Current through Register Vol. 42, No. 11, August 30, 2024
(1) The term "gross income" means all wealth
flowing to the taxpayer from whatever source derived other than as a return of
his capital and other than those items exempted by Section
40-18-14(2),
Code of Ala. 1975. Gross income includes income
realized in any form, whether in money, property, or services. Income may be
realized in the form of services, meals, accommodations, stock, or other
property, as well as in cash. Such income is to be reported for the year in
which received, or accrued and reported in accordance with accepted accounting
procedures applicable to the taxpayer's particular type of business. See Reg.
810-3-13-.03 for discussion of accounting methods.
(2) In the case of 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. In determining the gross income of a business,
subtraction should not be made for losses, or for items not ordinarily used in
computing the cost of goods sold.
(3) Earnings constitute gross income before
deductions for withholding for federal income tax, social security tax,
insurance and retirement programs (including those allowable as a deduction
under Code of Ala. 1975, Section
40-18-15(11)) or other voluntary or involuntary withholdings.
(4) Income actually received or accrued must
be included in gross income, although losses may later incur against this
income. An exception to this general rule occurs in situations involving the
renegotiation of war contracts under federal statutes. Where repayment is made
to the government as a result of renegotiation, the amount of income for the
year of original payment is the amount of such payment less the amount refunded
to the government, even though the repayment is made to the government in a
later year. As long as the matter of renegotiation is open, the extent of the
gain or profit of the contractor, if any, for that year of payment remains
undetermined.
(5) If services are
paid for with something other than money, the fair market value of the property
or services taken in payment is the amount to be included as gross income. If
living quarters or meals are furnished to employees for the convenience of the
employer, the ratable value need not be added to the compensation of the
employees, but if a person receives a compensation for service rendered
compensation in the form of living quarters or meals, the value to such person
of the quarters furnished constitutes income subject to tax. For living
quarters furnished to ministers, see Reg. 810-3-14.02(1)(g).
(6)
(a) An
employee who is given an annuity by his employer must pay income tax on the
amount of the premium in the year in which the premium is paid. The annuity is
considered as additional compensation for services rendered and not as a
gratuity. The payments that qualify as a deduction under Code of
Ala. 1975, §
40-18-15(11) shall be included in gross income.
(b) An employee who is the insured or owner
of a group life insurance policy with a face value in excess of $50,000, and
the premiums on such policy are paid by the employer, must include in gross
income the value of such premiums for coverage in excess of $50,000.
(7) For procedure in reporting the
income of minors, see §
40-18-27 and regulations thereunder.
(8) The
Federal Internal Revenue Code contains provisions similar to those of §
40-18-14(1).
Decisions and interpretations of the federal courts and agencies will be given
due weight in interpreting this section.
(9) Gross income includes recovery of items
deducted in previous years. See Reg.
810-3-14-.04.
(10) For tax years beginning after December
31, 1981, gross income includes alimony and separate maintenance according to
I.R.C. §71 in effect January 1, 1982. For tax years beginning after
December 31, 1984, gross income includes alimony and separate maintenance
payments as defined in I.R.C. §71, as in effect on January 1, 1985. For
tax years beginning after December 31, 1989, gross income includes alimony and
separate maintenance payments as defined in I.R.C. §71, as in effect from
time to time. Decisions and interpretations of the federal courts and agencies
interpreting I.R.C. §71 will be given due weight in interpreting
Code of Ala. 1975, Section
40-18-14(1) and this regulation as it relates to alimony and separate maintenance payments.
Regulations pertaining to I.R.C. §71 are hereby made a part of this
regulation.
(a) Alimony or separate
maintenance payments received under a divorce or separation instrument executed
after March 1, 1954, but prior to January 1, 1985, will be included in gross
income as follows:
1.
(i) Periodic payments, (for definition of
periodic payments see section 2. below) whether or not received at regular
intervals, received after January 1, 1982 are includible in gross income if -
(I) Payments received are in discharge of (or
attributable to property transferred, in trust or otherwise, in discharge of) a
legal obligation, and
(II) the
obligation is imposed on or incurred because of a marital or family
relationship, and
(III) the legal
obligation is under the decree, or written agreement incident to divorce or
separation, and
(IV) the payment
received does not represent payment in support of minor children, and
(V) the payment received does not represent a
settlement of property rights.
