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Exam 4: Gross Income

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Question 41

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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.

A) The $1,500,000 is not taxable because it represents a recovery of capital.
B) The $1,500,000 is taxable because Detroit has no basis in the goodwill.
C) The $1,500,000 is not taxable because Detroit did nothing to earn the money.
D) The $1,500,000 is not taxable because Detroit settled the case.
E) None of the above.

F) All of the above
G) A) and B)

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Question 42

Multiple Choice

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Maroon Corporation expects the employees' income tax rates to increase next year.The employees use the cash method.The company presently pays on the last day of each month.The company is considering changing its policy so that the December salaries will be paid on the first day of the following year.What would be the effect on an employee of the proposed change in company policy for paying its salaries beginning for December 2013.

A) The employee would be required to recognize the income in December 2013 because it is constructively received at the end of the month.
B) The employee would be required to recognize the income in December 2013 because the employee has a claim of right to the income when it is earned.
C) The employee will not be required to recognize the income until it is received,in 2014.
D) The employee can elect to either include the pay in 2013 or 2014.
E) None of the above.

F) A) and C)
G) A) and E)

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Question 43

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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?

In January 2013,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 2013.

The constructive receipt doctrine requires that income must be recognized when it is made available to the cash basis taxpayer,although it has not been actually received.The constructive receipt doctrine does not apply to accrual basis taxpayers.

On December 1,2013,Daniel,an accrual basis taxpayer,collects $12,000 rent for December 2013 and $12,000 for January 2014.Daniel must include the $24,000 in 2013 gross income.

Teal company is an accrual basis taxpayer.On December 1,2013,a customer paid for an item that was on hand,but the customer wanted the item delivered in early January 2014.Teal delivered the item on January 4,2014.Teal included the sale in its 2013 income for financial accounting purposes.

Darryl,a cash basis taxpayer,gave 1,000 shares of Copper Company common stock to his daughter on September 29,2013.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 18,2013.

Perry is in the 33% tax bracket.During 2013,he had the following capital asset transactions: Perry's tax consequences from these gains are as follows:

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?

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% (35% Federal and 5% 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?

During 2013,Jackson had the following capital gains and losses:

An accrual basis taxpayer who owns and operates a professional basketball team is allowed to allocate income from season ticket sales on the basis of the number of games played during the year.

Freddy purchased a certificate of deposit for $20,000 on July 1,2013.The certificate's maturity value in two years (June 30,2015) is $21,218,yielding 3% before-tax interest.

A sole proprietorship purchased an asset for $1,000 in 2013 and its value was $1,500 at the end of 2013.In 2014,the sole proprietorship sold the asset for $1,400.The sole proprietorship realized a taxable gain of $400 in 2014 but an economic loss of $100 in 2014.

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

Gull Corporation was undergoing reorganization under the bankruptcy laws.The shareholders,who had made loans of $300,000 to the corporation,agreed to accept additional stock with a value of $200,000 instead of repayment on the debt.The Old Line Insurance Company,which had a $400,000 mortgage on the building,agreed to reduce the principal to $250,000.A trade creditor with a receivable of $150,000 from the company agreed to accept $70,000 in full payment for the debt incurred to purchase goods that were still on hand.Finally,the company transferred some equipment with an adjusted basis of $90,000 in satisfaction of a liability for $120,000.Compute the corporation's gross income and other adjustments necessary as a result of the above transactions.

Barney painted his house which saved him $3,000.According to the realization requirement,Barney must recognize $3,000 of income.

An advance payment received in June 2013 by an accrual basis and calendar year taxpayer for services to be provided over a 36-month period can be spread over four tax years.

Sarah,a majority shareholder in Teal,Inc.,made a $200,000 interest-free loan to the corporation.Sarah is not an employee of the corporation.