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Unformatted text preview: H Chapter Five H GROSS INCOME SOLUTIONS TO PROBLEM MATERIALS DISCUSSION QUESTIONS 5-1 The discrimination that exists between renters and owners is attributable to the income definition adopted for tax purposes. The tax definition of income generally excludes benefits received in kind from property (e.g., the net rental value of using ones personal residence), while the economic definition would include such benefits as income, since these represent a type of consumption. For example, assume an individual in the 28 percent bracket has $100,000 to invest in either a home or a security. Also assume the consumption value of the house (what it would cost to rent the home) was $10,000, which is equivalent to the interest received on the bond. After taxes, the return on the investment in the house is $10,000, while the return on the bond investment is $7,200 [$10,000 c. The economist includes in income all goods and services actually consumed. Therefore, the cost of the flight would be included in income. For tax purposes, this benefit clearly falls within the definition of gross income. However, many employee fringe benefits (including travel passes to airline employees) have been historically excluded for tax purposes. This treatment was maintained under the Proposed Regulations introduced in 1976 and codified in 132 concerning employee fringe benefits in 1984. Under 132, the benefit is nontaxable as long as the airline incurs no substantial additional cost (e.g., the employee uses a seat that would otherwise be empty) including foregone revenue in providing the benefit. (See Example 8; pp. 5-4, 5-5, 5-10 and 5-11; and 61 and 132.) d. The economist would recognize $5,000 in income. The appreciation would not be recognized for either tax or financial accounting purposes until the gain is realized. (See pp. 5-4 and 5-5.) e. If the taxpayer reinvests in similar property, there will be no change in his net worth, and the proceeds will not be included in his economic income. As for tax purposes, the taxpayer can defer recognition of a gain from the proceeds by investing in property that is similar or related in service of the destroyed property (involuntary conversion). If the proceeds exceed the cost of the replacement property, the taxpayer will be taxed on the excess because of the wherewithal-to-pay concept. (See pp. 5-4 through 5-7 and 1033.) f. No income would be recognized for economic or tax purposes. The taxpayers net worth did not change because both his assets and liabilities increased by the same amount. Note the claim of right doctrine does not apply as there is a definite obligation to repay the loan. (See Example 26 and pp. 5-4, 5-5, and 5-25 and 5-26.) g. The $5 ($105 $100) is included as income for tax purposes because taxable income is computed using historical coststhe increase or decrease in the purchasing power of the dollar is irrelevant....
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This note was uploaded on 03/01/2011 for the course ACCT 4331 taught by Professor X during the Spring '08 term at University of Houston.

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