(ii) The source of the payments is
immaterial. The payments may be from property held in trust, life insurance,
endowment or annuity contract, any other interest in property or from income or
capital of the payor whether paid directly or indirectly by him.
(iii) If the decree or written agreement
specifies an amount to be paid in support of minor children, the payment
received goes first to satisfy this obligation. If the payment is less than the
amount specified as support of minor children, then the payment received shall
be considered a payment of support of minor children.
(I) If the decree or written agreement
specifies one amount as payment of both alimony or separate maintenance and
child support, the entire amount will be considered as alimony or separate
maintenance and will be included in gross income of the recipient.
2. In general, periodic
payment means "payable over a period of indefinite duration". Payments made for
an unspecified principal amount are considered periodic payments even if, by
provision of the decree or written agreement or local law, payments will be
terminated by death of either spouse, remarriage, or change in economic status
of either spouse.
3. Payment of a
specified amount, in terms of money or property, under the decree or written
agreement to be made over a period of 10 years or less from the date of the
decree or agreement will be considered periodic payments if -
(i) payments are subject to one or more of
the contingencies of death, remarriage, or change in the economic status of
either spouse, and
(ii) payments
are in the nature of alimony or an allowance for support.
4. If payment of a specified amount, in terms
of money or property, under the decree or written agreement, is to be made over
a period of more than 10 years from the date of the decree or agreement,
payments will be considered periodic payments but only to the extent that the
installment payment, or sum of the installment payment, received during the
recipient's taxable year does not exceed 10 percent of the principal sum. This
10 percent limitation applies to installment payments made in advance, but does
not apply to delinquent installment payments for a prior taxable year of the
recipient made during the current taxable year.
5. A transfer of property in settlement of
marital rights may result in a recognizable gain or loss. The gain or loss is
the difference between the adjusted basis of the property and its fair market
value at the time of the transfer.
(i) If the
property has appreciated, there may be a taxable gain on the transfer. Property
has appreciated if its fair market value is more than its adjusted basis. The
difference is a gain.
(ii) If the
fair market value is less than the adjusted basis, a loss is realized. Such a
loss is deductible if it is on business or investment property, but is not
deductible if it is on property held for personal use.
(iii) An equal division of property that is
co-owned by husband and wife does not result in a gain or loss.
(iv) If husband and wife each keep their
separately owned property in a divorce settlement, there is no taxable gain or
loss.
(v) If one spouse transfers
separately owned property to the other spouse, the spouse transferring the
property realizes a gain or loss. The spouse receiving the property has no gain
or loss on the transaction. The basis of the property to the receiving spouse
is its fair market value on the date of the transfer.
(vi) Taxpayers report the gain or loss in a
property settlement the same as any sale or exchange of an asset.
(b) Alimony or separate
maintenance payments received from divorce or separation instruments executed
after December 31, 1984, (and to divorce or separation agreements executed
prior to January 1, 1985, if modified to expressly provide for the application
of this subparagraph) is includible in gross income as follows:
1. the term "alimony or separate maintenance
payment" means any payment in cash, if -
(i)
such payment is received by (or on behalf of) a spouse under divorce or
separation instrument, and
(ii) the
divorce or separation instrument does not designate such payment as a payment
which is not includible in gross income under §
40-18-14 and not allowable as a deduction under §
40-18-15,
and
(iii) in the case of an
individual legally separated from his spouse under a separate maintenance
instrument or decree of divorce, the payee and payors are not members of the
same household at time such payment is made and do not file a joint income tax
return, and
(iv) there is no
liability to make any such payment for any period after the death of the payee
spouse and there is no liability to make any payment (in cash or other
property) as a substitute for such payments after the death of the payee
spouse.
2. The term
"divorce or separation instrument" means:
(i)
a decree of divorce or separate maintenance or a written instrument incident to
such a divorce, or
(ii) a written
separation agreement, or
(iii) a
decree (not described in subsection (I) above) requiring a spouse to make
payments for the support of the other spouse, such as temporary
alimony.
