Question

b

For each tax treatment described, determine the applicable income tax concept(s), and explain how it forms the basis for the treatment:
a. Jackson owned bonds that paid regular monthly interest. He contacted the bank and requested that the next $5,000 worth of interest payment checks be made out to and directly mailed to his son. Jackson is taxed on the $5,000 of interest, even though he never actually received the interest.

b. Joan's barn on her ranch was destroyed by a tornado. The barn had an adjusted basis of $24,000. Joan received insurance proceeds of $35,000 and built a new barn costing $40,000. Joan does not have to recognize the gain realized on the barn in the current period.

c. Elvis borrowed $30,000 from University Credit Union to purchase a new car. He is not taxed on the receipt of the $30,000.

Answer 1

Answer(a)

The statement is suggested by the assignment of income doctrine. The reason is Mr.Jackson owns the bonds still so he is taxable on the interest which actually received..

Answer(b)

This statement is based on wherewithal to pay concept. The destroyed barn result as a gain of $11,000(35,000-24,000). But Joan could not recognize any gain currently because he reinvested the total amount of insurance proceeds $35,000.

He no amount is remaining to pay tax on gain.

Answer(c)

The receipts of $30,000 is settled to repay the amount borrowed by Elvis which also increase in the wealth of Elvis.

Elvis does not have a claim on rights because he has the responsibility to pay the loan.