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Originally Posted by farmer_giles_of_ham
A relative has received a W2 statement in the mail accusing him of receiving about 100,000 bux of "salary", an item of gross income. His personal bank records indicate deposits in exactly these amounts on the same dates.
He says that the characterization is false, he paid for that money with equal value.
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Your relative (and you) have made a very common law school mistake, which is that you are trying to calculate "gain" based on the
values of what have been exchanged.
Gain is NOT the difference between the
value of what is received and the
value of what is transferred away. It is the difference between the
value of what is received and the
BASIS of what is transferred away, and "basis" is what you paid for it and not what it's worth.
For example, if I buy stock of the XYZ corporation at $100 per share, and then later sell the same stock for $120 per share on a day when the stock is trading on an open exchange at $120 per share, I have received $120 for stock with a value of $120 (which is an exchange of equal values)
AND I have a gain of $20 because I originally paid only $100 for the stock and the $20 represents the increase in value that I have realized.
Similarly, if I own a plumbing business and I hire a plumber for $20 per hour, I send him to do work for one of my customers, and I charge the customer $30 for one hour of work, I have a gain of $10. The gain is not the difference between what I was paid ($30) and the
value of the services, but the difference between what I was paid for the services ($30) and what I had paid for those services ($20).
So if your relative received $100,000 for his services, the measure of his gain is not the difference between the $100,000 and the
value of his services, but the difference between the $100,000 received and what your relative paid for his own services. Your relative paid himself nothing for his own services, so the entire amount is gain, and therefore income.
Congress, the IRS, and the courts (i.e. all three branches of the government) all agree that the entire amount received is income. You can disagree if you want, but your disagreement will not change the reality of what the law is.