Gross Income and Exclusions CH 5

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?

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?

3. [LO 1] Describe the concept of
realization for tax purposes.

4. [LO 1] Compare and contrast realization
of income with recognition of income.

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?
6. [LO 1] Andre constructs and installs
cabinets in homes. Blair sells and
installs carpet in apartments. Andre and
Blair worked out an arrangement whereby Andre installed cabinets in Blair’s
home and Blair installed carpet in Andre’s home. Neither Andre nor Blair believes they are
required to recognize any gross income on this exchange because neither
received cash. Do you agree with them? Explain.
7. [LO 1] What issue precipitated the return
of capital principle? Explain.

8. [LO 1]
Compare how the return of capital principle applies when (1) a taxpayer
sells an asset and collects the sale proceeds all immediately and (2) a
taxpayer sells an asset and collects the sale proceeds over several periods
(installment sales). If Congress wanted
to maximize revenue from installment sales, how would they have applied the
return of capital principle for installment sales?
9. [LO 1] This year Jorge received a
refund of property taxes that he deducted on his tax return last year. Jorge is not sure whether he should include
the refund in his gross income. What
would you tell him?
10. [LO 1] Describe in general how the
cash method of accounting differs from the accrual method.
11. [LO 1] Janet is a cash-basis
calendar-year taxpayer. She received a
check for services provided in the mail during the last week of December. However, rather than cash the check, Janet
decided to wait until the following January because she believes that her delay
will cause the income to be realized and recognized next year. What would you tell her? Would it matter if she didn’t open the
envelope? Would it matter if she refused
to check her mail during the last week of December? Explain.

12. [LO 1]
The cash method of accounting means that taxpayers don’t recognize
income unless they receive cash or cash equivalents. True or false? Explain.
13.
[LO 1]Contrast the constructive receipt
doctrine with the claim of right doctrine.
14. [LO 1] Dewey is a lawyer who uses the
cash method of accounting. Last year
Dewey provided a client with legal services worth $55,000, but the client could
not pay the fee. This year Dewey
requested that in lieu of paying Dewey $55,000 for the services, the client
could make a $45,000 gift to Dewey’s daughter.
Dewey’s daughter received the check for $45,000 and deposited it in her
bank account. How much of this income is
taxed, if any, to Dewey? Explain.
15. [LO 1] Clyde and Bonnie were married
this year. Clyde
has a steady job that will pay him about $37,000 while Bonnie does odd jobs
that will produce about $28,000 of income.
They also have a joint savings account that will pay about $400 of
interest. If Clyde and Bonnie reside in
a community property state and file married-separate tax returns, how much
gross income will Clyde and Bonnie each
report? Any difference if they reside in
a common law state? Explain.
16. [LO 2] Distinguish earned income from
unearned income, and provide an example of each.
17. [LO 2] Jim purchased 100 shares of
stock this year and elected to participate in a dividend reinvestment
program. This program automatically uses
dividends to purchase additional shares of stock. This year Jim’s shares paid $350 of dividends
and he used these funds to purchase shares of stock. These additional shares are worth $375 at
year-end. What amount of dividends, if
any, should Jim declare as income this year?
Explain.
18. [LO 2] Jerry has a certificate of
deposit at the local bank. The interest
on this certificate was credited to his account on December 31 of last year but
he didn’t withdraw the interest until January of this year. When is the interest income taxed?
19. [LO 2] Conceptually, when taxpayers
receive annuity payments, how do they determine the amount of the payment they
must include in gross income?