Gross Income Concepts

Question 1

Gross Income

Answer 1

all income from whatever source derived except as otherwise provided

Question 2

Realized income

Answer 2

TP engaged in a transaction that has:

1. measurable change in property rights AND
2. provides the WHEREWITHAL to pay tax on associated income

Question 3

Is ALL realized income included in gross income?

Answer 3

NO. Realized income is included unless it is specifically excluded or deferred by tax law.

Question 4

Recognized Income

Answer 4

The portion of realized income reported on the tax return. All income that Congress has not deferred or excluded specifically.

Question 5

Net Worth

Answer 5

Assets - Liabilities

Question 6

Return of Capital Principal

Answer 6

The tax basis (asset cost) is excluded when calculating realized/recognized income

Question 7

Deferred income

Answer 7

Income economically earned this period but not taxed until a future period

Question 8

Excluded income

Answer 8

income not subject to tax

Question 9

Inclusion

Answer 9

tax term for items specifically included in Gross income

Question 10

Tax incidence

Answer 10

The concept that asks who is economically responsible for the tax (may/may not be the same person who is liable for the tax)

Question 11

A taxpayer RECOGNIZE gross income when… (3)

Answer 11

1. they receive an economic benefit (ie: debt forgiven)
2. they realize income
3. the tax law does not allow for exclusion or deferral

Question 12

Recovery Amounts Previously Deducted

Answer 12

taxpayer is “reversing out” items that where over/incorrectly deducted in prior years

Question 13

Fruit Of The Tree Doctrine

Answer 13

The fruit (income) must be attributed to the tree(source) it came from.

1. tax paid by the person who earns the income
2. tax paid by the person who owns the property

Question 14

Claim of Right Doctrine (2)

Answer 14

1. A TP must RECOGNIZE income received even if they do not have a fixed right to the income.

Example: an employee receives a $10,000 bonus but must return it if he leaves the company before a five year period - income is recognized in year received

2. TP reports income even if it is in dispute
   * Income can be adjusted out if necessary in later years

Question 15

In community property states how is Gross Income assigned between spouses?

Answer 15

1. each spouse is assigned 1/2 of joint compensation
2. income from property acquired before marriage is assigned to the owner of the property only
3. income from gifts/inheritance is assigned to receiver
   * *once funds are commingled they are always treated as community property