Exam 4: Gross Income: Concepts and Inclusions

The alimony recapture rules are intended to:

Maroon Corporation expects the employees' income tax rates to increase next year. The employees use the cash method. The company presently pays on the last day of each month. The company is considering changing its policy so that the December salaries will be paid on the first day of the following year. What would be the effect on an employee of the proposed change in company policy for paying its salaries beginning December 2017?

Betty purchased an annuity for $24,000 in 2017. 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.

At the beginning of 2017, Mary purchased a 3-year certificate of deposit (CD) for $8,760. The maturity value of the certificate was $10,000 and it was to yield 4.5%. She also purchased a Series EE bond for $6,400 with a maturity value in 10 years of $10,000. Mary must recognize $1,240 of income from the certificate of deposit in 2017, and $3,600 from the Series EE bonds in 2026.

The constructive receipt doctrine requires that income must be recognized when it is made available to the cash basis taxpayer, although it has not been actually received. The constructive receipt doctrine does not apply to accrual basis taxpayers.

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

After the divorce, Jeff was required to pay $18,000 per year to his former spouse, Darlene, who had custody of their child. Jeff's payments will be reduced to $12,000 per year in the event the child dies or reaches age 21. During the year, Jeff paid the $18,000 required under the divorce agreement. Darlene must include the $12,000 in gross income.

Katherine is 60 years old and is bargaining with her employer over deferred compensation. In exchange for reducing her current year's salary by $50,000, she can receive a lump-sum amount in 5 years, when she will retire. If she receives the $50,000 in the current year, she will invest in certificates of deposit that yield 5%. Katherine is in the 28% marginal tax bracket in all relevant years. What is the minimum amount Katherine should accept as a deferred pay option? [Hint: the compound interest factor is 1.1934.]

Determine the proper tax year for gross income inclusion in each of the following cases. a.An automobile dealer has several new cars in inventory, but often does not have the right combination of body style, color, and accessories. In some cases the dealer makes an offer to sell a car at a certain price, accepts a deposit, and then orders the car from the manufacturer. When the car is received from the manufacturer, the sale is closed, and the dealer receives the balance of the sales price. At the end of the current year, the dealer has deposits totaling $8,200 for cars that have not been received from the manufacturer. When is the $8,200 subject to tax? b.Purple Corporation, an exterminating company, is a calendar year taxpayer. It contracts to provide service to homeowners once a month under a one-, two-, or three-year contract. On April 1 of the current year, the company sold a customer a one-year contract for $120. How much of the $120 is taxable in the current year if the company is an accrual basis taxpayer. If the $120 is payment on a two-year contract, how much is taxed in the year the contract is sold and in the following year? If the $120 is payment on a three-year contract, how much is taxed in the year the contract is sold and in the following year? c.Pink, Inc., an accrual basis taxpayer, owns an amusement park whose fiscal year ends September 30. To increase business during the fall and winter months, Pink sold passes that would allow the holder to ride "free" during the months of October through March. During the month of September, $6,000 was collected from the sale of passes for the upcoming fall and winter. When will the $6,000 be taxable to Pink? d.The taxpayer is in the office equipment rental business and uses the accrual basis of accounting. In December he collected $5,000 in rents for the following January. When is the $5,000 taxable?

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

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

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):

Jim and Nora, residents of a community property state, were married in early 2016. Late in 2016 they separated, and in 2017 they were divorced. Each earned a salary, and they received income from community owned investments in all relevant years. They filed separate returns in 2016 and 2017.

In the case of a zero interest below-market loan by a corporation to a shareholder-employee, what difference does it make to the corporation and the shareholder whether the loan is characterized as a corporation's loan to its shareholder or a corporation's loan to its employee?

In all community property states, the income from property that was inherited by a spouse after the marriage is treated as all earned by the spouse who inherited the property.

Orange Cable TV Company, an accrual basis taxpayer, allows its customers to pay by the year in advance ($500 per year), or two years in advance ($950). In September 2017, the company collected the following amounts applicable to future services: As a result of the above, Orange Cable should report as gross income:

Father made an interest-free loan of $25,000 to Son who used the money to buy an SUV. Son had $1,600 interest income from a certificate of deposit for the year. Father is not required to impute interest 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 2017. However, in December the partnership was short on cash and José was required to invest an additional $10,000 in the partnership. In March 2017, José received $40,000 as his share of distributed 2016 profits. The partnership earnings before partners' withdrawals for 2017 totaled $1 million. Compute José's gross income from the partnership for 2017.

Wayne owns a 30% interest in the capital and profits of Emerald Company (a calendar year partnership). For tax year 2017, the partnership earned revenue of $900,000 and had operating expenses of $660,000. During the year, Wayne withdrew from the partnership a total of $90,000. He also invested an additional $30,000 in the partnership. For 2017, Wayne's gross income from the partnership is:

In 2007, Terry purchased land for $150,000. In 2017, 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.