Solutions to Cpt 4 and 5 Questions

Solutions to Cpt 4 and 5 Questions - Chapter 4 Gross Income...

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Chapter 4 Gross Income Answers to Questions Economic, Legal, and Accounting Income 1. Economic income is defi ned as “the maximum amount a person can consume during a week and still expect to be as well-off at the end of the week as at the beginning.” Legal income has been defi ned by courts and by Congress. In Eisner v. Macomber, income was defi ned as the “gain derived from capital, from labor, or from both combined.” Accounting income is defi ned as the excess of revenue over costs incurred to produce that revenue. The legal and the accounting defi nitions are much more practical than the economic defi nition. Economic Benefi t and Constructive Receipt Doctrines 2. The economic benefi t doctrine addresses the concept of “what” is income. The constructive receipt doctrine is concerned with “when” do we have income. The constructive receipt doctrine is for cash basis taxpayers, not accrual basis. Rules have been established to prevent individuals from simply “choosing” a time to recognize income. Assignment of Income Doctrine 3. The court in Lucas v. Earl stated that the “fruit” may not be “attributed to a different tree from that on which it grew.” The doctrine is concerned with assignment of income and ensuring that the owner of the capital (tree) does not try to reduce tax liability by assigning income. Compensation—Salary Advances 4. No. The employee must repay the advance. This is considered a loan and it should not be confused with compensation for services. Payroll Purchases of Savings Bonds 5. No. The U.S. savings bonds are purchased with after-tax dollars. Payroll deduction items are not exclusions from gross income. Compensation v. Gifts 6. Compensation is money received for services rendered. Compensation is fully taxable to the recipient when constructively received. A gift is given not as a return for services or value, but out of affection, regard, or pity. Section 102(a) specifi cally excludes the value of property acquired by gift. Scholarships 7. Scholarships received by a degree candidate are excludable from gross income if amounts received cover the costs of tuition, books, supplies, and course-related fees. Scholarships for room and board are not excludable from gross income. Also, scholarships to non-degree candidates must be included in gross income. Business Sales Expenses 8. Selling and administrative expenses of a business are deducted after gross income has been determined. Lessee Improvements 9. Improvements made by the lessee are income to the lessor if they are made in lieu of rent. Also, they are based on market value and not cost. Stock Dividends
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This note was uploaded on 10/24/2011 for the course ACC 432A taught by Professor Forrestyoung during the Fall '11 term at National.

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Solutions to Cpt 4 and 5 Questions - Chapter 4 Gross Income...

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