Chapter 5: Gross Income and Exclusions

Question 0

When is gross income recognized?

Answer 0

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.

Question 1

What is Gross Income according to Reg. 1.161(a)?

Answer 1

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

Question 2

What are some examples of Economic benefit?

Answer 2

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)

Question 3

What is the Realization Principle?

Answer 3

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

Question 4

What are the two major advantages to the realization principle?

Answer 4

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

Question 5

What is meant by wherewithal to pay taxes?

Answer 5

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

Question 6

What are barter clubs?

Answer 6

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

Question 7

What is a tax basis?

Answer 7

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

Question 8

What is the Return of Capital principle?

Answer 8

the portion of proceeds from a sale (or distribution) representing a return of the original cost of the underlying property

Question 9

What is the accrual method of accounting?

Answer 9

Income is recognized when earned and expenses are deducted in the period when liabilities are incurred

Question 10

What is the cash method of accounting?

Answer 10

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

Question 11

What is the constructive receipt doctrine?

Answer 11

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

Question 12

What is the claim of right doctrine?

Answer 12

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)

Question 13

What is the community property system?

Answer 13

A System in which state laws dictate how the income and property is legally shared between a husband and a wife

Question 14

What is earned income?

Answer 14

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

Question 15

What is the grant date of stock options?

Answer 15

the date on which employees receive stock options to acquire employer stock at a specified price

Question 16

What is the vesting date for stock options?

Answer 16

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

Question 17

What is the bargain element of a stock option?

Answer 17

the difference between the fair market value of the employer’s stock and the amount employees pay to acquire the employer’s stock

Question 18

What is the exercise price of a stock option?

Answer 18

the price at which holders of stock options may purchase stock in the corporation issuing the option

Question 19

What is the exercise date of the stock options?

Answer 19

the date employees use their stock options to acquire employer stock at a discounted price

Question 20

What is unearned income?

Answer 20

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

Question 21

What is an Annuity?

Answer 21

an investment that pays a stream of equal payments over time.

Question 22

What is the return of capital principle?

Answer 22

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.

Question 23

When does a taxpayer use the FIFO method when selling shares of stock?

Answer 23

When the taxpayer has not adequately tracked the basis of the shares of stock they own and wish to sell.

Question 24

What is the Specific identification method?

Answer 24

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

Question 25

When is the Specific identification method used when selling shares of stock?

Answer 25

When the taxpayer has maintained good records on the purchase (basis) price of shares of stock.

Question 26

What are short-term capital gains or losses?

Answer 26

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

Question 27

What are long-term capital gains and losses?

Answer 27

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

Question 28

What is the holding period for capital assets?

Answer 28

The holding period for capital assets begins the day after acquisition and includes the day of sale

Question 29

What is a wash sale?

Answer 29

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

Question 30

What is a flow-through entity?

Answer 30

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

Question 31

What is imputed income?

Answer 31

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

Question 32

When is a discharge of indebtedness not taxable?

Answer 32

When the taxpayer is insolvent (unable to pay debt) before AND after the debt forgiveness

Question 33

What are the two primary reasons that congress allows most exclusions and deferrals?

Answer 33

(1) to subsidize or encourage particular activities

2) to be fair to taxpayers (such as mitigating the inequity of double taxation

Question 34

What are nonrecognition provisions?

Answer 34

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

Question 35

What are fringe benefits?

Answer 35

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

Question 36

What are accelerated death benefits?

Answer 36

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