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Exam 4: Gross Income: Concepts and Inclusions

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Question 41

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Tim and Janet were divorced. Their only marital property was a personal residence with a value of $120,000 and cost of $50,000. Under the terms of the divorce agreement, Janet would receive the house and Janet would pay Tim $15,000 each year for 5 years, or until Tim's death, whichever should occur first. Tim and Janet lived apart when the payments were made to Tim. The divorce agreement did not contain the word "alimony."

A) Tim must recognize a $35,000 [$60,000 - 1/2($50,000) ] gain on the sale of his interest in the house.
B) Tim does not recognize any income from the above transactions.
C) Janet is not allowed any alimony deductions.
D) Janet is allowed to deduct $15,000 each year for alimony paid.
E) None of these.

F) B) and C)
G) C) and E)

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Question 42

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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?

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None of Sarah's Social Security benefits...

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Question 43

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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 .

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.

The Maroon & Orange Gym, Inc., uses the accrual method of accounting. The corporation sells memberships that entitle the member to use the facilities at any time. A one-year membership costs $480 ($480/12 = $40 per month) ; a two-year membership costs $720 ($720/24 = $30 per month) . Cash payment is required at the beginning of the membership period. On July 1, 2017, the company sold a one-year membership and a two-year membership. The company should report as gross income from the two contracts:

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

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?

In the case of a person with other income of $300,000, 15% of his or her Social Security benefits received are excluded from gross 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 $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?

Freddy purchased a certificate of deposit for $20,000 on July 1, 2017. The certificate's maturity value in two years (June 30, 2019) is $21,218, yielding 3% before-tax interest.

Mike contracted with Kram Company, Mike's controlled corporation. Mike was a medical doctor and the contract provided that he would work exclusively for the corporation. No other doctor worked for the corporation. The corporation contracted to perform an operation for Rosa for $8,000. The corporation paid Mike $6,500 to perform the operation under the terms of his employment contract.

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 $1,500,000 for the damages to its goodwill.

Susan purchased an annuity for $200,000. She is to receive $18,000 each year and her life expectancy is 13 years. If Susan collects under the annuity for 14 years, the entire $18,000 received in the 14th year must be included in her gross income.

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

Barney painted his house which saved him $3,000. According to the realization requirement, Barney must recognize $3,000 of income.

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

On January 1, 2017, 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 $2,400. The taxpayer should report $1,600 of income in 2018.

Thelma and Mitch were divorced. The couple had a joint brokerage account that included stocks with a basis of $600,000 and a fair market value of $1,000,000. Under the terms of the divorce agreement, Mitch would receive the stocks and Mitch would pay Thelma $100,000 each year for 6 years, or until Thelma's death, whichever should occur first. Thelma and Mitch lived apart when the payments were made by Mitch. Mitch paid the $600,000 to Thelma over the six-year period. The divorce agreement did not contain the word "alimony." Then, Mitch sold the stocks for $1,300,000. Mitch's recognized gain from the sale is:

Mark a calendar year taxpayer, purchased an annuity for $50,000 in 2015. The annuity was to pay him $3,000 on the first day of each year, beginning in 2015, for the remainder of his life. Mark's life expectancy at the time he purchased the annuity was 20 years. In 2017 Mark developed a deadly disease, and doctors estimated that he would live for no more than 24 months.

Alvin is the sole shareholder of an S corporation that earned $200,000 in 2017 and distributed $75,000 to Alvin. Alvin must recognize $75,000 as income from the S corporation in 2017.