Exam 4: Gross Income: Concepts and Inclusions

In 2010,Jimmy,a cash basis taxpayer,was offered $3,000,000 for signing a professional baseball contract.He rejected the offer in favor of $900,000 per year for 4 years beginning in 2010.He collected $900,000 in 2010.Jimmy did not constructively receive $3,000,000 in 2010.

The underlying rationale for the alimony rules is that:

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:

An advantage to operating a business as an S corporation is that the shareholder has no gross income from the S corporation unless the shareholder makes a withdrawal during the tax year.

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

Lois,who is single,received $9,000 of Social Security benefits.She also received $30,000 from dividends,interest,and her employer's pension plan.If Lois sells a capital asset that produces a $1,000 recognized loss,Lois's taxable income will decrease by less than $1,000.

Norma's income for 2010 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.

In 2003,Terry purchased land for $150,000.In 2010,Terry received $5,000 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 $5,000 because it was a return of his capital invested in the land.

Under the terms of a divorce agreement,Kim was to pay her husband Tom $4,000 per month in alimony and $1,500 per month in child support.For a twelve-month period,Kim can deduct from gross income (and Tom must include in gross income):

George and Erin are divorced,and George is required to pay Erin $20,000 of alimony each year.George earns $75,000 a year.Erin is not required to include the alimony payments in gross income because George earned the income and therefore he should pay the tax on the income.

The effects of a below-market loan for $450,000 made by a corporation to its chief executive officer as an enticement to get him to remain with the company are:

Tim and Janet were divorced.Their only marital property was a personal residence with a value of $100,000 and cost of $40,000.Under the terms of the divorce agreement,Janet would receive the house and Janet would pay Tim $10,000 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."

For purposes of determining gross income,which of the following is true?

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 $400 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 $40,000 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:

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

Ted was shopping for a new computer.He found one that met his needs and agreed to purchase it for $1,200.After he had paid for the computer,he discovered a rebate coupon inside the packaging.He filled out the required form and sent it to the manufacturer.The next week he received a $100 check from the manufacturer.How much should Ted include in gross income?

The realization requirement applies to taxable income but not to the economist's concept of income.

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?

In the case of a below-market loan between family members,if the imputed interest rules apply:

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.