1.The definition of gross income in the tax law is: A. All items specifically listed as income in the tax law B. All cash payments received for goods provided and services performed C. All income from whatever source derived D. All income from whatever source derived unless the income is earned illegally
1.The definition of gross income in the tax law is:
A. All items specifically listed as income in the tax law
B. All cash payments received for goods provided and services performed
C. All income from whatever source derived
D. All income from whatever source derived unless the income is earned illegally
2.Which of the following is not taxable for income tax purposes?
 A.Prizes
B.Severance pay
C.Gifts
D.Partnership income
E.All of the above are taxable
3.All of the following items are taxable to the taxpayer receiving them, except:
A.Life insurance proceeds
B.Unemployment compensation
C.Embezzled funds
D.Prizes
E.Gambling winnings
The Correct Answer and Explanation is:
Correct Answers:
- C. All income from whatever source derived
- C. Gifts
- A. Life insurance proceeds
Explanation
Question 1:
The correct definition of gross income under U.S. tax law (as per IRC §61) is “all income from whatever source derived,” which is option C. This broad definition includes all types of income—cash, property, or services—unless a specific exclusion applies. It covers wages, interest, dividends, rents, royalties, and other gains. The law is intentionally comprehensive to ensure that taxpayers report virtually all forms of income, whether earned legally or illegally. This makes option D incorrect, since illegal income is also taxable.
Question 2:
The only item listed in the question that is not taxable is C. Gifts. Gifts received are generally excluded from gross income under IRC §102(a), provided they are truly given out of generosity and not as compensation. However, the donor might be subject to gift tax depending on the value of the gift.
- Prizes and severance pay are taxable because they are considered windfalls or compensation.
- Partnership income is also taxable to partners, who must report their share of the partnership’s income, whether or not it is distributed (per pass-through taxation rules).
So, only gifts are not taxable among the options listed.
Question 3:
A. Life insurance proceeds are typically not taxable when received due to the death of the insured (IRC §101(a)). The beneficiary receives these proceeds tax-free unless the policy was transferred for valuable consideration or interest accrues post-death.
In contrast:
- Unemployment compensation is taxable.
- Embezzled funds, though illegally obtained, are still taxable (per James v. United States, 1961).
- Prizes and gambling winnings are taxable as “other income.”
Therefore, life insurance proceeds are the correct exclusion in this case.
