Exam 2: Income Tax Concepts

Nancy owns a truck she uses personally. It cost her $18,000 two years ago. Doug offers Nancy $19,000 for the truck. What would be the tax effects if the transaction is completed this year? I.Nancy will realize a capital gain of $1,000 due to the capital recovery concept. II.Nancy must recognize income of $19,000 due to the all-inclusive-income concept. III.Nancy must recognize a capital gain of $1,000 on her current-year tax return because there is no legislative provision to exclude this gain. IV.Nancy will recognize no gain on her tax return due to lack of business purpose with the automobile. ​

Samuel owns some land, which has an oil deposit underneath it. His annual royalties vary from $50,000 to $60,000. Because Samuel is in the highest marginal tax rate bracket, he would like to have some (or all) of the royalty income taxed to his son, Jack, thus lowering the overall tax on the royalty income. To do this I.Samuel can gift part of the land to Jack. II.Samuel can gift part of each year's royalties to Jack. ​

Explain the similarities and differences of the Claim of Right doctrine and the Constructive Receipt doctrine.

Lauren owns an annuity that pays her $400 per month until she dies. Which of the following income tax concepts provides for the tax treatment of the annuity payments Lauren receives? I.Annual Accounting Period Concept. II.All-inclusive Income Concept. III.Constructive Receipt Doctrine. IV.Capital Recovery Concept. ​

Match each statement with the correct term below. -Administrative Convenience

Alexis, a cash basis contractor, builds a storage building for Jones. The building is completed, and the bill is given to Jones. Jones pays $60,000 in 2018. Subsequently, Jones files suit for damages based on alleged faulty construction. Alexis required to recognize $60,000 of income in 2018 based upon I.Constructive Receipt Doctrine. II.Claim-of-right Doctrine. ​

Match each statement with the correct term below. -Claim of Right Doctrine

Alfred is a consultant for Data Planners. In an effort to minimize his tax liability he enters into a legal contract transferring 25% of the fees from a new consulting contract to his son Ken, who is 42, and owns a pest control business. Which of the following statements concerning the transaction is correct? I.The assignment-of-income doctrine prevents Alfred from transferring taxation of the income to his son. II.The assignment-of- income doctrine does not apply because the transfer is supported by a legal contract. ​

Betty is a house painter and owns Trim Beautiful Painting Company. Last month she painted the lake cottage of Anne, a local attorney who performed some litigation work for Betty to help in some delinquent bill collection. The painting, valued at $1,000, was done in exchange for the litigation work. Neither party charged fees. What should be the tax consequences of these events? I.Anne reports $1,000 of income when the painting is completed. II.No cash was received. Therefore, neither party reports income. III.Neither individual reports income because there is no reporting of the event to the IRS. IV.Both parties report income because there is no exclusion for barter transactions.. ​

Tim purchased State of Idaho general-purpose bonds at a cost of $3,400 in 2016. He receives $170 interest on the bonds in 2016, 2017, and 2018. In 2018, he sells the bonds for $3,800. Tim excludes the bond interest, but must include a $400 capital gain in his 2018 gross income. Which of the following Concepts, Constructs, and/or Doctrines help in forming the basis for this treatment? I.Constructive Receipt Doctrine. II.All-inclusive Income Concept. ​

Laurie's Lawn Service, Inc., purchases a heavy-duty tri-cut lawn mower on March 17, 2018, for $5,500. Under a special election, Laurie's expenses the $5,500 cost of the lawn mower in 2018. In July, a tire on the lawn mower is repaired at a cost of $450. Maintenance costs on the lawn mower for 2018 total $175. What is Laurie's basis in the lawn mower at the end of 2018?

Match each term with the correct statement below. -Assignment of Income

Sandra sells a business-use warehouse to her wholly owned corporation. Sandra realizes a loss of $13,000 on the sale. (Sales price, $102,000, less adjusted basis, $115,000). Tax law does not permit Sandra a deduction for the $13,000 loss. Which of the following explain(s) this tax result? I.Arm's-length Transaction Concept. II.Pay-As-You-Go Concept. III.Legislative Grace Concept IV.Business Purpose Concept. ​

Match each statement with the correct term below. -All-Inclusive Income Concept

The Nadal Company mails its annual dividend check on December 31. Even when the shareholders receive their check in the following year, they must report the income in the year the check was written and mailed.

The ability-to-pay concept is fundamental to the income tax structure. Constructs used to implement this concept include I.Deductions II.Progressive tax rates III.Exclusions IV.Business losses ​

Carlota sells her personal automobile for $1,000. The car cost her $10,000 nine years ago. What are the tax effects of the current sale? I.Carlota realizes a transaction loss of $9,000 due to the capital recovery concept. II.Carlota realizes income of $1,000 due to the all-inclusive-income concept. ​

Match each statement with the correct term below. -Tax Benefit Rule

Match each statement with the correct term below. -Ability-to-Pay Concept

During the current year, Trane invests $35,000 in each of two separate corporations. Each investment gives him a 20% ownership interest. Brazil Corporation is a regular corporation that has taxable income of $200,000 and pays dividends totaling $50,000. China Corporation is an S corporation that has taxable income of $100,000 and pays $50,000 of dividends. As a result of these two investments, Trane I.Has $40,000 of taxable income from Brazil Corporation. II.Has $20,000 of taxable income from China Corporation. ​