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Exam 4: Gross Income Concepts and Inclusions

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Question 21

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

A) True
B) False

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Question 22

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If a lottery prize winner transfers the prize to a qualified government unit or nonprofit organization,then the prize is excluded from the winner's gross income if the amount of the prize does not exceed 30% of the winner's AGI.

A) True
B) False

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Question 23

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Mark is a cash basis taxpayer.He is a partner in the M&M partnership,and his share of the partnership's profits for 2016 is $90,000.Only $40,000 was distributed to him in January 2016,and this was his share of the 2015 partnership profits.None of the 2016 profits were distributed .Mark's gross income from the partnership for 2016 is $40,000.

Ted earned $150,000 during the current year.He paid Alice,his former wife,$75,000 in alimony.Under these facts,the tax is paid by the person who benefits from the income rather than the person who earned the income.

If the employer provides all employees with group term life insurance equal to twice the employee's annual salary,an employee with a salary of $50,000 has no gross income from the life insurance protection provided by the employer.

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 is 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.]

How does the taxation of Social Security benefits differ from the taxation of an annuity purchased by the taxpayer?

When a business is operated as an S corporation,a disadvantage is that the shareholder must pay the tax on his or her share of the S corporation's income even though the S corporation did not distribute the income to the shareholder.

Alimony recapture may occur if there is a substantial decrease in the amount of the alimony payments in the second year.

Daniel purchased a bond on July 1,2016,at par of $10,000 plus accrued interest of $300.On December 31,2016,Daniel collected the $600 interest for the year.On January 1,2017,Daniel sold the bond for $10,200.

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 5 years when Turner will be age 65.

As a general rule: I. Income from property is taxed to the person who owns the property. II. Income from services is taxed to the person who earns the income. III. The assignee of income from property must pay tax on the income. IV. The person who receives the benefit of the income must pay the tax on the income.

Ralph purchased his first Series EE bond during the year.He paid $709 for a 10-year bond with a $1,000 maturity value.The yield to maturity on the bonds was 3.5%.Ralph is not required to recognize the $291 ($1,000 - $709)original issue discount until the bond matures.However,Ralph can elect to amortize the discount over the ten-year period.

Sarah,a widow,is retired and receives $20,000 interest income and dividends and $10,000 in Social Security benefits.Sarah is considering selling a stock at an $8,000 gain.What will be the increase in Sarah's gross income as a result of the sale of the stock?

The tax concept and economic concept of income are in agreement on which of the following:

The Blue Utilities Company paid Sue $2,000 for the right to lay an underground electric cable across her property anytime in the future.

On January 1,2016,Faye gave Todd,her son,a 36-month certificate of deposit she purchased December 31,2014,for $8,638.Faye gave Todd 1,000 shares of ABC,Inc. ,on December 2,2016.The certificate had a maturity value of $10,000 and the yield to maturity was 5%.On November 30,2016,ABC,Inc. ,had declared a dividend of $1.00 payable to stockholders of record on December 5th.How much interest and dividends should Todd include in his gross income for 2016?

Rhonda has a 30% interest in the capital and profits of the ABC Partnership.In the first year of the partnership,2016,it earned $150,000.However,the partners agreed that nothing would be distributed until after the end of March 2017,before Rhonda filed her 2016 tax return.The distributions were to be delayed because it was unclear as to whether business conditions would remain good in 2017.Things were going well in 2017 and therefore the partnership distributed $30,000 to Rhonda at the end of March,as a portion of her share of the partnership's 2016 earnings.The partnership's income for 2017 was $60,000.As a result,Rhonda must recognize $30,000 of gross income in 2016 and $18,000 in 2017.

Father made an interest-free loan of $25,000 to Son who used the money to buy an SUV.Son had $1,600 interest income from a certificate of deposit for the year.Father is not required to impute interest income.

Paula transfers stock to her former spouse,Fred.The transfer is pursuant to a divorce agreement.Paula's cost of the stock was $75,000 and its fair market value on the date of the transfer is $95,000.Fred later sells the stock for $100,000.Fred's recognized gain from the sale of the stock is $5,000.