3. The term
"alimony or separate maintenance" shall not apply to that part of any payment
which the terms of the divorce or separation instrument designates (in terms of
an amount of money or a part of a payment) as a sum which is payable for the
support of children of the payor. If any amount specified in the instrument
will be reduced -
(i)
(I) on the happening of a contingency
specified in the instrument relating to a child (such as attaining a specified
age, marrying, dying, leaving school, or a similar contingency), or
(II) At a time which can be clearly
associated with a contingency of a kind specified in (I); an amount equal to
the amount of such reduction will be treated as an amount designated or fixed
as payable for the support of children of the payor.
(ii)
(I) If
any payment is less than the amount specified in the instrument as support of
the children of the payor, then so much as such payment as does not exceed the
sum payable for support shall be considered a payment for such
support.
(II) If the instrument
specifies a single amount in payment of both alimony or separate maintenance
and child support with no more contingency of the type provided in
sections
3.
(I)
(I) or
(II) above, or no support of money
or part of the payment specifically designated as child support, the entire
payment will be considered as alimony or separate maintenance and will be
included in gross income of the recipient.
4. Alimony or separate maintenance payments
in excess of $10,000 during any calendar year paid to a single payee will not
be treated as alimony or separate maintenance unless such payments are to be
made by the payor to the payee in each of the six (6) post-separation years
(not taking into account any termination contingent on the death of or
remarriage of either spouse).
5. If
there is an excess amount determined under section 6. below for any computation
year -
(i) the payor spouse shall include
such excess in gross income for the taxable year beginning in the computation
year, and
(ii) the payee spouse
shall be allowed a deduction in computing adjusted gross income for such excess
amount for the taxable year which ends on or after the taxable year of the
payor spouse beginning in the computation year.
6.
(i) The
excess amount determined under this section for any computation year is the sum
of -
(I) the excess (if any) of - I. the
amount of alimony or separate maintenance payments paid by the payor spouse
during the immediately preceding post-separation year, over II. the amount of
alimony or separate maintenance payments paid by the payor spouse during the
computation year increased by $10,000, plus
(II) a like excess for each of the other
post-separation years.
(ii) In determining the amount of alimony or
separate maintenance payments made by the payor spouse during any preceding
post-separation year, the amount paid during such year shall be reduced by any
excess previously determined in respect of such year under this section 6.
(I) EXAMPLE: H makes alimony payments to W of
$25,000 in 1985 and $12,000 in 1986. The excess amount with respect to 1985
that is recaptured in 1986 is $3,000 ($25,000 - ($12,000 + $10,000)). For
purposes of subsequent computation years, the amount deemed paid in 1985 is
$22,000. If H makes alimony payments to W of $1,000 in 1987, the excess amount
that is recaptured in 1987 will be $12,000. This is the sum of an $11,000
excess amount for 1985 ($22,000 - $1,000 + $10,000)) and a $1,000 excess amount
with respect to 1986 ($12,000 - ($1,000 + $10,000)). If, prior to the end of
1990 (the end of the six year post-separation period), payments decline
further, additional recapture will occur.
7. For purposes of this subparagraph, the
term "post-separation year" means any calendar year in the six (6) calendar
year period beginning with the first calendar year in which the payor spouse
paid alimony or separate maintenance payments to the recipient spouse, and the
term "computation year" means the post-separation year for which the excess
under section 6. above is being determined.
8. The recapture rule provided in section 5.
above shall not apply to any post-separation year (and subsequent
post-separation years).
(i) either spouse
dies or the payee spouse before the close of such post-separation year,
and
(ii) the alimony or separation
maintenance payments cease by reason of such death or remarriage, or
(iii) the payments are received under a
decree described in section 2. (iii) above, or (iv) the payment is made
pursuant to a continuing liability (over a period not less than six years) to
pay a fixed portion of the income from a business or property or from
compensation or employment or self-employment.
9. To qualify for the deduction provided in
§
40-18-15,
alimony or separate maintenance payments may not be made in any form other than
cash. Transfers of services or property (including a debt instrument of a third
party or any annuity contract), executing of a debt instrument by the payor, or
the use of property of the payor, do not qualify as alimony or separate
maintenance payment. See §§
40-18-8(p) and
40-18-6(a)(15) for treatment of gain or loss on transfers of property incident to a
divorce.
