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Exam 4: Gross Income

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Question 31

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In the case of a zero interest below-market loan by a corporation to a shareholder-employee, what difference does it make to the corporation and the shareholder whether the loan is characterized as a corporation's loan to its shareholder or a corporation's loan to its employee?

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Imputed interest on the loan to an emplo...

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Question 32

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Hazel, a solvent individual but a recovering alcoholic, embezzled $6,000 from her employer.In the same year that she embezzled the funds, her employer discovered the theft.Her employer did not fire her and told her she did not have to repay the $6,000 if she would attend Alcoholics Anonymous.Hazel met the conditions and her employer canceled the debt.

A) Hazel did not realize any income because her employer made a gift to her.
B) Hazel must include $6,000 in gross income from discharge of indebtedness.
C) Hazel must include $6,000 in gross income under the tax benefit rule.
D) Hazel may exclude the $6,000 from gross income because the debt never existed.
E) None of these.

F) A) and B)
G) None of the above

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Question 33

Multiple Choice

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

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

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

Judy is a cash basis attorney.In 2017, she performed services in connection with the formation of a corporation and received stock with a value of $4,000 for her services.By the end of the year, the value of the stock had decreased to $2,000.She continued to hold the stock.Judy must recognize $4,000 of gross income from the stock for 2017.

Jessica is a cash basis taxpayer.When Jessica failed to repay a loan, the bank garnished her salary.Each week $60 was withheld from Jessica's salary and paid to the bank.Jessica is required to include the $60 each week in her gross income even though it is the creditor that benefits from the income.

When stock is sold after the date of declaration but before the record date, the buyer must recognize as income the dividend declared.

In 2017, Juan, a cash basis taxpayer, was offered $3 million for signing a professional baseball contract.He counter offered that he would receive $900,000 per year for 4 years beginning in 2018.The team accepted the counteroffer.Juan constructively received $3 million in 2017.

Iris collected $150,000 on her deceased husband's life insurance policy.The policy was purchased by the husband's employer under a group policy.Iris's husband had included $5,000 in gross income from the group term life insurance premiums during the years he worked for the employer.She elected to collect the policy in 10 equal annual payments of $18,000 each.

The purpose of the tax rules that apply to below-market loans between family members is to:

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.Roy 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% the factor is 1.5981, which alternative should Roy choose?

On December 1, 2017, Daniel, an accrual basis taxpayer, collects $12,000 rent for December 2017 and $12,000 for January 2018.Daniel must include the $24,000 in 2017 gross income.

Zack was the beneficiary of a life insurance policy on his wife.Zack had paid $20,000 in premiums on the policy.He collected $50,000 on the policy when his wife died from a terminal illness.Because it took several months to process the claim, the insurance company paid Zack $53,000, the face amount of the policy plus $3,000 interest.Zack must include $23,000 in his gross income.

Margaret owns land that appreciates at the rate of 10% each year.Ralph owns a zero coupon (i.e., all of the interest is paid at maturity but is taxed annually) corporate bond with a yield to maturity of 10%.At the end of 10 years, the bond will mature and the land will be sold.At the end of the 10 years,

In January 2017, Tammy purchased a bond due in 24 months.The cost of the bond is $857 and its maturity value is $1,000.No interest is paid each year, but the compound interest rate on the bond is 8%.Tammy also purchased a Series EE United States Government bond for $558, with a maturity value in 10 years of $1,000.This is the only Series EE bond she has ever owned.The Series EE bond is sold to yield 6% interest.Tammy is 13 years old and has no other source of income.She is claimed as a dependent by her parents.Compute Tammy's gross income from the bond and Series EE bond for 2017 .

On a particular Saturday, Tom had planned to paint a room in his house, but his employer gave him the opportunity to work that day.If Tom works, he must hire a painter for $120.For Tom to have a positive cash flow from working and hiring the painter:

Turquoise Company purchased a life insurance policy on the company's chief executive officer, Joe.After the company had paid $400,000 in premiums, Joe died and the company collected the $1.5 million face amount of the policy.The company also purchased group term life insurance on all its employees.Joe had included $16,000 in gross income for the group term life insurance premiums.Joe's widow, Rebecca, received the $100,000 proceeds from the group term life insurance policy.

Harold bought land from Jewel for $150,000.Harold paid $50,000 cash and gave Jewel an 8% note for $100,000.The note was to be paid over a five-year period.When the balance on the note was $80,000, Jewel began having financial difficulties.To accelerate her cash inflows, Jewel agreed to accept $60,000 cash from Harold in final payment of the note principal.

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 the above information: