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Exam 4: Gross Income: Concepts and Inclusions

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Question 1

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With respect to income from services,which of the following is true?

A) The income is always amortized over the period the services will be rendered by an accrual basis taxpayer.
B) A cash basis taxpayer can spread the income from a 24-month service contract over the contract period.
C) If an accrual basis taxpayer sells a 36-month service contract on July 1,2015 for $3,600,the taxpayer's 2015 gross income from the contract is $600.
D) If an accrual basis taxpayer sells a 24-month service contract on July 1,2015,one-half (12/24) the income is recognized in 2016.
E) None of these.

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

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Question 2

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

A) True
B) False

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Question 3

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Terri purchased an annuity for $100,000.She was to receive $10,000 per year and her life expectancy was 20 years.She died after receiving 8 payments.Terri's final return should reflect a loss of $20,000 ($100,000 - $80,000).

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.

On January 1,Father (Dave) loaned Daughter (Debra) $100,000 to purchase a new car and to pay off college loans.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.

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.

George and Erin are divorced,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.

Turner,Inc. ,provides group term life insurance to the officers of the corporation only.Janet,a vice-president,received $450,000 of coverage for the year at a cost to Turner,Inc.of $5,600.The Uniform Premiums (based on Janet's age) are $15 a year for $1,000 protection.How much of this must Janet include in gross income this year?

The fact that the accounting method the taxpayer uses to measure income is consistent with GAAP does not assure that the method will be acceptable for tax purposes.

The financial accounting principle of conservatism is not well-suited to the task of measuring taxable income.

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?

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 $600,000 and a fair market value of $800,000.Alice is trying to decide whether to bargain to receive the bonds or the stock.She has no plans for selling the bonds or stock,whichever she receives. a.Which would you advise Alice to receive? b.From Ted's perspective,are the assets of equal value?

Margaret made a $90,000 interest-free loan to her son,Adam,who used the money to retire a mortgage on his personal residence and to buy a certificate of deposit.Adam's only income for the year is his salary of $35,000 and $1,400 interest income on the certificate of deposit.The relevant Federal interest rate is 8% compounded semiannually.The loan is outstanding for the entire year. a.​ ​ Based on the above information,what is the effect of the loan on Margaret's gross income for the year? b.​ ​ The facts are the same as above,except you discovered that Margaret had made an additional loan of $15,000 to Adam in the previous year.Adam used the funds to pay his child's private school tuition.What are the effects of the loans on Margaret's gross income?

The amount of Social Security benefits received by an individual that he or she must include in gross income:

Mark is a cash basis taxpayer.He is a partner in the M&M partnership,and his share of the partnership's profits for 2015 is $90,000.Only $40,000 was distributed to him in January 2015,and this was his share of the 2014 partnership profits.None of the 2015 profits were distributed .Mark's gross income from the partnership for 2015 is $40,000.

In some foreign countries,the tax law specifically designates the types of income items that are includible in gross income.How does this approach compare with the U.S.Internal Revenue Code (§ 61)? What is a major advantage to the approach used in the U.S.tax law?

ABC Corporation declared a dividend for taxpayers of record as of December 24,2014.The dividend checks were mailed on December 31,2014.Ed,a cash basis shareholder,received the dividend check on January 2,2015.Ed cannot delay reporting the income from the dividend until 2015.

On November 1,2015,Bob,a cash basis taxpayer,gave Dave common stock.On October 30,2015,the corporation had declared the dividend payable to shareholders of record as of November 22,2015.The dividend was paid on December 15,2015.The corporation has paid the $1,200 dividend once each year for the past ten years,during which Bob owned the stock.When Dave collected the dividend on December 15,2015:

Mark a calendar year taxpayer,purchased an annuity for $50,000 in 2013.The annuity was to pay him $3,000 on the first day of each year,beginning in 2013,for the remainder of his life.Mark's life expectancy at the time he purchased the annuity was 20 years.In 2015 Mark developed a deadly disease,and doctors estimated that he would live for no more than 24 months.

Dick and Jane are divorced in 2014.At the time of the divorce,Dick had a lawsuit pending.He had filed suit against a former employer for overtime pay.As part of a divorce agreement,Dick agreed to pay Jane one-half of the proceeds from the lawsuit.In 2015,Dick collected $250,000 from the former employer and paid Jane $125,000.What are the tax consequences for Dick receiving the $250,000 and then paying Jane the $125,000?