(c) Alimony or
separate maintenance payments received from divorce or separation instruments
executed after December 31, 1989 (and to divorce or separation agreements
executed prior to January 1, 1990, if modified to expressly provide for the
application of this subparagraph (is includible in gross income in the same
manner as provided in subparagraph (b) of this regulation with the following
exceptions;
1. the payments must be cash
payments received by (or on behalf of) a spouse or former spouse:
2. the payments must be under a divorce or
separation instrument;
3. the
payments must not extend after the death of a payee-spouse (need not be
expressly stated in the instrument);
4. the spouses (or former spouses) must not
be members of the same household and must not file joint returns;
5. the divorce or separation instrument can
designate such payment which is not includible in gross income under I.R.C.
§71 and not allowable as a deduction under I.R.C. §215 (if so
designated, the payments are not considered as alimony):
6. the payment must not be for child support;
and
7. the payments need not be
made in discharge of marital obligations imposed by state law, nor need the
payments be "periodic."
(11) Except for plans specifically exempt by
law from tax, payments received from pension, profit-sharing, stock bonus,
retirement, annuity, or bond purchase plans, in excess of the taxpayer's
investment in such plans, shall be included in gross income.
(a) This includes all payments received, not
just those received upon completion of the plan.
(b) The taxpayer's investment in the above
plans is the taxpayer's contributions to such plans, excluding those allowable
as a deduction under §§
40-18-15(a)(11) and
40-18-15(a)(12) and/or those allowable as an exclusion from gross income under §
40-18-14(1)(I).
See also Reg.
810-3-14-.10.
(c) Those employer contributions previously
included in gross income of the taxpayer but not allowable as a deduction by
the taxpayer are included in the taxpayer's investment.
(12)
(a)
For tax years beginning after December 31, 1981, but before January 1, 1990, in
accordance with §
40-18-14(2) e (I.R.C. §105 as in effect January 1, 1982), any amount an employee
receives for disability through an accident and health insurance plan that is
attributable to his employer's contributions is included in gross income
except:
1. Payments for permanent loss of, or
loss of use of a member or function of the body, or for permanent
disfigurement,
2. Payments under a
plan as reimbursement for expenses incurred by the employee for medical care
for himself, spouse or dependents, or
3. Payments, within limits that are in lieu
of wages for a period during which an employee is absent from work on account
of permanent and total disability if the employee has not attained age 65
before the close of the taxable year and has retired on disability.
(i) The disability income exclusion of this
paragraph (c) is limited to $100 per week, and
(ii) The disability exclusion to which the
taxpayer would be entitled shall be reduced by the amount that adjusted gross
income, including disability income, exceeds $15,000.00.
(iii) EXAMPLE: A disabled taxpayer under age
65 received $6,000.00 in disability retirement income in lieu of wages. He also
had $10,000.00 of other income which, together with the $6,000.00 of disability
payments in lieu of wages, gave him an adjusted gross income of $16,000.00.
Assume that before reduction the taxpayer is entitled to an exclusion of
$5,200.00 for the year. Since the taxpayer's adjusted gross income exceeds
$15,000.00, his exclusion is reduced by the $1,000.00 excess. Consequently, his
maximum exclusion is $4,200.00 ($5,200.00 minus $1,000.00).
(b) The exclusion
provision of paragraph (a) above does not apply to disability income received
after December 31, 1989.
(13) Gross income includes the fair market
value of the personal use (including commuting) of an employer (including a
governmental employer) owned automobile, together with the fair market value of
any fuel furnished by the employer. The rates and methods for determining the
values for this paragraph will be as provided in I.R.C. §61(a)(1) (and
I.R.C. Reg. 1-61-2 T) as in effect January 1, 1985.
(14)
(a)
For taxpayers who are shareholders of an Alabama S corporation with a tax year
which began before January 1, 1990 -
1. Gross
income includes the deemed distributive share of separately stated and
nonseparately stated income (or loss) for shareholders of an electing Alabama S
corporation.
