Chapter 5: Gross Income and Exclusions Flashcards
When is gross income recognized?
When the (1) taxpayer receives an economic benefit, (2) they realize the income and (3) no tax provision allows them to exclude or defer the income from gross income for that year.
What is Gross Income according to Reg. 1.161(a)?
Means all income from whatever source derived, unless excluded by law. Gross income includes income realized in any form, whether in money, property, or services
What are some examples of Economic benefit?
Cash, property or services received for services rendered.
Proceeds from property sales, including debt relief
income from investments or business activities (including rent, interest and dividends)
What is the Realization Principle?
The proposition that income only exists when there is a transaction with another party resulting in a measurable change in property rights
What are the two major advantages to the realization principle?
income can be measured objectively since both parties must agree to the value of the exchanged property rights AND
(2) the transaction provides the taxpayer with the funds to pay taxes on income generated by the transaction
What is meant by wherewithal to pay taxes?
the ability or resources to pay taxes due from a particular transaction
What are barter clubs?
organizations that facilitate the exchange of rights to goods and services between members
What is a tax basis?
the amount of a taxpayer’s unrecovered cost of or investment in an asset
What is the Return of Capital principle?
the portion of proceeds from a sale (or distribution) representing a return of the original cost of the underlying property
What is the accrual method of accounting?
Income is recognized when earned and expenses are deducted in the period when liabilities are incurred
What is the cash method of accounting?
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
What is the constructive receipt doctrine?
the doctrine that states that a taxpayer must recognize income when it is actually or constructively received. Constructive doctrine has occurred when the income has been credited to the taxpayer’s account, the income is unconditionally available to the taxpayer and there are no restrictions on the taxpayer’s control over the income
What is the claim of right doctrine?
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 (for example, the taxpayer does not have an obligation to repay the amount)
What is the community property system?
A System in which state laws dictate how the income and property is legally shared between a husband and a wife
What is earned income?
compensation and other forms of income received for providing goods or services in the ordinary course of business
What is the grant date of stock options?
the date on which employees receive stock options to acquire employer stock at a specified price
What is the vesting date for stock options?
the date on which the taxpayer becomes legally entitled to receive a particular benefit without risk of forfeiture. The date the options can be exercised
What is the bargain element of a stock option?
the difference between the fair market value of the employer’s stock and the amount employees pay to acquire the employer’s stock
What is the exercise price of a stock option?
the price at which holders of stock options may purchase stock in the corporation issuing the option
What is the exercise date of the stock options?
the date employees use their stock options to acquire employer stock at a discounted price
What is unearned income?
Income from property that accrues as time passes without effort on the part of the owner of the property
What is an Annuity?
an investment that pays a stream of equal payments over time.
What is the return of capital principle?
Taxpayers realize a gain/loss when disposing of an asset and are allowed to recover their investment in property (tax basis) before they realize any gain.
When does a taxpayer use the FIFO method when selling shares of stock?
When the taxpayer has not adequately tracked the basis of the shares of stock they own and wish to sell.
What is the Specific identification method?
an elective method for determining the cost of an asset sold. Under this method, the taxpayer specifically chooses the assets that are to be sold
When is the Specific identification method used when selling shares of stock?
When the taxpayer has maintained good records on the purchase (basis) price of shares of stock.
What are short-term capital gains or losses?
gains or losses from the sale of capital assets held for one year or less. the holding period begins the day after purchase and includes the day of sale. gains ARE NOT taxed at preferential rates, considered ordinary income
What are long-term capital gains and losses?
gains or losses from the sale of capital assets held for more than 12 months. the holding period begins the day after acquisition and includes the day of sale. these gains are taxed at preferential rates
What is the holding period for capital assets?
The holding period for capital assets begins the day after acquisition and includes the day of sale
What is a wash sale?
the sale of an investment if that same investment (or substantially identical investment) is purchased within 30 days before or after the sale date. Losses on wash sales are deferred
What is a flow-through entity?
a legal entity 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
What is imputed income?
Income from an economic benefit the taxpayer receives indirectly rather than directly. The amount of the income is based on comparable alternatives
When is a discharge of indebtedness not taxable?
When the taxpayer is insolvent (unable to pay debt) before AND after the debt forgiveness
What are the two primary reasons that congress allows most exclusions and deferrals?
(1) to subsidize or encourage particular activities
2) to be fair to taxpayers (such as mitigating the inequity of double taxation
What are nonrecognition provisions?
Tax laws that allow taxpayers to permanently exclude income from taxation or to defer recognizing realized income until a subsequent period
What are fringe benefits?
noncash benefit provided to an employee as a form of compensation. As a general rule, fringe benefits are taxable, However, fringe benefits are excluded from gross income
What are accelerated death benefits?
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 within 24 months
