Exam 4: Gross Income: Concepts and Inclusions

Linda delivers pizzas for a pizza shop.On Wednesday,December 31,2015,Linda made several deliveries and collected $400 from customers.However,Linda forgot to turn in the proceeds for the day to her employer until the following Friday,January 2,2016.The pizza shop owner recognizes the income of $400 when he receives it from Linda in 2016.

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 Green Company,an accrual basis taxpayer,provides business-consulting services.Clients generally pay a retainer at the beginning of a 12-month period.This entitles the client to no more than 40 hours of services.Once the client has received 40 hours of services,Green charges $500 per hour.Green Company allocates the retainer to income based on the number of hours worked on the contract.At the end of the tax year,the company had $50,000 of unearned revenues from these contracts.The company also had $10,000 in unearned rent income received from excess office space leased to other companies.Based on the above,Green must include in gross income for the current year:

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 31,2015,the accrued interest on the bond was $100.On December 31,2015,Brent collected $400 interest on the bond.Brent must include in gross income the $300 interest earned after the date of the gift.

As a general rule: I. Income from property is taxed to the person who owns the property. II. Income from services is taxed to the person who earns the income. III. The assignee of income from property must pay tax on the income. IV. The person who receives the benefit of the income must pay the tax on the income.

Office Palace,Inc. ,leased an all-in-one printer to a new customer,Ashley,on December 27,2015.The printer was to rent for $600 per month for a period of 36 months beginning January 1,2016.Ashley was required to pay the first and last month's rent at the time the lease was signed.Ashley was also required to pay a $1,500 damage deposit.Office Palace must recognize as income for the lease:

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

Norma's income for 2015 is $27,000 from part-time work and $9,000 of Social Security benefits.Norma is not married.A portion of her Social Security benefits must be included in her gross income.

Theresa,a cash basis taxpayer,purchased a bond on July 1,2011,for $10,000,plus $400 of accrued interest.The bond paid $800 of interest each December 31.On March 31,2015,she sold the bond for $9,800,which included $200 of accrued interest.

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.

Under the terms of a divorce agreement,Lanny was to pay his wife Joyce $2,000 per month in alimony and $500 per month in child support.For a twelve-month period,Lanny can deduct from gross income (and Joyce must include in gross income):

Alvin is the sole shareholder of an S corporation that earned $200,000 in 2015 and distributed $75,000 to Alvin.Alvin must recognize $75,000 as income from the S corporation in 2015.

In the case of a gift loan of less than $100,000,the imputed interest rules apply if the donee has net investment income of over $1,000.

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.

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:

Under the alimony rules:

Under the original issue discount (OID) rules as applied to a three-year certificate of deposit:

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.

On January 1,2015,Faye gave Todd,her son,a 36-month certificate of deposit she purchased December 31,2013,for $8,638.Faye gave Todd 1,000 shares of ABC,Inc. ,on December 2,2015.The certificate had a maturity value of $10,000 and the yield to maturity was 5%.On November 30,2015,ABC,Inc. ,had declared a dividend of $1.00 payable to stockholders of record on December 5th.How much interest and dividends should Todd include in his gross income for 2015?

Ralph purchased his first Series EE bond during the year.He paid $709 for a 10-year bond with a $1,000 maturity value.The yield to maturity on the bonds was 3.5%.Ralph is not required to recognize the $291 ($1,000 - $709) original issue discount until the bond matures.However,Ralph can elect to amortize the discount over the ten-year period.