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Exam 4: Gross Income: Concepts and Inclusions

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Question 51

Multiple Choice

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Our tax laws encourage taxpayers to ____ assets that have declined in value and ____ assets that have appreciated in value.

A) sell,keep.
B) sell,sell.
C) keep,sell.
D) keep,keep.
E) None of the above.

F) A) and D)
G) C) and E)

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Question 52

True/False

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Mabel is age 65 and lives on her Social Security benefits and gifts from her son,Fred.Fred is a full-time teacher.He has written a book and receives royalties from it.This year Fred directed the publisher to make the royalty check payable to Mabel because she needs the money for support.Mabel must include the amount of the royalty check in her gross income.

A) True
B) False

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Question 53

True/False

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The realization requirement gives an incentive to sell assets that have declined in value and to retain assets whose value has increased.

Katherine is 60 years old and is bargaining with her employer over deferred compensation.In exchange for reducing her current year's salary by $50,000,she can receive a lump-sum amount in 5 years,when she will retire.If she receives the $50,000 in the current year,she will invest in certificates of deposit that yield 5%.Katherine in the 28% marginal tax bracket in all relevant years.What is the minimum amount Katherine should accept as a deferred pay option? [Hint: the compound interest factor is 1.1934.]

Sarah,a majority shareholder in Teal,Inc. ,received a $150,000 interest-free loan from the corporation.Sarah is not an employee of the corporation.

The alimony rules:

On October 1,2010,Bob,a cash basis taxpayer,gave Dave common stock that paid a dividend of $1,000 on December 15,2010.On November 15,2010,the corporation declared the dividend payable to shareholders of record as of November 22,2010.The corporation has paid the $1,000 dividend once each year for the past ten years,during which Bob owned the stock.When Dave collected the dividend on December 15,2010:

Fred painted his house which saved him $2,000.According to the realization requirement,the taxpayer must recognize $2,000 of income.

Ted and Alice were in the process of negotiating a divorce agreement.They own bonds with a basis of $800,000 and a fair market value of $800,000.They also own common stock with a basis of $500,000 and a fair market value of $800,000.Alice is trying to decide whether to bargain to receive the bonds or the stock.Whichever of the assets she receives,she will sell it to start a new business and to purchase a house.She knows that Ted would prefer to receive the bonds,but she is not sure why. a.Why do you suppose that Ted prefers to receive the bonds? b.If Ted is bargaining to receive the bonds,what additional consideration should Alice receive?

On January 1,2010,an accrual basis taxpayer entered into a contract to provide termite inspection service each month for 36 months.The amount received for the contract was $1,800.The taxpayer should report $600 of income each year in 2010,2011,and 2012.

Mark is a cash basis taxpayer.He is a partner in the M&M partnership,and his share of the partnership's profits for 2010 is $70,000.Only $30,000 was distributed to him in January 2010,and this was his share of the 2009 partnership profits.None of the 2010 profits were distributed because the partnership needed the cash for operations.Mark's gross income from the partnership for 2010 is $70,000.

Detroit Corporation sued Chicago Corporation for intentional damage to Detroit's goodwill.Detroit had created its goodwill through providing high-quality services to its customers.Thus,no basis for the goodwill appeared on Detroit's balance sheet.The suit was settled and Detroit received $1,000,000 for the damages to its goodwill.

In all community property states,the income from property that was inherited by a spouse after the marriage is treated as if one-half is earned by each spouse.

Gordon,an employee,is provided group term life insurance coverage equal to twice his annual salary of $100,000 per year.According to the IRS Uniform Premium Table (based on Gordon's age) ,the amount is $12 per year for $1,000 of protection.The cost of an individual policy would be $15 per year for $1,000 of protection.Since Gordon paid nothing towards the cost of the $200,000 protection,Gordon must include in his 2010 gross income which of the following amounts.

On January 1,Father (Dave) loaned Daughter (Debra) $100,000 to purchase a new car.There were no other loans outstanding between Dave and Debra.The relevant Federal rate on interest was 6 percent.The loan was outstanding for the entire year.

Rachel,who is in the 35% marginal tax bracket,is considering purchasing an annuity that will pay her $10,000 per year for the remainder of her life.Her life expectancy is 15 years.The cost of the annuity is $97,120,and the cost is calculated to yield her an expected 6% return on her investment.As an alternative,Rachel could place the $97,120 in a savings account yielding 6% and she could withdraw $10,000 each year for 15 years (reducing the value of the account to zero at the end of 15 years).How might the tax laws applicable to annuities affect Rachel's decision?

Rhonda has a 30% interest in the capital and profits of the ABC Partnership.Her share of the profits for 2010 was $60,000.She withdrew $40,000 from the partnership in 2010.In January 2011,after her share of the profits for 2010 had been computed,she withdrew her remaining $20,000 share of 2010 profits.As a result,Rhonda must recognize $40,000 of gross income in 2010 and $20,000 in 2011.

A cash basis taxpayer purchased a certificate of deposit for $900 on July 1,2010 that will pay $1,000 upon its maturity on June 30,2012.The taxpayer must recognize a portion of the income in 2010.

Nicholas owned stock that decreased in value by $20,000 during the year,but he did not sell the stock.He earned $45,000 salary,but received only $34,000 because $11,000 in taxes were withheld.Nicholas saved $10,000 of his salary and used the remainder for personal living expenses.Nicholas's gross income for tax purposes exceeded his economic income for the year.

In the case of a below-market gift loan for which there is no exception to the imputed interest rules,the lender is deemed to have received interest income even though no interest is charged and collected.