Identifying the Proper Taxpayer

Question 1

Does a gift with a reversionary interest at a future date (a “vertical” or “carved-out interest”) shift income to the donee?

Answer 1

No

Question 2

What is a cash-basis taxpayer?

Answer 2

A taxpayer who reports income as received and deducts expenses as they are paid

Question 3

Under the economic benefit doctrine, in what year are amounts irrevocably held in trust for the benefit of the taxpayer taxed?

Answer 3

In the year of deposit, even if the taxpayer may not have access to the funds until a subsequent year

NB: Deferred compensation agreements may deviate from this

Question 4

What is an accrual basis taxpayer?

Answer 4

A taxpayer who reports the earning of income or the right to receive income, not the receipt of it.

Question 5

What is the “all events test” for determining the accrual of income or deductions?

Answer 5

All events must have occurred that fix the amount of the tax and determine the liability of the taxpayer to pay it

Question 6

What are the two methods to calculate profits from inventory?

Answer 6

1. FIFO (first in, first out)

2. LIFO (last in, first out)

Question 7

Can a taxpayer use the LIFO method?

Answer 7

Only with permission from the IRS Commissioner

Question 8

How is FIFO calculated?

Answer 8

Taking the cost of goods first purchased and substracting it from the sale price

Net value is the taxpayer’s profit

Question 9

What are the two types of tax years?

Answer 9

1. Calendar year

2. Fiscal year

Question 10

When does the calendar year begin?

Answer 10

January 1; ends December 31

Question 11

When does the fiscal year end?

Answer 11

It is a 12-month period that ends on the last day of a month other than December

Question 12

How does the “kiddie” tax treat a child’s unearned income?

Answer 12

As the child’s income, but at the parent’s highest marginal tax rate