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Unformatted text preview: Chapter 05 - Gross Income and Exclusions Chapter 5 Gross Income and Exclusions SOLUTIONS MANUAL Discussion Questions 1. [LO 1] Based on the definition of gross income in 61 and related regulations, what is the general presumption regarding the taxability of income realized? 61(a) defines gross income as all income from whatever source derived. Reg. 1.61-(a) provides further insight into the definition of gross income as follows: Gross income means all income from whatever source derived, unless excluded by law. Gross income includes income realized in any form, whether in money, property, or services. Thus, the general presumption regarding any income realized is that it is taxable, unless otherwise excluded by law. 2. [LO 1] Based on the definition of gross income in 61, related regulations, and judicial rulings, what are the three criteria for recognizing taxable income? Based on 61(a), Reg. 1.61-(a), and various judicial rulings, taxpayers recognize gross income when (1) they receive an economic benefit, (2) they realize the income, and (3) no tax provision allows them to exclude or defer the income from gross income for that year. 3. [LO 1] Describe the concept of realization for tax purposes. As indicated in Reg. 1.61-(a), the tax definition of income adopts the realization principle. Under this principle, income is realized when (1) a taxpayer engages in a transaction with another party, and (2) the transaction results in a measurable change in property rights. In other words, assets or services are exchanged for cash, claims to cash, or other assets with determinable value. The concept of realization for tax purposes closely parallels the concept of realization for financial accounting purposes. Requiring a transaction to trigger realization reduces the uncertainty associated with determining the amount of income because a change in rights can typically be traced to a specific moment in time and is generally accompanied by legal documentation. 4. [LO 1] Compare and contrast realization of income with recognition of income. Realization is a judicial concept that determines the period in which income is generated, whereas, recognition is a statutory concept that determines whether realized income is going to be included in gross income during the period. Realization is a prerequisite to recognition, and absent an exclusion or deferral provision, recognition is automatic. 5. [LO 1] Tim is a plumber who joined a barter club. This year Tim exchanges plumbing services for a new roof. The roof is properly valued at $2,500, but Tim would have only billed $2,200 for the plumbing services. What amount of income should Tim recognize on the exchange of his services for a roof? Would your answer change if Tim would have normally billed $3,000 for his services?...
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- Spring '12