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acct411ch4notes - Chapter 4 Gross Income Note Some of the...

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Chapter 4 Gross Income Note: Some of the material below relates more specifically to Chapter 5 but the chapters are very related in focus. I. Tax Concept of Income – Generally income must be realized A. Administrative Convenience Objectivity and administrative convenience support taxing realized, rather than unrealized appreciation. EXAMPLE: If a piece of land owned by the taxpayer appreciates from $100,000 at the beginning of the tax year to $130,000 at the end of the tax year, there is no tax on the $30,000 appreciation until the disposal of the land. The appreciation above would be considered income in an economic sense but not in a tax sense. At one time, appreciation was never accounting income either but that principle has been eroded somewhat. Taxing unrealized gains and losses would also have valuation problems when we are talking about gains and losses on items that aren’t easily valued. Finally, the fluctuations in asset values may introduce more variability and less predictability into the tax system if they were included in taxable income. The variability problem has been a concern in accounting for those who did not wish to include unrealized gains and losses in income. B. Wherewithal-to-Pay Taxing unrealized appreciation would cause cash flow problems for taxpayers. EXAMPLE: If the $30,000 appreciation described in the previous example was taxed at 20%, the taxpayer could be hard pressed to come up with the $6,000 tax due without liquidation of the investment. C. Gross Income Defined Code Sec. 61 includes in gross income "all income from whatever source derived." Specific examples listed in the statute include: 1. Compensation for services 2. Business income 3. Gains from sale or exchange of property 4. Interest 5. Rents 6. Royalties 7. Dividends 8. Alimony 9. Pensions and annuities 10. Income from certain life insurance contracts
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11. Income from the discharge of indebtedness 12. Distributive share of partnership or S-corporation income 13. Income in respect of a decedent 14. Income from an estate or trust II. To Whom is Income Taxable? A. Assignment of Income – Refers to directing income to someone other than the person earning it. Although a taxpayer earning income may indicate that the income should be paid to someone else, the taxpayer earning the income must report the income and be taxed on it. 1. Income from personal services is taxed to the taxpayer who rendered the services, and income from property is taxed to the owner of the property. 2. Family trusts are not effective to change the incidence of tax on personal service income from the taxpayer earning the income to trust beneficiaries. B. Allocating Income Between Married Persons 1. Income allocation between husband and wife is dependent on state law (i.e., common law state vs. community property state).
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