Section 61 of the IRS Code defines income as "income from whatever source derived unless otherwise excluded." In determining income, several key concepts have evolved from this definition. Explain the following concepts and provide at leas one example of each. Explain which concept you think is most beneficial from a taxpayer's point of view and which concept is most beneficial from the IRS's point of view.
1. Realized income
2. Recognized income
3. Return of capital doctrine
4. Constructive receipt
5. Tax benefit rule
6. Wherewithal to pay doctrine
Heilman (1929) provides that realized income is the most commonly used principle in determining income and that realized income is the amount received as a result of sales of products or services. When goods and services are exchanged for cash or claims to cash the amount received is termed as realized income. Realized income is therefore gross income or income before deductions thus it is not influenced by expenses. While filing tax returns a taxpayer is required to report total realized income and also indicate portion of income that is not taxable. Examples of realized income include income received on sale of common stock or money received after providing a service.
Recognized income is the amount of money a business receives after sale of products or provision of services and includes all forms of increase in owner's equity such as sales and sale of assets. Recognized income is the income an entity considers it has received and depends on accounting methods being used such as accrual basis and cash basis. Income is recognized once a certain event has occurred and the amount can be determined. An example of a recognized income is a business recognizing an income once it has signed a deal with a client.
Return of ...
Section 61 of the IRS Code are examined. The tax benefit rule are determined.