.1232-3.md?p=b) of § 1.1232-3). For rules relating to the taxation of options described in this subdivision, see [section 1234](/cfr/26/1234.md) and the regulations thereunder.
  - (2) If a person acquires an option which is not subject to the rules contained in [section 421](/cfr/26/421.md), and if such option has a readily ascertainable fair market value, such person may establish that such option was not acquired as payment of an amount constituting compensation by showing that the amount of money or its equivalent paid for the option equaled the readily ascertainable fair market value of the option. If a person acquires an option which is not subject to the rules contained in [section 421](/cfr/26/421.md), and if such option does not have a readily ascertainable fair market value, then to establish that such option was not acquired as payment of an amount constituting compensation, such person must show that, from an examination of all the surrounding circumstances, there was no reason for the option to have been granted as the payment of an amount constituting compensation. For example, such person must show that he had neither rendered nor was obligated to render substantial services in consideration for the granting of the option. In determining whether an option, such as an option acquired in connection with an obligation as part of an investment unit, has been granted as compensation for services, the ordinary services performed by an investor in his own self-interest in connection with his investing activities will not be treated as the consideration for the grant of the option. For example, if a small business investment company takes an active part in the management of its debtor small business company, the rendering of such management services will not be treated as the consideration for the granting of the option, provided such services are rendered for an independent consideration, or are merely protective of the small business investment company's investment in the borrower. See paragraph (c) of § 1.421-6 for the meaning of the term “readily ascertainable fair market value.”
- (c) **Statement required in connection with certain options.**
  - (1) Any person acquiring any option to purchase securities (other than an option described in [subparagraph (2)](#c-2) of this paragraph) shall attach a statement to his income tax return for the taxable year in which the option was acquired. For the definition of the term “securities”, see [section 165(g)(2)](/cfr/26/165.md?p=g-2).
  - (2) The statement otherwise required by [subparagraph (1)](#c-1) of this paragraph shall not be required with respect to the following options:
    - (i) Options subject to the rules contained in [section 305(a)](/cfr/26/305.md?p=a) or [section 421](/cfr/26/421.md);
    - (ii) Options acquired as part of an investment unit consisting of an option and a debenture, note, or other similar obligation—

      (a) If such unit is acquired as part of a public offering and the amount of money or its equivalent paid for such unit is not less than the public offering price, or

      (b) If such unit is actively traded on an established market and the amount of money or its equivalent paid for such unit is not less than the price paid for such unit in contemporaneous purchases of such unit by persons independent of both the seller and the taxpayer;

    - (iii) Options acquired as part of a public offering, if the amount of money or its equivalent paid for such option is not less than the public offering price; and
    - (iv) Options which are actively traded on an established market and which are acquired for money or its equivalent at a price not less than the price paid for such options in contemporaneous purchases of such options by persons independent of both the seller and the taxpayer.
  - (3) The statement required by [subparagraph (1)](#c-1) of this paragraph shall contain the following information:
    - (i) Name and address of the taxpayer;
    - (ii) Description of the securities subject to the option (including number of shares of stock);
    - (iii) Period during which the option is exercisable;
    - (iv) Whether the option had a readily ascertainable fair market value at date of grant; and
    - (v) **Whether the option is subject to paragraph (a) of this section.**
  - (4) If the statement required by [subparagraph (1)](#c-1) of this paragraph indicates either that the option is not subject to [paragraph (a)](#a) of this section, or that the option is subject to [paragraph (a)](#a) of this section but that such option had a readily ascertainable fair market value at date of grant, then such statement shall contain the following additional information:
    - (i) Option price;
    - (ii) Value at date of grant of securities subject to the option;
    - (iii) Restrictions (if any) on exercise or transfer of option;
    - (iv) Restrictions (if any) on transfer of securities subject to the option;
    - (v) Value of the option (if readily ascertainable);
    - (vi) How value of option was determined;
    - (vii) Amount of money (or its equivalent) paid for the option;
    - (viii) Person from whom the option was acquired;
    - (ix) A concise description of the circumstances surrounding the acquisition of the option and any other factors relied upon by the taxpayer to establish that the option is not subject to [paragraph (a)](#a) of this section, or, if the option is treated by the taxpayer as subject to [paragraph (a)](#a) of this section, that the option had a readily ascertainable fair market value at date of grant.
- (d) **Effective date.** This section shall apply to options granted after July 11, 1963, other than options required to be granted pursuant to the terms of a written contract entered into on or before such date.