Question

Fay "hires" her four-year-old son as the office manager for her real estate firm. She deducts $20,000 annual salary paid to her sonas a business expense. The IRS disallows the deduction upon examination of Fay's tax return. Which of the following concepts or doctrines supports the position of the IRS?

Group of answer choices

all-inclusive income concept

substance-over-form doctrine

claim-of-right doctrine

entity concept

realization concept

The text stated that realized gains from certain types of transactions (e.g., like-kind exchanges) are deferred for recognition in a future period. The basis of this treatment is the

Group of answer choices

annual accounting period concept

business purpose concept

wherewithal-to-pay concept

capital recovery concept

Answer 1

Disallowance of deduction by IRS,

the IRS might have according to substance over form disallowed the deduction, as per legal concepts any expenses incurred may be deducted from the total income inorder to arrive at the taxable income. But thinking in an economic manner, as the substance over form says, 4 year old son does not have any qualifications to act as a manager. So the answer is substance over form.

The text realised gains from certain transactions are deferred for recognition in a future period, on the basis of annual accounting period concept. Because no other concept is accepting the statement. It might be on the basis that business entity will exist into the future. So the answer is annual accounting period concept.