Exam 4: Gross Income: Concepts and Inclusions

Harry and Wanda were married in Texas,a community property state,but moved to Virginia,a common law state.The calculation of their income on a joint return:

Under the terms of a divorce agreement,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:

Darryl,a cash basis taxpayer,gave 1,000 shares of Copper Company common stock to his daughter on September 29,2015.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 18,2015.

On December 1,2015,Daniel,an accrual basis taxpayer,collects $12,000 rent for December 2015 and $12,000 for January 2016.Daniel must include the $24,000 in 2015 gross income.

Fred is a full-time teacher.He has written a book and receives royalties from it.Fred's mother,Mabel,is age 65 and lives on her Social Security benefits and gifts from her son,Fred.This year Fred directed the publisher to make the royalty check payable to Mabel because she needs the money for support.Fred must include the amount of the royalty check in his gross income.

Jacob and Emily were co-owners of a personal residence.As part of their divorce agreement,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.

Under the terms of a divorce agreement,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):

Roy is considering purchasing land for $10,000.He expects the land to appreciate in value 8% each year (compounded) and he will sell it at the end of 10 years.He also is considering purchasing a bond for $10,000.The bond does not pay any annual interest,but will pay $21,589 at maturity in 10 years.The before-tax rate of return on the bond is 8%.Roy is in the 40% (combined Federal and State) marginal tax bracket.Roy has other investments that earn an 8% before-tax rate of return.Given that the compound interest factor at 8% is 2.1589,and at 4.8% the factor is 1.5981,which alternative should Roy choose?

Rachel owns rental properties.When Rachel rents to a new tenant,she usually requires the tenant to pay an amount in addition to the first month's rent.The additional amount serves as security for damages to the property and the tenant's failure to pay future rents.How should the payments be characterized (e.g. ,on lease documents) to minimize Rachel's current tax liability?

Travis and Andrea were divorced.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.

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

An advance payment received in June 2015 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.

Jay,a single taxpayer,retired from his job as a public school teacher in 2015.He is to receive a retirement annuity of $1,200 each month and his life expectancy is 180 months.He contributed $36,000 to the pension plan during his 35-year career;so his adjusted basis is $36,000.Jay collected 192 payments before he died.What is the correct method for reporting the pension income?

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

In 2015,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 2016.The team accepted the counteroffer.Juan constructively received $3 million in 2015.

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 2014.However,in December the partnership was short on cash and José was required to invest an additional $10,000 in the partnership.In March 2014,José received $40,000 as his share of distributed 2013 profits.The partnership earnings before partners' withdrawals for 2014 totaled $1 million.Compute José's gross income from the partnership for 2014.

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,

On a particular Saturday,Tom had planned to paint a room in his house,but his employer gave him the opportunity to work that day.If Tom works,he must hire a painter for $120.For Tom to have a positive cash flow from working and hiring the painter:

Alimony recapture may occur if there is a substantial decrease in the amount of the alimony payments in the second year.

The purpose of the tax rules that apply to below-market loans between family members is to: