ACCT 351: Federal Tax Law Chapter 5

Study Notes

Gross income is defined under §61(a) as all income derived from any source, unless specifically excluded.
Reg.§1.61-(a) states that gross income includes income realized in any form, such as money, property, or services.

Economic Benefit: Taxpayers recognize gross income when they receive an economic benefit, such as compensation or investment income.
Liabilities: Borrowed money is a liability and does not count as gross income.
Realization Principle: Income is realized when a taxpayer engages in a transaction that results in a measurable change in property rights.
Recognition: Income must not be excluded or deferred to be recognized as gross income; excluded income is not taxed, while deferred income gets taxed later when recognized.

Form of Receipt: Income must be reported regardless of its form (cash, property, services) or IRS knowledge.
Return of Capital Principle: The cost of an asset is its tax basis. Return of capital is excluded from realized income as it does not represent an economic benefit.
Gains on Asset Sales: Gains from selling an asset must be included in realized income.
Recovery of Deductions: Refunds for previously deducted amounts may be included in gross income since they affect taxes in the prior deduction year.

Example 1 (Gram and Acme Corporation): Gram does not realize any income from the appreciation of her shares unless she sells them since no transaction occurs.
Example 2 (Rental Payments): Scenario highlights how non-payment of rent affects income reporting but isn't detailed in provided context.

Gross income is defined under §61(a) as all income derived from any source, unless specifically excluded.
Reg.§1.61-(a) states that gross income includes income realized in any form, such as money, property, or services.

Economic Benefit: Taxpayers recognize gross income when they receive an economic benefit, such as compensation or investment income.
Liabilities: Borrowed money is a liability and does not count as gross income.
Realization Principle: Income is realized when a taxpayer engages in a transaction that results in a measurable change in property rights.
Recognition: Income must not be excluded or deferred to be recognized as gross income; excluded income is not taxed, while deferred income gets taxed later when recognized.

Form of Receipt: Income must be reported regardless of its form (cash, property, services) or IRS knowledge.
Return of Capital Principle: The cost of an asset is its tax basis. Return of capital is excluded from realized income as it does not represent an economic benefit.
Gains on Asset Sales: Gains from selling an asset must be included in realized income.
Recovery of Deductions: Refunds for previously deducted amounts may be included in gross income since they affect taxes in the prior deduction year.

Example 1 (Gram and Acme Corporation): Gram does not realize any income from the appreciation of her shares unless she sells them since no transaction occurs.
Example 2 (Rental Payments): Scenario highlights how non-payment of rent affects income reporting but isn't detailed in provided context.