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Exam 4: Gross Income

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Question 1

Multiple Choice

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In the case of interest income from state and Federal bonds:

A) Interest on United States government bonds received by a state resident can be subject to that state's income tax.
B) Interest on United States government bonds is subject to Federal income tax.
C) Interest on bonds issued by State A received by a resident of State B cannot be subject to income tax in State B.
D) All of these are correct.
E) None of these are correct.

F) C) and D)
G) None of the above

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B

Question 2

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Katherine is 60 years old and is bargaining with her employer over deferred compensation. In exchange for reducing her current year's salary by $50,000, she can receive a lump-sum amount in 5 years, when she will retire. If she receives the $50,000 in the current year, she will invest in certificates of deposit that yield 5%. Katherine is in the 28% marginal tax bracket in all relevant years. What is the minimum amount Katherine should accept as a deferred pay option? [Hint: the compound interest factor is 1.1934.]

Correct Answer

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$59,669
The $50,000 salary will be $36,0...

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Question 3

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In 2006, Terry purchased land for $150,000. In 2016, Terry received $10,000 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 $10,000 because it was a return of his capital invested in the land.

During 2016, Addison has the following gains and losses: ​ a.How much is Addison's tax liability if she is in the 15% tax bracket? b.If her tax bracket is 33% (not 15%)?

In January 2016, Tammy purchased a bond due in 24 months. The cost of the bond is $857 and its maturity value is $1,000. No interest is paid each year, but the compound interest rate on the bond is 8%. Tammy also purchased a Series EE United States Government bond for $558, with a maturity value in 10 years of $1,000. This is the only Series EE bond she has ever owned. The Series EE bond is sold to yield 6% interest. Tammy is 13 years old and has no other source of income. She is claimed as a dependent by her parents. Compute Tammy's gross income from the bond and Series EE bond for 2016 .

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:

In some foreign countries, the tax law specifically designates the types of income items that are includible in gross income. How does this approach compare with the U.S. Internal Revenue Code (§ 61)? What is a major advantage to the approach used in the U.S. tax law?

Hazel, a solvent individual but a recovering alcoholic, embezzled $6,000 from her employer. In the same year that she embezzled the funds, her employer discovered the theft. Her employer did not fire her and told her she did not have to repay the $6,000 if she would attend Alcoholics Anonymous. Hazel met the conditions and her employer canceled the debt.

George, an unmarried cash basis taxpayer, received the following amounts during 2016: ​ What amount should George report as gross income from dividends and interest for 2016?

Swan Finance Company, an accrual method taxpayer, requires all of its customers to carry credit life insurance. If a customer dies, the company receives from the insurance company the balance due on the customer's loan. Ali, a customer, died owing Swan $1,500. The balance due included $200 accrued interest that Swan has included in income. When Swan collects $1,500 from the insurance company, Swan:

In December 2016, Todd, a cash basis taxpayer, paid $1,200 of fire insurance premiums for the calendar year 2017 on a building he held for rental income. Todd deducted the $1,200 of insurance premiums on his 2016 tax return. He had $150,000 of taxable income that year. On June 30, 2017, he sold the building and, as a result, received a $500 refund on his fire insurance premiums. As a result of the above:

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 $120. For Tom to have a positive cash flow from working and hiring the painter:

Freddy purchased a certificate of deposit for $20,000 on July 1, 2016. The certificate's maturity value in two years (June 30, 2018) is $21,218, yielding 3% before-tax interest.

ABC Corporation declared a dividend for taxpayers of record as of December 24, 2015. The dividend checks were mailed on December 31, 2015. Ed, a cash basis shareholder, received the dividend check on January 2, 2016. Ed cannot delay reporting the income from the dividend until 2016.

Zack was the beneficiary of a life insurance policy on his wife. Zack had paid $20,000 in premiums on the policy. He collected $50,000 on the policy when his wife died from a terminal illness. Because it took several months to process the claim, the insurance company paid Zack $53,000, the face amount of the policy plus $3,000 interest. Zack must include $23,000 in his gross income.

A cash basis taxpayer purchased a certificate of deposit for $1,000 on July 1, 2014 that will pay $1,100 upon its maturity on June 30, 2016. The taxpayer must recognize a portion of the income in 2015.

Mike contracted with Kram Company, Mike's controlled corporation. Mike was a medical doctor and the contract provided that he would work exclusively for the corporation. No other doctor worked for the corporation. The corporation contracted to perform an operation for Rosa for $8,000. The corporation paid Mike $6,500 to perform the operation under the terms of his employment contract.

Office Palace, Inc., leased an all-in-one printer to a new customer, Ashley, on December 27, 2016. The printer was to rent for $600 per month for a period of 36 months beginning January 1, 2017. 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:

The effects of a below-market loan for $100,000 made by a corporation to its chief executive officer as an enticement to get him to remain with the company are:

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