Chapter 4 - Gross Income Study Guide 1. (4-1) Know the income tax formula and what each item of the formula means. 2. (4-2) What is gross income? a. Section 61 of the Internal Revenue Code (under 4-1) b. (4-2c) When is income realized? In what form can it be realized? 3. (4-3b) How is income recognized under the cash method? 4. (4-3b) How is income recognized under the accrual method? 5. (4-3c) What is the constructive receipt doctrine? How is income recognized under the constructive receipt doctrine? 6. (4-3c) What is the original issue discount (OID)? How is it taxed? 7. (4-4) Sources of income (Who recognizes income?) a. (4-4a) Who includes income from personal services in the gross income? b. (4-4b - dividends) To whom are dividends taxed when a taxpayer sells stock after the dividend declaration but before the record date? How is it different for a sale and a gift? 8. (4-5a) How are gains and losses from property transactions recognized for tax purposes? a. How do you calculate realized gain or loss? How are they recognized? (You need to understand the difference between the realization and recognition.) b. How are the net capital gain/loss taxed for individuals? For C corporations? (You don't have to know the capital gain/loss netting process for this exam.) 9. (4-5b) What is the tax treatment of interest on state and local government obligations? (Remember that the exempt status applies solely to state and local government bonds.) What is the tax treatment of interest on U.S. government bonds? 10. (4-5c) How are the life insurance proceeds taxed? (Don't worry about the exemptions to the exclusion treatment.) 11. (4-5d) What is the tax treatment of debt cancellation? When can it be excluded from gross income? (For exclusion, you only need to know the situation #2: when the debtor is insolvent.) 12. (4-5e) What is the tax benefit rule? How is income recognized under the tax benefit rule?