Question 1

Under the all-inclusive income concept, the tax law always starts with the proposition that all receipts of cash are taxable.

Accepted Answer

Under the all-inclusive income concept, all sources of income, whether in cash, property or services, are generally considered taxable unless specifically excluded by the tax law. Therefore, the statement that all receipts of cash are taxable is true under this concept.

Question 2

Any deduction taken in a prior year that is recovered in a subsequent year is reported as income in the year it is recovered, to the extent that a tax benefit was received from the deduction.

Accepted Answer

This is the definition of the tax principle of the "tax benefit rule," which requires taxpayers to recognize as income any refunds, recoveries, or other amounts received in a subsequent year to the extent that the amounts previously deducted provided a tax benefit in a prior year. This ensures that taxpayers do not receive an unfair double tax benefit from deductions that are later reversed or refunded.

Question 3

The administrative convenience concept explains why some items are not treated consistently when the cost of implementing a concept exceeds the benefit of using it.

Accepted Answer

The administrative convenience concept states that some items may not be treated consistently if the cost of implementing a concept exceeds the benefit of using it, in order to make administrative processes more efficient. Therefore, the statement is true.

Question 4

An asset's adjusted basis is the amount of unrecovered investment after considering any increases and decreases in the original purchase price.

Accepted Answer

The adjusted basis takes into account any adjustments to the original purchase price, such as improvements or depreciation, and reflects the current value of the asset's unrecovered investment.

Question 5

The rules that limit self-dealing through the related party provisions is a result of the

Accepted Answer

The related party provisions require transactions between related parties to be conducted as if they were arm's-length transactions, meaning that the terms and conditions of the transaction should be similar to those that would be negotiated between unrelated parties. This helps to ensure fairness and prevent self-dealing. The other concepts listed do not specifically pertain to related party transactions.

Question 6

Susan purchased a lot for investment purposes. She paid $10,000 for the lot. Three years later she sold the lot to her daughter for $8,000. Susan cannot deduct the loss due to

Accepted Answer

Susan cannot deduct the loss due to the Arm's-Length Transaction Concept, which means the transaction was between related parties (mother and daughter), and the price may not reflect the fair market value of the lot. Therefore, the loss is not considered a genuine economic loss and cannot be used for tax purposes.

Question 7

When items of income are omitted because the cost of the time and effort of the taxpayer to accumulate the information, it is an application of the

Accepted Answer

The omission of income for administrative convenience is a practical application of the Administrative Convenience Concept, which recognizes that the cost of gathering and verifying income information may outweigh the benefit of taxing certain items of income. This is also known as the de minimis rule.

Question 8

Under the ability-to-pay concept, taxpayers are required to have tax withheld from income or to make estimated tax payments so that the taxpayer avoids a large tax liability at the end of the year.

Accepted Answer

The answer of Under the ability-to-pay concept, taxpayers are required...

Question 9

Bethany bought a new suit to wear to work. She will not be able to deduct the cost of the suit even though she wears it to work.

Accepted Answer

The cost of clothing that is suitable for everyday wear, even if worn to work, is typically not deductible as a business expense.

Question 10

Withholding of taxes from the taxpayers wages and quarterly estimated tax payments are a result of the

Accepted Answer

The Pay-as-You-Go Concept requires taxes to be collected as income is earned, which is achieved through withholding taxes from wages and quarterly estimated tax payments.

Question 11

John sells his uncle Bob land held for investment for $10,000 that he had purchased 3 years ago for $12,000. John is precluded from taking the $2,000 loss under the arm's-length transaction concept since this is a related party transaction.

Accepted Answer

The answer of John sells his uncle Bob land held...

Question 12

Benji hired his three-year-old son to work in his engineering consulting firm. As long as Benji fills out all the forms and properly deposits the paychecks in his son's bank account, he will be able to deduct the expenditure as a business expense.

Accepted Answer

It is illegal to hire a child who is too young to perform actual work and pay them as an employee. This type of deduction would be considered fraud.

Question 13

An individual can legally assign income to another individual, and the assignment relieves the owner of the income from paying tax on the income.

Accepted Answer

It is not possible for an individual to assign income to another individual and avoid paying taxes on it. Income belongs to the person who earned it, and they are responsible for paying taxes on it. Any attempt to assign income to someone else for the purpose of avoiding taxes would be considered tax fraud.

Question 14

Under the pay-as-you-go concept, the tax base used to compute the taxpayer's income tax liability is a net income number.

Accepted Answer

The pay-as-you-go concept refers to withholding tax from income as it is earned, not necessarily using net income to compute tax liability.

Question 15

Frank rents an apartment to Pete and collects a cleaning deposit to be repaid at the end of the lease. Under the claim-of-right doctrine, Frank includes the deposit in income when collected.

Accepted Answer

Under the claim-of-right doctrine, a deposit that is refundable is not considered income when collected because there is an obligation to return it at the end of the lease. It is only considered income if it becomes non-refundable.

Question 16

Sam coaches a little league baseball team. He makes 15 copies of the team's schedule to give to the players on his employer's copy machine. The cost of the copies is not income to Sam due to the

Accepted Answer

According to the Administrative Convenience Concept, small fringe benefits, such as the cost of using an employer's copy machine, are not considered taxable income to the employee if providing the benefit is administratively convenient for the employer. Therefore, the cost of the copies Sam made for the baseball team is not taxable income to him.

Question 17

The Nadal Company mails its annual dividend check on December 31. Even when the shareholders receive their check in the following year, they must report the income in the year the check was written and mailed.

Accepted Answer

The answer of The Nadal Company mails its annual dividend...

Question 18

All deductions are allowed because of the legislative grace concept.

Accepted Answer

The legislative grace concept allows for certain deductions to be made from taxable income, even though they may not be specifically authorized by the tax code. This is done in order to promote certain policy objectives, such as encouraging investment or charitable giving.

Question 19

The taxpayer will be able to benefit from capital recovery on business equipment over the life of the asset and any remaining capital will be recovered when the asset is sold.

Accepted Answer

This statement is generally true as it describes the concept of depreciation, which allows businesses to recover the cost of assets over their useful lifespan and potentially recoup any remaining value upon their sale or disposal. However, the specifics of capital recovery and asset valuation can vary based on applicable tax laws and accounting practices.

Question 20

Under the Wherewithal to Pay concept, income should be recognized and a tax paid on the income when the taxpayer has the resources to pay the tax.

Accepted Answer

The Wherewithal to Pay concept is based on the principle that income should be recognized and taxed when the taxpayer has the financial ability to pay the tax, regardless of whether the income has been realized or received. This means that a tax liability may be recognized even if the taxpayer has not yet received the income, but has the means to pay the tax owed on that income.

Quiz 2: Income Tax Concepts