TaxAccSol_Chapter 4

TaxAccSol_Chapter 4 - CHAPTER 4 GROSS INCOME: CONCEPTS AND...

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CHAPTER 4 GROSS INCOME: CONCEPTS AND INCLUSIONS DISCUSSION QUESTIONS 2. a. The overcharge to the customer created a liability equal to the amount of the overcharge. Therefore, the taxpayer did not experience an increase in wealth from an economic point of view. For tax purposes, the taxpayer would report gross income in 2005 and a deduction in 2006. b. From an economist’s point of view, the taxpayer suffered a $1,000 loss from the decline in value in the year of purchase, and then experienced a $3,500 ($6,500 _ $3,000) gain in the year the stock was sold. For tax purposes, the taxpayer realized a $2,500 ($6,500 _ $4,000) gain in the year the stock was sold. The loss was not recognized in the year of purchase for tax purposes because the loss was not realized in that year. c. According to the economist, the carpenter should recognize income in the year the improvements were made, based on the increase in value of the property improved. Thus, the carpenter should recognize $26,000 ($140,000 _ $100,000 _ $14,000) when the improvements were made and no income in the year of sale. The economist may reason that the carpenter made $20,000 from the imputed value of his services and $6,000 from the sale of the property. Which of these options the economist selects depends on the fair market value of the property at the end of the tax year in which the improvements were made. For tax purposes, no income was realized until the property was sold, and the $26,000 was gain from the sale of the property. d. The discount the shareholder received on the purchase of the property of $5,000 ($15,000 _ $10,000) is income (a constructive dividend) for tax purposes. From an economic perspective, the shareholder and his corporation may not be treated as separate entities and thus the shareholder was receiving what he already owned and was retaining his $10,000 cash received by his corporation. So there is no income. pp. 4-3 to 4-5 6. The employer is required to include the $3,000 in gross income in 2006, when the employer’s agent receives the payment from the customer. pp. 4-7 to 4-10 and 4-16 7. a. The income should be reported in 2007. In 2006, Jared has not received anything of value. b. The significance of when the income is recognized by Jared relates to (1) the time value of money—if the tax is deferred, the present value of the tax decreases; and (2) the marginal tax rates—the taxpayer may be subject to different rates between years because of changes in the tax law, changes in his or her taxable income, changes in the taxpayer’s filing status, and changes in the entity status. pp. 4-7 to 4-9 9. a. Allyson must report income under the original issue discount (OID) rules in each of the four years, 2006, 2007, 2008, and 2009.
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b. Clearly, the original issue discount rules were not enacted to relieve the taxpayer’s compliance burden as no such burden existed. In fact, the OID rules add significant complexity to a relatively simple fact pattern. Without the OID rules, the income would
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This note was uploaded on 04/23/2008 for the course ACC 343 taught by Professor Dr.purcell during the Spring '08 term at Creighton.

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TaxAccSol_Chapter 4 - CHAPTER 4 GROSS INCOME: CONCEPTS AND...

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