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20110928 Chat Wed Cpt 4 & 5

20110928 Chat Wed Cpt 4 & 5 - C HAT WEDNESDAY T HE...

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CHAT WEDNESDAY T HE 28T H OF SEPT EMBER, 2011 Making cup of coffee be right back?? Chapter 4 Gross Income SUMMARY OF CHAPT ER Gross income, according to the Internal Revenue Code, includes all income unless specifi cally exempted by law. This comprehensive defi nition requires a more probing discussion of what must be included in income. Two further concerns are how much must be included in income and what portion of total income may be excluded. T he Concept of Income ¶4001 Economic Income Economists defi ne income as the maximum amount that an individual can consume during a week and remain as well-off at the end of the week as the individual was at the beginning of the week. This defi nition is not practical for tax purposes. ¶4015 The Legal/Tax Concept of Income The tax concept of income derives from the Code, which states that gross income includes “all income from whatever source derived” unless specifi cally exempted by law. (Code Sec. 61(a).) The legal concept of income is best described in the Eisner v. Macomber case as “gain derived from capital, from labor, or from both combined.” ¶4025 Accounting Income Accountants measure income as the excess of revenues over costs incurred to produce those revenues. As in fi nancial accounting, all gains must be “realized” before they are includible in income. Under the accrual method, income is recognized when a transaction is consummated. Under the cash method, income is recognized only when cash is received. Economic Benefi t, Constructive Receipt, and Assignment of Income Doctrines ¶4101 Economic Benefi t Doctrine The economic benefi t doctrine focuses on what is income. ¶4125 Constructive Receipt Doctrine The constructive receipt doctrine focuses on when income is received. A distinctive feature is that the doctrine affects only cash basis taxpayers. P4-47 p 4-47 4125 Multiple Choice—Constructive Receipt Income 47. b. In part (a), the taxpayer has the right to pick up the check on December 15. In part (c), taxpayer’s agent received income on December 30 and that is the same as the taxpayer receiving it. For part (d), the taxpayer actually received the check. Whether or not he deposits the check is immaterial. In part (e), the taxpayer received stock on December 30 and it is income at that time. That he sold it later did not affect the transaction. Accordingly, the correct answer is (b). The taxpayer did not receive the asset until January 12, 2011; therefore, he had no income in 2010. Economic Benefi t, Constructive Receipt, and Assignment of Income Doctrines ¶4201 Assignment of Income Doctrine The assignment of income doctrine focuses on the person to whom income is taxable. For tax purposes, income is taxed to the individual who has earned it. The assignment of income is disregarded unless the source of the income is also assigned.
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