Exam 4: Gross Income: Concepts and Inclusions

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.

In 2018, 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 2019. The team accepted the counteroffer. Juan constructively received $3 million in 2018.

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.

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 for 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.

If the employer provides all employees with group term life insurance equal to twice the employee's annual salary, an employee with a salary of $50,000 has no gross income from the life insurance protection provided by the employer.

Jake is the sole shareholder of an S corporation that earned $60,000 in 2018. The corporation was short on cash and therefore distributed only $15,000 to Jake in 2018. Jake is required to recognize $60,000 of income from the S corporation in 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:

Jim and Nora, residents of a community property state, were married in early 2017. Late in 2017 they separated, and in 2018 they were divorced. Each earned a salary, and they received income from community owned investments in all relevant years. They filed separate returns in 2017 and 2018.

Alvin is the sole shareholder of an S corporation that earned $200,000 in 2018 and distributed $75,000 to Alvin. Alvin must recognize $75,000 as income from the S corporation in 2018.

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

A cash basis taxpayer purchased a certificate of deposit for $1,000 on July 1, 2016 that will pay $1,100 upon its maturity on June 30, 2018. The taxpayer must recognize a portion of the income in 2017.

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.

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

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

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.

Betty purchased an annuity for $24,000 in 2018. Under the contract, Betty will receive $300 each month for the rest of her life. According to the actuarial estimates, Betty will live to receive 96 payments and will receive a 3% return on her original investment.

The B & W Partnership earned taxable income of $140,000 for the year. Bryan is entitled to 50% of the profits, but Bryan withdrew only $60,000 during the year. Bryan's gross income from the partnership for the year is $60,000.

The alimony recapture rules are intended to: