McGraw Hill Solutions Chap005

Taxation of Individuals, 2011 edition

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Chapter 05 - Gross Income and Exclusions Chapter 5 Gross Income and Exclusions SOLUTIONS MANUAL Discussion Questions: 1. [LO 1] Explain how the definition of gross income in §61 might influence whether a particular cash flow is included in gross income. Taxpayers must presume that, absent a specific provision to the contrary, all income is taxable and no expenses are deductible. This assumption is necessary because Congress intended to fully utilize its taxing authority to construct a tax formula that achieves a broad tax base. This intent is expressed in the all inclusive definition of income in § 61, where Congress stated that “except as otherwise provided…, gross income means all income from whatever source derived…” Deductions are not permitted unless specifically authorized by the tax laws. 2. [LO 1] Discuss why it might be difficult to determine taxable income using an economist’s definition of income. Economic income depends upon measuring changes in wealth over a year. This would impose tremendous burdens on taxpayers because assets would need to be inventoried and appraised each year. Moreover, administration of the law would also be difficult because many assets are very difficult to value and the appraisal process could be very subjective and prone to manipulation. 3. [LO 1] Describe the concept of realization for tax purposes. Realization is a judicial concept that determines when income is generated (“realized”). Realization requires verification for income to exist thereby facilitating the measurement of the amount of income. Realization is generally satisfied by a transaction with another party resulting in a measurable change in property rights. A transaction reduces the uncertainty associated with determining income because a change in rights can typically be traced to a specific moment in time and is accompanied by legal documentation. Moreover, a transaction reduces the need for appraisals because the parties must agree on the value of the exchanged property rights. 4. [LO 1] Explain why the definition of gross income for tax purposes might vary from the definition of income for financial accounting income. 5-1
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Chapter 05 - Gross Income and Exclusions The definition of income depends upon realization which is a relatively vague concept. Realization for measuring financial accounting income is generally construed to measure income conservatively so as to avoid misleading investors. In contrast, realization for measuring taxable income is generally defined by Congress in a manner to maximize income and thereby maximize governmental revenues. 5. [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,
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McGraw Hill Solutions Chap005 - Chapter 05 - Gross Income...

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