Chapter 2 - Income Tax Concepts

Chapter 2 - Income Tax Concepts - Chapter 2: Income Tax...

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Chapter 2: Income Tax Concepts I. Introduction a. Concept: i. A broad principle that provides guidance on the income tax treatment of transactions b. Construct: i. Mechanism that has been developed to implement a concept c. Doctrine: i. Construct that has been developed by the courts II. General Concepts a. Ability-To-Pay Concept: i. States that the tax levied on a taxpayer should be based on the amount that the taxpayer can afford to pay 1. Income tax base is a net income number (i.e., income minus deductions and losses) rather than a gross figure such as total income received a. This allows the tax base to recognize different deduction levels incurred by taxpayers as well as different levels of income 2. Uses the progressive tax structure a. Individuals with large taxable incomes pay a higher marginal tax rate than do individuals with small taxable incomes b. Administrative Convenience Concept: i. States that items may be omitted from the tax base whenever the cost of implementing a concept exceeds the benefit of using it 1. Generally the cost is the time and effort for taxpayers to accumulate the information necessary to implement the concept as well as the cost to the government of ensuring compliance 2. Generally the benefit received from implementation is the tax that would be collected
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a. Many items that meet the definition of income are not taxed because the cost of collecting the information necessary to ensure compliance is greater than the tax produced b. Tax law lets a taxpayer take a standard deduction in lieu of accumulating the information necessary to deduct the actual allowable deductions c. Arm’s-Length Transaction Concept i. Arm’s Length Transaction: 1. Transaction in which all parties have bargained in good faith and for their individual benefits, not for the benefit of the transaction group ii. Concept: 1. In seeking to pay the minimum amount of tax, taxpayers often structure transactions that may not reflect economic reality a. Not given a tax effect b. Generally involve an element of self-dealing iii. Related-Party Provisions:
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Chapter 2 - Income Tax Concepts - Chapter 2: Income Tax...

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