Federal Income Tax - Basis

Section 61 of the IRS Code provides that gross income means income from whatever source derived.  When determining Gross Income as far as a business is concerned, we look towards regulation 1.61-3(a) which states that "gross income means the total sales less the costs of goods sold." 

Section 61(a)(3) includes in income "gains derived from dealings in property." 
Section 1001 describes a gain as the excess of the amount realized from the sale over the taxpayer's basis for the property. 

What then is Basis?  I have a law school exam in only a couple of weeks, and in order to do well, I want to know everything about Basis. 

The term, Basis, is a term of art in the tax law.  Section 1012 states: "the basis of a property is usually its cost to the taxpayer, except as otherwise provided." 
-Basis is a mechanism by which taxpayers are allowed to recover their capital investment when they sell property.
-Accounting for gain or loss is generally postponed until property is sold, however. 
-IRS code generally only taxes realized gains.

There are three ways in which a taxpayer accounts for costs.
1.  Immediately deductible expenses. 
-If there is enough income to offset the deductions, the tax-free recovery of these income producing is immediate.
2.  Capitalized expenses.
-Purchase price or cost is taken into account only when sold.  (i.e., stock). 
-Dividend income received while the stock is held is taxed fully without any offset for the capital which was invested.
3.  Depreciated asset.
-Periodic deductions are allowed for the asset's cost.

Purchased Property = The basis of property is its cost, except as otherwise provided.
-If taxpayer receives property in exchange for services, basis = fair market value of property received.
-Basis is cost even if the taxpayer has underpaid or overpaid for the property.

Property in exchange for other property = Generally equal value.
-Exchange is generally a realization event and any gain/loss on either side will be 'recognized'. 
-"Where the value of the property given up differs from the value of the property received, the taxpayer's basis in the property received is its value."

Basis of Property Acquired By Gift
-The basis of property for computing gains in the hands of a donee = basis in the hands of the donor.
-If donee can not acquire donee's basis, basis = FMV at the date the property was acquired by the donor.