Chapter 5

Question 1

early receipt of life insurance proceeds that are not taxable under certain circumstances, such as the taxpayer is medically certified with an illness that is expected to cause death with 24 months

Answer 1

accelerated death benefits

Question 2

an employer’s reimbursement plan under which employees must submit documentation supporting expenses to receive reimbursement and reimbursements are limited to legitimate business expenses

Answer 2

accountable plan

Question 3

a method of accounting that generally recognizes income in the period earned and recognizes deductions in the period that liabilities are incurred

Answer 3

accural method

Question 4

a support payment of cash made to a former spouse. The payment ins made under a written separation agreement or divorce decree that does not designate the payment as something other than alimony, the payment must be made when the spouses do not live together, and the payment must cease no later that when the recipient dies

Answer 4

alimony

Question 5

a stream of equal payments over time

Answer 5

annuity

Question 6

the judicial doctrine holding that earned income is taxed to the taxpayer providing the service and that income from property is taxed to the individual who owns the property when the income accrues

Answer 6

assignment of income doctrine

Question 7

organizations that facilitate the exchange of rights to goods and services between members

Answer 7

barter clubs

Question 8

the method of accounting that recognizes income in the period in which cash, property or services are received and recognizes deductions in the period paid

Answer 8

cash method

Question 9

judicial doctrine that states that income has been realized if a taxpayer receives income and there are no restrictions on the taxpayer’s use of the income

Answer 9

claim of right doctrine

Question 10

nine states (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin) that automatically equally divide the ownership of property acquired by either spouse during marriage

Answer 10

community property systems

Question 11

the judicial doctrine that provides that a taxpayer must recognize income when it is actually or constructively received. Deemed to have occurred if the income has been credited to the taxpayer’s account or if the income is unconditionally available to the taxpayer, the taxpayer is aware of the income’s availability and there are no restrictions on the taxpayer’s control over the income

Answer 11

constructive receipt doctrine

Question 12

sometimes called sick pay or wage replacement insurance. It pays the insured for wages lost due to injury or disability

Answer 12

disability insurance

Question 13

compensation and other forms of income received for providing goods and services in the ordinary course of business

Answer 13

earned income

Question 14

legal entities, like partnerships, limited liability companies and S corporations, that do not pay income tax. Income and losses from flow through entities are allocated to their owners

Answer 14

flow-through entity

Question 15

non cash benefits provided to an employee as a form of compensation. As a general rule, fringe benefits are taxable. However certain fringe benefits are excluded from gross income.

Answer 15

fringe benefits

Question 16

a transfer of property where no, or inadequate, consideration is paid for the property

Answer 16

gift

Question 17

realized income minus excluded and deferred income

Answer 17

gross income

Question 18

income from an economic benefit the taxpayer receives indirectly rather than directly. The amount of the income is based on comparable alternatives

Answer 18

imputed income

Question 19

a transfer of property when the owner is deceased ( the transfer is made the the decedent’s estate).

Answer 19

inheritance

Question 20

a sale for which the taxpayer receives payment in more that one period

Answer 20

installment sale

Question 21

the common name for state and local government debt

Answer 21

municipal bond

Question 22

tax laws that allow taxpayers to permanently exclude income from taxation or to defer recognizing realized income until a subsequent period

Answer 22

nonrecognition provisions

Question 23

plans meeting certain requirements that allow compensation placed in the account to be tax-deferred until the taxpayer withdraws money from the account

Answer 23

qualified retirement accounts

Question 24

the proposition that income only exists when there is a transaction with another party resulting in a measurable change in property rights

Answer 24

realization principle

Question 25

the portion of proceeds from a sale representing a return of the original cos of the underlying property

Answer 25

return of capital

Question 26

the amount of a taxpayer’s unrecovered cost of or investment in an asset

Answer 26

tax basis

Question 27

holds that a refund of an amount deducted in a previous period is only included in income to the extent that the deduction reduced taxable income

Answer 27

tax benefit rule

Question 28

income from property that accrues as time passes without effort on the part of the owner of the property

Answer 28

unearned income

Question 29

the ability or resources to pay taxes due from a particular transaction

Answer 29

wherewithal to pay