Exam 4: Gross Income: Concepts and Inclusions

Dick and Jane are divorced in 2017. 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 2018, 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?

Your client is considering transferring $25,000 from his savings account in a local bank paying 2% interest to a bank in Mexico City fully-insured bank paying 3%. What do you advise?

In 2018 Todd purchased an annuity for $150,000. The annuity is to pay him $2,500 per month for the rest of his life. His life expectancy is 100 months. Which of the following is correct?

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).

Tim and Janet were divorced in 2018. 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."

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,

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:

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

Rhonda has a 30% interest in the capital and profits of the ABC Partnership. In the first year of the partnership, 2018, it earned $150,000. However, the partners agreed that nothing would be distributed until after the end of March 2019, before Rhonda filed her 2018 tax return. The distributions were to be delayed because it was unclear as to whether business conditions would remain good in 2019. Things were going well in 2019 and therefore the partnership distributed $30,000 to Rhonda at the end of March, as a portion of her share of the partnership's 2018 earnings. The partnership's income for 2019 was $60,000. As a result, Rhonda must recognize $30,000 of gross income in 2018 and $18,000 in 2019.

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.

An advance payment received in June 2018 by an accrual basis and calendar year taxpayer for services to be provided over a 36-month period can be spread over four tax years.

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.

The annual increase in the cash surrender value of a life insurance policy:

Gordon, an employee, is provided group term life insurance coverage equal to twice his annual salary of $125,000 per year. According to the IRS Uniform Premium Table based on Gordon's age), the amount is $12 per year for $1,000 of protection. The cost of an individual policy would be $15 per year for $1,000 of protection. Since Gordon paid nothing towards the cost of the $250,000 protection, Gordon must include in his 2018 gross income which of the following amounts?

A sole proprietorship purchased an asset for $1,000 in 2018 and its value was $1,500 at the end of 2018. In 2019, the sole proprietorship sold the asset for $1,400. The sole proprietorship realized a taxable gain of $400 in 2019 but an economic loss of $100 in 2019.

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

Teal company is an accrual basis taxpayer. On December 1, 2018, a customer paid for an item that was on hand, but the customer wanted the item delivered in early January 2019. Teal delivered the item on January 4, 2019. Teal included the sale in its 2018 income for financial accounting purposes.

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.

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.

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.