(i) For electing Alabama S
corporations with income from more than one state, gross income includes only
the deemed distributive share attributable to Alabama.
2.
(i)
Gross income does not include actual distributions from electing Alabama S
corporations which have been previously included in gross income under
subparagraph (a)1. above.
(ii) For
resident shareholders, all other actual distributions from a S corporation,
including distributions representing income taxable in other states, is
included in gross income.
3. Gross income does include actual
distributions from S corporations which have not elected to be Alabama S
corporations, but does not include deemed distributive shares of income (or
losses) of such corporations.
4.
See §§
40-18-160, et
seq., and regulations thereunder, relating to Alabama S corporations.
(b) For taxpayers who are
shareholders of an Alabama S corporation with a tax year which began after
December 31, 1989 and before January 1, 1997 -
1. Gross income includes the deemed
distributive share of separately stated and nonseparately stated income (or
loss) of the Alabama S corporation.
2. Gross income does not include actual
distributions from an Alabama S corporation which have been previously included
in gross income under subparagraph (a)1. above.
(c) For taxpayers who are shareholders of an
Alabama S corporation with a tax year which began after December 31, 1996 -
1. Gross income includes the shareholder's
pro rata share of separately stated and nonseparately stated items of income,
loss, deduction, or credit attributed to Alabama by the Alabama S corporation
for the corporation's taxable year which ends with or during the individual's
tax year.
2. Gross income does not
include actual distributions from an Alabama S corporation which have been
previously included in gross income under subparagraph (a)1. above.
3. Gross income does not include actual
distributions from an Alabama S corporation which are determined to be
nontaxable under the provisions of §
40-18-165 and the regulations thereunder.
(d) For taxpayers who are shareholders of an
Alabama S corporation with a tax year which began after December 31, 2010 gross
income is determined in accordance with Code of Ala.
1975, §§
40-18-162 and
40-18-14 and without regard to (c)above.
(15)
(a)
For taxpayers providing foster care services who are not engaged in the trade
or business of providing such services, gross income includes payments received
in excess of expenses incurred in providing such services but does not include
expenses in excess of receipts.
(b)
For taxpayers engaged in the trade or business of providing foster care
services, gross income includes all payments received for such services, less
expenses incurred in the performance of such services. A taxpayer will be
presumed to be engaged in the trade or business of providing foster care
services when such services are provided for more than ten (10) minors or more
than five (5) adults.
(c) The
provisions of this paragraph are substantially similar to the provisions of
I.R.C. §131, and regulations and decisions regarding the interpretation
and implementation of I.R.C. §131 will be given due consideration in the
administration of this paragraph.
(16)
(a)
For tax years beginning after December 31, 1996 and before January 1, 2011,
gross income for a resident partner or member of a subchapter K entity includes
the following:
1. For a multi-state
subchapter K entity doing business within and without the State of Alabama,
only that income which is required to be allocated and apportioned to Alabama
under the rules of Section
40-18-22.
(If the multi-state subchapter K entity is not doing business in Alabama, no
income is reportable to Alabama from that subchapter K entity.)
2. For a subchapter K entity doing business
in only one state, whether the State of Alabama or another state, the
distributive share of the entire income from that subchapter K
entity.
(b) For tax
years beginning after December 31, 2010, the amount of income, deduction, gain,
loss or credit includable or deductible by an owner of an interest in a
subchapter K entity shall be determined in accordance with subchapter K of the
Internal Revenue Code, 26 U.S.C. §§
701 - 761, Code of
Ala. 1975, §§
40-18-24 and
40-18-14 and without regard to (a) above.
(17) Property transferred in connection with
performance of service-Tax years beginning after December 31, 1989.
(a) Inclusion in gross income.
1. If stock or other property is transferred
to any person other than the person for whom the services are performed, the
excess of -
(i) the fair market value of such
property (determined without restrictions other than restrictions that will
never lapse) at the first time the rights of the person having beneficial
interest in such property are transferable or are not subject to substantial
risk of forfeiture, whichever occurs first, over
(ii) the amount actually paid for such
property, shall be included in the gross income of the transferee who performed
the service in the first tax year during which a fair market value under
provisions of (a)(I) above can be determined.
