Exam 4: Gross Income: Concepts and Inclusions

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.

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

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 a 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?

Terri purchased an annuity for $100,000.She was to receive $8,000 per year and her life expectancy was 20 years. She died after receiving 15 payments.Terri's final return should reflect a loss of $40,000 (5 payments not made ´ $8,000).

Teal company is an accrual basis taxpayer.On December 1, 2012, a customer paid for an item that was on hand, but the customer wanted the item delivered in early January 2013. Teal delivered the item on January 4, 2013.Teal included the sale in its 2012 income for financial accounting purposes.

Our tax laws encourage taxpayers to ____ assets that have appreciated in value and ____ assets that have declined in value.

Which of the following is not a requirement for an alimony deduction?

Sharon made a $60,000 interest-free loan to her son, Todd, who used the money to start a new business.Todd's only sources of income were $25,000 from the business and $490 of interest on his checking account.The relevant Federal interest rate was 5%.Based on the above information:

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.

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:

In the case of a below-market loan between family members, if the imputed interest rules apply, which of the following is not true?

A cash basis taxpayer purchased a certificate of deposit for $1,000 on July 1, 2012 that will pay $1,100 upon its maturity on June 30, 2014. The taxpayer must recognize a portion of the income in 2012.

Dick and Jane are divorced in 2011.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 2012, 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?

Mark is a cash basis taxpayer. He is a partner in the M&M partnership, and his share of the partnership's profits for 2012 is $90,000.Only $40,000 was distributed to him in January 2012, and this was his share of the 2011 partnership profits. None of the 2012 profits were distributed although Mark's share of the 2012 profits was $90,000.Mark's gross income from the partnership for 2012 is $40,000.

Sarah, a majority shareholder in Teal, Inc., made a $200,000 interest-free loan to the corporation.Sarah is not an employee of the corporation.

Jake is the sole shareholder of an S corporation that earned $50,000 in 2012. The corporation was short on cash and therefore distributed only $15,000 to Jake in 2012. Jake is required to recognize $15,000 of income from the S corporation in 2012.

Jessica is a cash basis taxpayer.When Jessica failed to repay a loan, the bank garnished her salary.Each week $60 was withheld from Jessica's salary and paid to the bank.Jessica is required to include the $60 each week in her gross income even though it is the creditor that benefits from the income.

Tim and Janet were divorced.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."

Freddy purchased a certificate of deposit for $20,000 on July 1, 2012.The certificate's maturity value in two years (June 30, 2014) is $21,218, yielding 3% before-tax interest.

As a general rule: