1 Individual Chapter 03 Solutions

1 Individual Chapter 03 Solutions - Chapter I:3 Gross...

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Chapter I:3 Gross Income-Inclusions Discussion Questions I:3-1 The phrase "income from whatever source derived" appears in both the 16th Amendment to the Constitution and in Sec. 61(a). This overlapping terminology was adopted to assure the constitutionality of the income tax. p. I:3-2. I:3-2 In economics, income is defined as the amount that an individual could consume during a period and remain as well off at the end of the period as he or she was at the beginning of the period. In accounting, income is measured by a transactions approach. Accountants measure income when it is realized in a completed transaction. pp. I:3-2 and I:3-3. I:3-3 It is much easier to administer the tax law based on the accounting concept of income instead of the economic concept. Also, wherewithal-to-pay is greater when income is taxed as it is realized. pp. I:3-3 and I:3-4. I:3-4 The concept of wherewithal-to-pay means that a tax should be imposed when the taxpayer can most easily pay. A taxpayer who owns property that has increased in value does not necessarily have the funds needed to pay any tax. Taxing the gain when it is realized often means that the tax becomes due at the same time the taxpayer collects the sales price. pp. I:3-3 and I:3-4. I:3-5 A loan repayment is not consistent with the normal meaning given to the word income. A taxpayer is no better off because a loan is repaid. There has been no economic benefit. As a result the repayment of a loan is not taxable simply because it is not income. p. I:3-3. I:3-6 Congress taxes prepaid rental income because of concern that taxpayers might otherwise spend the money and then be unable to pay the tax when it comes due. Taxing such amounts is to tax income when taxpayers have the greatest wherewithal to pay. The problem created for taxpayers is that they are taxed before they incur related expenses. Repairs, insurance, depreciation, interest and other expenses are incurred as the income is earned. Therefore, there is a mismatching of revenue and expense. pp. I:3-3 and I:3-11. I:3-7 Such arrangements might cause the IRS to question whether the improvements are being made in lieu of rent. If such was the case then the owner of the property may be required to include the value of the improvements in gross income. p. I:3-15. I:3-8 No. The form of payment (cash, property, or services) is usually unimportant. The important question is whether the taxpayer receives economic benefit. p. I:3-4. I:3-9 In the 1930 case of Lucas v. Earl , the Supreme Court held that earnings from labor are taxed to the person who performs the services rather than the person who receives the income. In I:3-1
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the 1940 case of Helvering v. Horst , the Supreme Court held that income from property is taxed to the person who owns the property rather than the person who receives the income. One cannot assign income by arranging to have payment made to another person. p. I:3-6. I:3-10
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1 Individual Chapter 03 Solutions - Chapter I:3 Gross...

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