2. Paragraph (a)1 shall not apply if the
transferee sells or otherwise disposes of such property in an arms length
transaction before his rights in such property become transferable or not
subject to substantial risk of forfeiture.
(b) Election to include in gross income in
the year of transfer.
1. The transferee may
elect to have paragraph (a) above apply in the year of transfer.
2. The election must be made in the same
manner and within the same time frame as required by regulations pertaining to
26 U.S.C. §83.
3. The
statement of election required by regulations pertaining to 26 U.S.C. §
83 shall be made a part of the Alabama income tax return for the year of
transfer.
(c) Special
rules - For the purpose of this regulation -
1. Substantial risk of forfeiture. - The
rights of a person in property are subject to a substantial risk of forfeiture
if such person's rights to full enjoyment of such property are conditioned upon
the future performance of substantial services by the individual.
2. Transferability of property - The rights
of a person in property are transferable only if the rights in such property of
the transferee are not subject to substantial risk of forfeiture.
3. Sales which give rise to suit under
section 16(b) of the Securities Exchange Act of 1983. - So long as the sale of
property at a profit could subject a person to suit under section 16(b) of the
Securities Exchange Act of 1934, such person's rights in such property are -
(i) subject to substantial risk of
forfeiture, and
(ii) not
transferable.
(d) Restrictions which will never lapse.
1. Valuation - Property subject to
restrictions which by its terms will never lapse, and which allows the
transferee to see such property for a price determined under some formula, the
formula price shall be determined to be the fair market value of the
property.
2. Cancellation - If,
property subject to a restriction which by its terms will never lapse has the
restriction canceled, then unless the transferee establishes -
(i) that such cancellation was not
compensatory, and
(ii) that the
taxpayer, if any, who would be allowed a deduction for compensation, will treat
the transaction as non-compensation:
(I) the
excess of the fair market value of the property (computed without regard to the
restrictions) at the time of the cancellation over the fair market value of the
property (computed by taking the restriction into account) immediately before
the cancellation plus the amount paid for the cancellation, shall be treated as
compensation for the tax year in which the cancellation occurs.
(e)
Applicability, - This regulation shall not apply to -
1. a stock option to which 26 U.S.C. §
421 applies.
2. a transfer to
or from a trust described in 26 U.S.C. §
401(a) or a transfer under an
annuity plan which meets the requirements of 26 U.S.C. §
404(a)(2).
3. the transfer of
an option without a readily ascertainable fair market value.
4. the transfer of property upon the exercise
of an option with a readily ascertainable market value at the date of the
grant, or
5. group term life
insurance to which 26 U.S.C. §
79 applies.
(f)
Code of Ala.
1975, §
40-18-14(1) stipulates that 26 U.S.C. §
83 will be the guiding document for determining
amount and time that income under this regulation is to be included in gross
income; therefore, regulations pertaining to 26 U.S.C. §
83 are hereby made
a part of this regulation. Judicial and administrative decision of Federal
agencies will govern in administering this regulation.
(18) With the exception noted below, the
amendments to this regulation which were filed with the Legislative Reference
Service on March 21, 2011 are effective for tax years beginning after December
31, 2010. The Department of Revenue will not enforce these regulatory changes
for tax periods ending prior to January 1, 2011, or for gains associated with
the taxable disposition of all or any portion of a taxpayer's assets or
Subchapter K interests where the parties to the transaction can document that
negotiations began prior to January 1, 2011 and continued with regularity until
the transaction was completed in 2011. These amendments are consistent with the
Administrative Law Division's Ruling, McNees v. Department of Revenue, DOCKET
NO. 06-523, entered December 12, 2006.
(19) The Department will not rely on the
amendments to this regulation which were filed with the Legislative Reference
Service on March 21, 2011 for tax periods beginning after December 31, 2011.
For tax periods beginning after December 31, 2011, the Department will issue
new regulatory language addressing the issues to which these amendments
pertain.
Authors: Ann Winborne, CPA, Individual and
Corporate Tax Division, Joe Garrett, Tax Policy Administrator
Statutory Authority:
Code of Ala.
1975, §§
40-2A-7(a)(5),
40-18-1.1(c),
40-18-14.
