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Exam 4: Gross Income: Concepts and Inclusions

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Question 1

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

A) The fair rental value of an owner-occupied home should be included in income.
B) The increase in value of assets held for the entire year should be included in income for the year.
C) Rent income for 2019 collected in 2018 is income for 2018.
D) All of these.

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

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Question 2

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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.

A) True
B) False

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Question 3

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Travis and Andrea were divorced in 2016. Their only marital property consisted of a personal residence (fair market value of $400,000, cost of $200,000) , and publicly-traded stocks (fair market value of $800,000, cost basis of $500,000) . Under the terms of the divorce agreement, Andrea received the personal residence and Travis received the stocks. In addition, Andrea was to receive $50,000 for eight years. I. If the $50,000 annual payments are to be made to Andrea or her estate (if she dies before the end of the eight years) , the payments will qualify as alimony. II. Andrea has a taxable gain from an exchange of her one-half interest in the stocks fo Travis' one-half interest in the house and cash. III. If Travis sells the stocks for $900,000, he must recognize a $400,000 gain.

On November 1, 2018, Bob, a cash basis taxpayer, gave Dave common stock. On October 30, 2018, the corporation had declared the dividend payable to shareholders of record as of November 22, 2018. The dividend was paid on December 15, 2018. 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, 2018:

Ted earned $150,000 during the current year. He paid Alice, his former wife, $75,000 in alimony. The couple divorced in 2016. Under these facts, the tax is paid by the person who benefits from the income rather than the person who earned the income.

José, a cash method taxpayer, is a partner in J&T Accounting Services, a calendar year partnership. Under the partnership agreement, José is to receive 20% of the partnership's profits or losses. Each partner is allowed to withdraw $10,000 each month for his or her living expenses. José withdrew $120,000 during the year as his monthly draw in 2018. However, in December the partnership was short on cash and José was required to invest an additional $10,000 in the partnership. In March 2018, José received $40,000 as his share of distributed 2017 profits. The partnership earnings before partners' withdrawals for 2018 totaled $1 million. Compute José's gross income from the partnership for 2018.

In January 2018, 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 2018.

Under the terms of a divorce agreement entered into in 2017, Ron is to pay his former wife Jill $10,000 per month. The payments are to be reduced to $7,000 per month when their 15 year-old child reaches age 18. During the current year, Ron paid $120,000 under the agreement. Assuming all of the other conditions for alimony are satisfied, Ron can deduct from gross income (and Jill must include in gross income) as alimony:

Under the alimony rules:

Darryl, a cash basis taxpayer, gave 1,000 shares of Copper Company common stock to his daughter on September 29, 2018. Copper Company is a publicly held company that has declared a $2.00 per share dividend on September 30th every year for the last 20 years. Just as Darryl had expected, Copper Company declared a $2.00 per share dividend on September 30th, payable on October 15th, to stockholders of record as of October 10th. The daughter received the $2,000 dividend on October 18, 2018.

The effects of a below-market loan for $100,000 made by a corporation to its chief executive officer as an enticement to get him to remain with the company are:

Samantha and her son, Brent, are cash basis taxpayers. Samantha gave Brent a corporate bond with a face amount and fair market value of $10,000. On the date of the gift, March 31, 2018, the accrued interest on the bond was $100. On December 31, 2018, Brent collected $400 interest on the bond. Brent must include in gross income the $300 interest earned after the date of the gift.

In 2008, Terry purchased land for $150,000. In 2018, Terry received $10,000 from a local cable television company in exchange for Terry allowing the company to run an underground cable across Terry's property. Terry is not required to recognize income from receiving the $10,000 because it was a return of his capital invested in the land.

Jacob and Emily were co-owners of a personal residence. As part of their divorce agreement entered into in 2016, Emily paid Jacob cash for his interest in the personal residence. This cash payment results in a taxable gain to Jacob if he receives more cash than his share of the cost of the residence.

Debbie is age 67 and unmarried and her only sources of income are $200,000 in taxable interest and $20,000 of Social Security benefits. Debbie's adjusted gross income for the year is:

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.

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.

Thelma and Mitch were divorced in 2017. 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:

ABC Corporation declared a dividend for taxpayers of record as of December 24, 2017. The dividend checks were mailed on December 31, 2017. Ed, a cash basis shareholder, received the dividend check on January 2, 2018. Ed cannot delay reporting the income from the dividend until 2018.

Under the terms of a divorce agreement entered into in 2018, Kim was to pay her husband Tom $7,000 per month in alimony. Kim's payments will be reduced to $3,000 per month when their 9 year-old son becomes 21. The husband has custody of their son. For a twelve-month period, Kim can deduct from gross income (and Tom must include in gross income) :