Chapter 5: Gross Income and Exclusions

Question 1

When do taxpayers recognize gross income?

Answer 1

When they receive an economic benefit, they realize the income, AND no tax provision allows them to exclude or defer the income from gross income for that year.

Question 2

What is the realization principle?

Answer 2

Income is realized when (1) a taxpayer engages in a transaction with another party, and (2) the transaction results in a measurable change in property rights.

Question 3

What’s the difference between realized and recognized income?

Answer 3

Realized income is revenue. The service has been performed. You recognize revenue by reporting it (in this case) on your tax return.

Question 4

What is Return of Capital?

Answer 4

Some or all of the money an investor has in an investment is paid back to him or her. Investors are not taxed on this return until it begins to exceed their original investment value.

Question 5

What is the Form of Receipt doctrine?

Answer 5

It doesn’t have to be cash to be taxable income.

Question 6

What is the Constructive Receipt Doctrine?

Answer 6

Unconditionally available to the taxpayer

Question 7

What is the claim of right doctrine?

Answer 7

No restrictions on the use of the income (ie it doesn’t have to be returned).