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Exam 4: Gross Income: Concepts and Inclusions

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Question 41

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ABC Corporation declared a dividend for taxpayers of record as of December 24, 2018. The dividend checks were mailed on December 31, 2018. Ed, a cash basis shareholder, received the dividend check on January 2, 2019. Ed cannot delay reporting the income from the dividend until 2019.

A) True
B) False

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Question 42

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The constructive receipt doctrine requires that income be recognized when it is made available to the cash basis taxpayer, although it has not been actually received. The constructive receipt doctrine does not apply to accrual basis taxpayers.

A) True
B) False

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Question 43

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Harry and Wanda were married in Texas, a community property state, but moved to Virginia, a common law state. The calculation of their income on a joint return:

Determine the proper tax year for gross income inclusion in each of the following cases. a. A cash basis landlord makes new tenants pay first and last month's rent at the start of the lease. How does the landlord report these items? Purple Corporation, an exterminating company, is a calendar year taxpayer. It contracts to b. provide service to homeowners once a month under a one-, two-, or three-year contract. For financial reporting purposes, Purple reports the income ratably over the months of the contract. On April 1 of the current year, the company sold a customer a one-year contract for $120. How much of the $120 is taxable in the current and subsequent years if the company is an accrual basis taxpayer? If the $120 is payment on a two-year contract, how much is taxed in the year the contract is sold and in the following years? If the $120 is payment on a three-year contract, how much is taxed in the year the contract is sold and in the following years? c. Pink, Inc., an accrual basis taxpayer, owns an amusement park whose fiscal year ends September 30. To increase business during the fall and winter months, Pink sold passes that would allow the holder to ride "free" during the months of October through March. During the month of September, $6,000 was collected from the sale of passes for the upcoming fall and winter. When will the $6,000 be taxable to Pink? d. A taxpayer is in the office equipment rental business and uses the accrual basis of accounting. In December he collected $5,000 in rents for the following January. When is the $5,000 taxable?

Tom, a cash basis taxpayer, purchased a bond on March 31 for $10,000, plus $100 accrued interest. In December, he collected $500 interest from the bond. Tom's interest income from the bond for the year is $500.

José, a cash method taxpayer, is a partner in J&T Accounting Services, a calendar year partnership. Under the partnership agreement, José is to receive 20% of the partnership's profits or losses. Each partner is allowed to withdraw $10,000 each month for his or her living expenses. José withdrew $120,000 during the year as his monthly draw in 2019. However, in December, the partnership was short on cash and José was required to invest an additional $10,000 in the partnership. In March 2019, José received $40,000 as his share of distributed 2018 profits. The partnership earnings before partners' withdrawals for 2019 totaled $1 million. Compute José's gross income from the partnership for 2019.

An advance payment received in June 2019 by an accrual basis and calendar year taxpayer for services to be provided over a 36-month period can be spread over four tax years.

Under the alimony rules:

Turner, a successful executive, is negotiating a compensation plan with his potential employer. The employer has offered to pay Turner a $600,000 annual salary, payable at the rate of $50,000 per month. Turner counteroffers to receive a monthly salary of $40,000 ($480,000 annually) and a $180,000 bonus in five years when Turner will be age 65.

Under the original issue discount (OID) rules as applied to a three-year certificate of deposit:

Teal company is an accrual basis taxpayer. On December 1, 2019, a customer paid for an item that was on hand, but the customer wanted the item delivered in early January 2020. Teal delivered the item on January 4, 2020. Teal included the sale in its 2019 income for financial accounting purposes.

Under the terms of a divorce agreement entered into in 2017, Lanny was to pay his wife Joyce $2,000 per month in alimony and $500 per month in child support. For a 12-month period, Lanny can deduct from gross income (and Joyce must include in gross income) :

Travis and Andrea were divorced in 2017. Their only marital property consisted of a personal residence (fair market value of $400,000, cost of $200,000) , and publicly traded stocks (fair market value of $800,000, cost basis of $500,000) . Under the terms of the divorce agreement, Andrea received the personal residence and Travis received the stocks. In addition, Andrea was to receive $50,000 for eight years. I. If the $50,000 annual payments are to be made to Andrea or her estate (if she dies before the end of the eight years) , the payments will qualify as alimony. II. Andrea has a taxable gain from an exchange of her one-half interest in the stocks for Travis' one-half interest in the house and cash. III. If Travis sells the stocks for $900,000, he must recognize a $400,000 gain.

Jerry purchased a U.S. Series EE savings bond for $744. The bond has a maturity value in 10 years of $1,000 and yields 3% interest. This is the first Series EE bond that Jerry has ever owned.

George and Erin divorced in 2020, and George is required to pay Erin $20,000 of alimony each year. George earns $75,000 a year. Erin is required to include the alimony payments in gross income although George earned the income.

Roy is considering purchasing land for $10,000. He expects the land to appreciate in value 8% each year (compounded), and he will sell it at the end of 10 years. He also is considering purchasing a bond for $10,000. The bond does not pay any annual interest but will pay $21,589 at maturity in 10 years. The before-tax rate of return on the bond is 8%. Roy is in the 40% (combined Federal and state) marginal tax bracket. He has other investments that earn an 8% before-tax rate of return. Given that the compound interest factor at 8% is 2.1589 and at 4.8% is 1.5981, which alternative should Roy choose?

Jacob and Emily were co-owners of a personal residence. As part of their divorce agreement entered into in 2017, Emily paid Jacob cash for his interest in the personal residence. This cash payment results in a taxable gain to Jacob if he receives more cash than his share of the cost of the residence.

The alimony recapture rules are intended to:

Sharon made a $60,000 interest-free loan to her son, Todd, who used the money to start a new business. Todd's only sources of income were $25,000 from the business and $490 of interest on his checking account. The relevant Federal interest rate was 5%. Based on this information:

In 2019, Juan, a cash basis taxpayer, was offered $3 million for signing a professional baseball contract. He counteroffered that he would receive $900,000 per year for four years beginning in 2020. The team accepted the counteroffer. Juan constructively received $3 million in 2019.