Janelle R. Polk v. California Franchise Tax Board

The State of California, like many states that impose a state income tax, bases its statutory definition of the term “gross income” on 26 U.S.C. §61. Though §61(a) provides a general definition of “gross income”, it also references other meanings of that term found in Subtitle A of 26 U.S.C., by way of the qualifying language: “Except as otherwise provided in [Subtitle A]...” In the decision below, the California Court of Appeal held that the entire amount of hourly wages paid to an individual for her labor performed in Burbank, California for Warner Bros, necessarily constitute gross income “for purposes of [26 U.S.C.] section 61(a)”, while failing to consider whether §872(a) is the applicable federal definition of “gross income”. The legal theory in the decision below seems to be that all gross receipts paid to any individual in exchange for his or her labor performed anywhere in the United States of America necessarily constitute income derived from a federally taxable source; thus, according to the California Court of Appeal, all such gross receipts necessarily constitute gross income. The question presented is: Whether all gross receipts paid to an individual in exchange for his or her labor or services performed in the United States of America are necessarily included by law in “gross income” under the general definitions provided at 26 U.S.C. §61(a) and §872(a).