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Exam 4: Gross Income: Concepts and Inclusions

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Question 1

True/False

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In December 2011,Mary collected the December 2011 and January 2012 rent from a tenant.Mary is a cash basis taxpayer.The amount collected in December 2011 for the 2012 rent should be included in her 2012 gross income.

A) True
B) False

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Question 2

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Darryl,a cash basis taxpayer,gave 1,000 shares of Copper Company common stock to his daughter on September 29,2011.Copper Company is a publicly held company that has declared a $2.00 per share dividend on September 30th every year for the last 20 years.Just as Darryl had expected,Copper Company declared a $2.00 per share dividend on September 30th,payable on October 15th,to stockholders of record as of October 10th.The daughter received the $2,000 dividend on October 18,2011.

A) Darryl must recognize the $2,000 dividend as his income because he knew the dividend would be paid.
B) Darryl must recognize the income of $2,000 because he constructively received the $2,000.
C) Darryl must recognize $1,500 of the dividend because he owned the stock for three-fourths of the year.
D) The daughter must recognize the income because she owned the stock when the dividend was declared and she received the $2,000.
E) None of the above.

F) D) and E)
G) B) and D)

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Question 3

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Dick and Jane are divorced in 2010.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 2011,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?

If the employer provides all employees with group term life insurance equal to twice the employee's annual salary,an employee with a salary of $50,000 has no gross income from the life insurance protection provided by the employer.

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:

Office Palace,Inc.,leased an all-in-one printer to a new customer,Ashley,on December 27,2011.The printer was to rent for $600 per month for a period of 36 months beginning January 1,2012.Ashley was required to pay the first and last month's rent at the time the lease was signed.Ashley was also required to pay a $1,500 damage deposit.Office Palace must recognize as income for the lease:

If the taxpayer's method of measuring income is consistent with GAAP,it will be acceptable for tax purposes.

Rachel owns rental properties.When Rachel rents to a new tenant,she usually requires the tenant to pay an amount in addition to the first month's rent.The additional amount serves as security for damages to the property and the tenant's failure to pay future rents.How should the payments be characterized (e.g.,on lease documents)to minimize Rachel's current tax liability?

On a particular Saturday,Tom had planned to paint a room in his house,but his employer gave him the opportunity to work that day.If Tom works,he must hire a painter for $100.For Tom to have a positive cash flow from working and hiring the painter:

The financial accounting principle of conservatism is not well-suited to the task of measuring taxable income.

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.

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?

Sarah,a widow,is retired and receives $24,000 interest income and dividends and $8,000 in Social Security benefits.Sarah is considering selling a stock at a $6,000 gain.What will be the increase in Sarah's gross income as a result of the sale of the stock? The $6,000 gain will cause Sarah's taxable Social Security benefits to increase to $4,000,which is the lesser of the following:

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

Detroit Corporation sued Chicago Corporation for intentional damage to Detroit's goodwill.Detroit had created its goodwill through providing high-quality services to its customers.Thus,no basis for the goodwill appeared on Detroit's balance sheet.The suit was settled and Detroit received $1,500,000 for the damages to its goodwill.

The tax concept and economic concept of income are in agreement on which of the following:

The realization requirement gives an incentive to sell assets that have increased in value and to retain assets whose value has decreased.

Rachel,who is in the 35% marginal tax bracket,is considering purchasing an annuity that will pay her $10,000 per year for the remainder of her life.Her life expectancy is 15 years.The cost of the annuity is $97,120,and the cost is calculated to yield her an expected 6% return on her investment.As an alternative,Rachel could place the $97,120 in a savings account yielding 6% and she could withdraw $10,000 each year for 15 years (reducing the value of the account to zero at the end of 15 years).How might the tax laws applicable to annuities affect Rachel's decision?

Ted and Alice were in the process of negotiating a divorce agreement.They own bonds with a basis of $600,000 and a fair market value of $600,000.They also own common stock with a basis of $800,000 and a fair market value of $600,000.Alice is trying to decide whether to bargain to receive the bonds or the stock.Whichever of the assets she receives,she will sell it to start a new business and to purchase a house.She knows that Ted would prefer to receive the stock,and that he intends to sell them.She knows that Ted has substantial investments that he inherited. a.Why do you suppose that Ted prefers to receive the stock? b.If Ted is bargaining to receive the stock,what additional consideration should Alice receive?

The Blue Utilities Company paid Sue $2,000 for the right to lay an underground electric cable across her property anytime in the future.