Exam 2: Income Tax Concepts

Duncan purchased State of Wisconsin 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. Duncan 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.Capital Recovery Concept. II.Legislative Grace Concept. ​

In which of the following will the Constructive Receipt Doctrine require reporting income in 2018? I.Cornell's December 2018 salary check is withheld until January 15, 2019, because the employer does not have sufficient cash to cover its December payroll. II.Donnie is an employee of Holt Corporation. The corporation regularly mails payroll checks to employees to arrive on or before the last day of each month. Donnie's check arrives in the mail at his house on December 31, 2018. However, Donnie was vacationing in Cancun and did not return until January 8, 2019. Donnie deposited the check into his account the next day. III.In December 2018, Cory signs a contract to play basketball for the Rhythms. He receives a signing bonus of $2,000,000 to be paid over 5 years beginning in 2019. His regular salary of $800,000 will be paid monthly during the season that begins in 2019. ​

No income is taxed until the taxpayer is allowed the return of the original investment due to the

Match each statement with the correct term below. -Business Purpose Concept

Match each statement with the correct term below. -Realization

Jerome, a self-employed attorney, is scrambling around to recalculate his estimated 2018 income tax liability, because he needs to mail his third quarter estimated tax payment tomorrow (September 15, 2018). What concept, construct, or doctrine is causing Jerome to scramble?

Sidney owns unimproved land in Chicago, Illinois. In 2008, Sidney leased the land for 10 years to the U-Store-It Storage Company. The lease terms require annual lease payments of $12,000 that are paid at the beginning of each year. U-Store-It immediately constructed a storage facility on the leased land. The storage facility building was worth $105,000 when it was constructed. In 2018, the lease expires and legal ownership of the building reverts to Sidney. The building is worth $125,000 when the lease expires. Sidney has reported the lease income annually, but will not report any income from the improvements the lessee made to the building. Explain in terms of the income tax concepts why Sidney has reported his income in this manner.

The primary difference(s) between the claim-of-right doctrine and the constructive receipt doctrine is/are I.Claim of right applies when the taxpayer has not yet physically received an item of income. II.Constructive receipt applies after the taxpayer has received an item of income. ​

Susan purchased a lot for investment purposes. She paid $10,000 for the lot. Three years later she sold the lot to her daughter for $8,000. Susan cannot deduct the loss due to

Margarita, a single individual, has $2,000 in state taxes withheld from her salary in 2018. Her total itemized deductions are $13,500. She claims the $2,000 as an itemized deduction on her 2018 tax return. In 2019, she receives a state income tax refund of $400. Under the tax benefit rule she has to report income in 2019 of

Wintrop has $4,000 of state income taxes withheld from his salary during 2017. On his 2017 income tax return, Wintrop properly deducts the $4,000 as state taxes paid. Upon filing his 2017 state tax return on April 15, 2018, he determines that his actual State income tax for 2017 is only $3,300. He receives a $700 refund on May 25, 2018 from the amounts withheld by the state. What concept(s), construct(s), or doctrine(s) dictate that the $700 is included in Wintrop's 2018 income? I.Claim of Right Doctrine. II.Constructive Receipt Doctrine. ​

Derek Builders, LLC, entered into a contract to do extensive remodeling work on Helen's house in October 2018. The bid cost of the job was $5,000 and Helen made a down payment of $2,000 in November 2018. Because Helen was short of cash, Derek agreed to accept payment of the remaining $3,000 when she receives her tax refund in 2019. Derek completed the work on the contract in December. Helen dies in May 2019 before she had paid Derek. Because Helen was heavily in debt when she died, the executor of Helen's estate told Derek that he would be lucky to get $1,000 when the estate was settled. a.Derek Builders uses the accrual method of accounting. Based on the income tax concepts, explain how Derek should account for the contract. b.In 2020, Derek Builders receives $1,500 from Helen's estate as final payment on the $3,000 amount owed. Based on the income tax concepts, explain how Derek should treat the $1,500 receipt in 2020.?

Sidney, a cash basis contractor, builds an apartment building for Jerry. The building is completed, and the bill is given to Jerry. Jerry pays $200,000 (1/4 of the bill) in 2018. Subsequently, Jerry files suit for damages based on alleged faulty construction. Sidney is required to recognize $200,000 of income in 2018 based upon I.Constructive Receipt Doctrine. II.Claim-of-Right Doctrine. III.Realization Concept. IV.Tax Benefit Rule. ​

Which of the following is/are based on an ability-to-pay concept? I.A flat tax . II.Johson City charges all households a flat fee of $25 per month for water usage. III.Boone County recently established Route 89 as a toll road. All cars traveling from East Johnson City to Appleton pay $1. ​

Rachel paid $1,000 for supplies in 2017. In 2018, the vendor finds a $200 mistake on the invoice and refunds the overpayment to Rachel. Which of the following doctrines or concepts is the least helpful in determining how the 2018 transaction should be reported for tax purposes?

Under the pay-as-you-go concept, the tax base used to compute the taxpayer's income tax liability is a net income number.

Which of the following constructs have developed from the Annual Accounting Period Concept? I.Entity Concept. II.Capital Recovery. III.Related Party. IV.Tax Benefit Rule. ​

It was stated in the text that realized gains from certain types of transactions (e.g., like-kind exchanges) are deferred for recognition in a future period. The basis of this treatment is the I.Annual Accounting Period Concept. II.Legislative Grace Concept. III.Wherewithal-to-Pay Concept. IV.Capital Recovery Concept. ​

Deduction concepts include which of the following? I.Capital Recovery Concept. II.Legislative Grace Concept. III.Business Purpose Concept. IV.Ability to Pay Concept. ​

Ted sells 200 shares of common stock for $2,000. The stock cost Ted $500 several years ago. Ted's realized gain from the sale is only $1,500. Which of the following provides support for this treatment?