Chapter 2 Flashcards
What are 15 items that are specifically included in gross income under the Internal
Revenue Code?
• compensation for services, including fees, commissions, fringe benefits, and similar items
• gross income derived from business
• gains derived from dealings in property
• interest
rents
• royalties
• dividends
• alimony and separate maintenance payments for divorce and separation agreements signed before January 1, 2019
• annuities
• income from life insurance and endowment contracts
• pensions
• income from discharge of indebtedness
• distributive share of partnership gross income
• income in respect of a decedent
• income from an interest in an estate or trust
How is the tax concept of income differentiated from the tax concept of capital?
Income is subject to income taxation, while capital is not. Therefore the receipt of an item of income (in
whatever form) is an event subject to income taxation, while the receipt, return, or replacement of a capital item is not a taxable event.
Don purchases stock at $30 a share. The price per share goes up to $50 in one week.
Has he realized income? Explain.
Don has not realized income because there has been no disposition of the property
Does your client, Mrs. Eidson, have income when interest earned on her life insurance policy dividends is credited to her policy account? Explain.
Mrs. Eidson has received income when interest earned on her life insurance policy dividends is credited to her policy account. Even though she has not actually reduced the income to her possession, she has received it constructively. The income tax regulations state that income must be included in a taxpayer’s gross income for the taxable year in which it is “actually or constructively received.” The regulations elaborate by
stating that even though income is not actually reduced to a taxpayer’s possession, the taxpayer is deemed to have constructively received it in the taxable year during which (1) it is credited to the taxpayer’s account, as in the case of Mrs. Eidson, (2) set apart for the taxpayer, or (3) otherwise made available to be drawn from at any time.
Under what circumstances will an employee be taxed on compensation under the economic-benefit theory?
Courts have held that Sec. 61 of the Code is broad enough to include as taxable income any economic or financial benefit conferred on an employee as compensation, regardless of its form. This concept is known as the economic-benefit theory or doctrine, and it has been applied to situations involving a payment in kind or where the employer has made available to the employee the equivalent of cash—in other words, when the employee receives from the employer something with a current, real, and measurable value.
Paul is the sales manager for the Freeman Corporation. The company pays premiums on a $100,000 whole life policy owned by Paul insuring his life. Paul has named his wife as beneficiary. What is the relevant income tax concept and its implications to Paul?
Paul receives an economic benefit from his employer intended as compensation in the form of life insurance premium payments. Therefore the amount of the premium is ordinary income to Paul.
Describe the principle of assignment of income.
The principle of assignment of income provides that the taxation of income cannot be shifted from one taxpayer to another merely by transferring or assigning to another
taxpayer the right to receive the income. Consequently, the taxpayer whose personal efforts generated the income or who is the owner of the property that generated the income must report or declare the income on his or her own tax return. Assigning the
income to another taxpayer (such as a family member whose marginal rate of taxation is lower) will not shift the burden of taxation for the income to that taxpayer.
John Jones, an agent for Podunk Mutual, assigns his renewal commissions to his 25-year-old daughter, Jane. In this situation, explain who the taxpayer is for income tax purposes as well as the principle of tax law that applies here
Jones, not his daughter, would be taxed on commissions based on the assignment-of-income doctrine. Jones cannot assign income that he has earned to another
party.
