Rev. Rul. 55-498

Advice has been requested whether capital gains and losses are to be taken into account in the determination of gross income of an individual for a taxable year in determining whether back pay, as defined in section 1303(b) of the Internal Revenue Code of 1954, received by an individual exceeds 15 percent of his gross income for the year.

Section 1303 of the 1954 Code, in providing for a limitation on income tax for the amount of back pay received by an individual for the taxable year, provides in part as follows:

(a) LIMITATION ON TAX.-If the amount of the back pay received or accrued by an individual during the taxable year exceeds 15 percent of the gross income of the individual for such year * * *.

Gross income is defined by section 61 of the 1954 Code, which reads in part as follows:

(a) GENERAL DEFINITION.-Except as otherwise provided in this subtitle Subtitle A , gross income means all income from whatever source derived, including (but not limited to) the following items:

*

(3) Gains derived from dealings in property;

The basic definition of gross income contained in section 61 of the 1954 Code is a broad one which does not provide for a complete detailed itemization of all items includible in gross income although some items of income are listed therein and certain other such items are specifically set forth in part II of subchapter B (sections 71 through 77 of the 1954 Code) as includible in gross income. Under the broad concept of income, all such items are included in gross income unless specifically excluded therefrom. The specific exclusions from gross income are set forth in part III of subchapter B (sections 101 through 121) of the 1954 Code.

From the above it is evident that capital gains are included in full under the broad concept of gross income. The 50 percent reduction for net long-term capital gains is allowed as a deduction from gross income under section 1202 of the Code. Likewise, capital losses along with certain other types of losses are deductions from gross income under the provisions of section 165 of the Code. Since the 50 percent reduction for long- term capital gains as well as the reduction for capital losses constitutes deductions and not exclusions from gross income such items are not factors in the determination of gross income.

In the case of Leslie H. Green v. Commissioner , 7 T.C. 263, acquiescence, C.B. 1946-2, 2, affirmed on other grounds, 168 Fed.(2d) 994, one of the issues involved was the computation of gross income where the taxpayer had reported a capital loss in his return filed. The court stated:

Under section 22(a) section 61 of the 1954 Code `gross income' is defined generally to include gains, profits and income from various specified sources, including sales or dealings in property, whether real or personal, or derived `from any source whatever.' Nothing is contained in any of the provisions of section 22 requiring an adjustment to be made in the computation of gross income on account of capital losses. Provision for deduction of such losses is found in subsection (g) of section 23 entitled `Deductions from Gross Income.' Section 165(f) of the 1954 code .

It seems clear from these provisions that capital losses from no part of the gross income, * * *.

In view of the foregoing it is held that capital gains must be included in full in gross income in determining whether the amount of back pay, as defined in section 1303(b) of the Internal Revenue Code of 1954, received or accrued by an individual during the taxable year exceeds 15 percent of the gross income of the individual for such year. For such purpose the deduction with respect to net long-term capital gains as well as the deduction for capital losses allowed under the provisions of sections 1202 and 165(f) of the Code, respectively, are not factors in the determination of gross income