Contrary to what the IRS would have you believe, “income” is NOT everything that “comes in.” The Code does not define income. It defines gross income as “income” derived from whatever source, including compensation for services, but that is not the same as defining income as being 100% of all compensation for services.
The Supreme Court has held that it and it alone can define “income” because Congress may not define Constitutional terms. Otherwise, it could define “speech” as “pig-Latin” and any other speech would no longer be protected by the Constitution.
So, what is “income”? The Supreme Court has defined income as gain, profit, derived from capital, labor or both combined. It has also given us some rules for determining what is and is not income:
Rule No. 1: What comes in is NOT “income”, but “gross receipts”, and in order to determine if there is any income in what comes in we must first deduct from those gross receipts the value or cost of whatever was given in exchange for it because income is only the gain or profit from the conversion of capital.
U. S. Supreme Court in Doyle v. Mitchell Brothers Co., 247 U.S. 179, 38 S.Ct. 467 (1918)
If you receive wages or a salary or are paid fees for your personally rendered services, your labor, how much do you deduct from those earnings in order to determine whether you have any income? What was your cost? A part of your life? Your labor? Your skill? Your knowledge? You can’t say how much that is worth in dollars? Then let’s look at the next rule:
Rule No. 2: In order for there to be income it must be DERIVED from, that is SEPARABLE from, that portion of gross receipts that represents the investment or property given in exchange for those gross receipts. If it cannot be separated, distinguished, from the capital and spent or used without injuring the capital portion, then THERE IS NO INCOME.
U. S. Supreme Court in Eisner v. Macomber, 252 U.S. 189, 40 S.Ct. 189 (1920)
So, can you separate the portion of your earnings that represents your labor and your time from a specific, identifiable portion that you can regard as profit? No? Then according to the Supreme Court, YOUR EARNINGS ARE NOT AND CANNOT BE REGARDED AS INCOME and should be excluded from your gross income (26 CFR § 1.861-1)!