i. ii. Legislative Grace Concept: Applied to deductions, this concept means that deductions are allowed only as a result of a specific act of Congress and that any relief granted in the form of a deduction must be strictly interpreted. Business Purpose Concept: a deduction is allowed only for an expenditure that is made for some business or economic purpose that exceeds any tax avoidance motive. This concept has been interpreted to mean that the expenditure was made in connection with a profit-seeking activity. Capital Recovery Concept: no income is realized until the amount invested has been recovered. The amount of investment in an asset is referred to as the asset's basis. Thus, the amount invested in an item, its cost, is the maximum amount that can be deducted in determining taxable iii. income i. ii. iii. All-Inclusive Income Concept: all income received is considered taxable unless some specific provision can be found in the tax law that excludes the item in question from taxation. Legislative Grace Concept: any tax relief provided to taxpayers is the result of specific acts of Congress that must be applied and interpreted strictly. Capital Recovery Concept: states that no income is taxed until all capital preiously invested in the asset is recovered.* That is, on any asset purchased, all investment in the asset must be recorded to determine the amount of profit (or loss) made upon disposition of the asset. The amount invested in an asset is referred to as its basis.* Realization Concept: no income is recognized for tax purposes (i.e., is included in taxable income) until it has been realized by the taxpayer. 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. iv. V. i. ii. iii. Ability-to-pay Concept: the tax levied on a taxpayer should be based on the amount that the taxpayer can afford to pay Administrative Convenience Concept: items may be omitted from the tax base whenever the cost of implementing a concept exceeds the benefit of using it. Arm's-Length Transaction Concept: An arm's-length transaction is one in which all parties have bargained in good faith and for their individual benefits, not for the benefit of the transaction group. Transactions that are not made at arm's length are generally not given any tax effect or are not given the intended tax effect. Pay-as-You-Go Concept: requires taxpayers to pay tax as they generate income. iv. V. c. Explain the effect of accounting concepts, how such concepts provide guidance in determining when an item of income should be included in gross income, and when an expense item is deductible. i. Entity Concept: each tax unit must keep separate records and report the results of its operations separate and apart from other tax units. 1. Taxable Entities: 2. Conduit Entities: ii. Annual Accounting Period Concept: all entities must report the results of their operations on an annual basis and that each taxable year is to stand on its own, apart from other tax years. 1. Burnet v. Sanford & Brooks (1931): Held that the transactions of each tax year should stand separate and apart from transactions of other tax years. Consider the concepts discussed by Murphy & Higgins in Chapter 2 of their textbook. Which concepts are most and least helpful to taxpayers in the effort to reduce their tax liability? Explain why. i. ii. Legislative Grace Concept: Applied to deductions, this concept means that deductions are allowed only as a result of a specific act of Congress and that any relief granted in the form of a deduction must be strictly interpreted. Business Purpose Concept: a deduction is allowed only for an expenditure that is made for some business or economic purpose that exceeds any tax avoidance motive. This concept has been interpreted to mean that the expenditure was made in connection with a profit-seeking activity. Capital Recovery Concept: no income is realized until the amount invested has been recovered. The amount of investment in an asset is referred to as the asset's basis. Thus, the amount invested in an item, its cost, is the maximum amount that can be deducted in determining taxable iii. income i. ii. iii. All-Inclusive Income Concept: all income received is considered taxable unless some specific provision can be found in the tax law that excludes the item in question from taxation. Legislative Grace Concept: any tax relief provided to taxpayers is the result of specific acts of Congress that must be applied and interpreted strictly. Capital Recovery Concept: states that no income is taxed until all capital preiously invested in the asset is recovered.* That is, on any asset purchased, all investment in the asset must be recorded to determine the amount of profit (or loss) made upon disposition of the asset. The amount invested in an asset is referred to as its basis.* Realization Concept: no income is recognized for tax purposes (i.e., is included in taxable income) until it has been realized by the taxpayer. 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. iv. V. i. ii. iii. Ability-to-pay Concept: the tax levied on a taxpayer should be based on the amount that the taxpayer can afford to pay Administrative Convenience Concept: items may be omitted from the tax base whenever the cost of implementing a concept exceeds the benefit of using it. Arm's-Length Transaction Concept: An arm's-length transaction is one in which all parties have bargained in good faith and for their individual benefits, not for the benefit of the transaction group. Transactions that are not made at arm's length are generally not given any tax effect or are not given the intended tax effect. Pay-as-You-Go Concept: requires taxpayers to pay tax as they generate income. iv. V. c. Explain the effect of accounting concepts, how such concepts provide guidance in determining when an item of income should be included in gross income, and when an expense item is deductible. i. Entity Concept: each tax unit must keep separate records and report the results of its operations separate and apart from other tax units. 1. Taxable Entities: 2. Conduit Entities: ii. Annual Accounting Period Concept: all entities must report the results of their operations on an annual basis and that each taxable year is to stand on its own, apart from other tax years. 1. Burnet v. Sanford & Brooks (1931): Held that the transactions of each tax year should stand separate and apart from transactions of other tax years. Consider the concepts discussed by Murphy & Higgins in Chapter 2 of their textbook. Which concepts are most and least helpful to taxpayers in the effort to reduce their tax liability? Explain why