For the past seven years Karen, an attorney, has directed litigation clients to Rebecca, a CPA, for accounting investigatory work. Because of the amount of litigation work Karen directed to Rebecca, Rebecca's business is now comprised solely of litigation support work. Karen began taking tennis lessons this year. Rebecca gives Karen a new tennis racquet so they could share afternoons by playing tennis together.
I.The "gift" appears to be a form of compensation.
II.Substance-over-form applies to this situation.
III.The tennis racquet meets the income tax definition of a gift.
IV.Karen recognizes no gross income from the receipt of the tennis racquet.

Question

For the past seven years Karen, an attorney, has directed litigation clients to Rebecca, a CPA, for accounting investigatory work. Because of the amount of litigation work Karen directed to Rebecca, Rebecca's business is now comprised solely of litigation support work. Karen began taking tennis lessons this year. Rebecca gives Karen a new tennis racquet so they could share afternoons by playing tennis together.
I.The "gift" appears to be a form of compensation.
II.Substance-over-form applies to this situation.
III.The tennis racquet meets the income tax definition of a gift.
IV.Karen recognizes no gross income from the receipt of the tennis racquet.
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Quizplus · Accepted Answer

Statement I is correct because the tennis racquet could be seen as a form of compensation for the amount of litigation work Karen had directed to Rebecca over the past seven years.
Statement II is correct because substance-over-form is a principle used to ensure that the economic reality of a transaction is reflected in its accounting treatment, which means that the form of a transaction must match its substance.
Statement III is incorrect because the tennis racquet does not meet the income tax definition of a gift since it was given as a form of compensation.
Statement IV is correct because Karen does not recognize any gross income from the receipt of the tennis racquet, as there was no intention for it to be seen as income.

For the Past Seven Years Karen, an Attorney, Has Directed