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Exam 4: Gross Income: Concepts and Inclusions

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Question 1

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On January 2, 2019, Tim purchased a bond paying interest at 6% for $30,000.On March 31, 2019, he gave the bond to Jane.The bond pays $1,800 interest on December 31.Tim and Jane are cash basis taxpayers.When Jane collects the interest in December 2019:

A) Tim must include all of the interest in his gross income.
B) Jane must report $1,800 gross income for 2019.
C) Jane reports $1,350 of interest income in 2019, and Tim reports $450 of interest income in 2019.
D) Jane reports $450 of interest income in 2019, and Tim reports $1,350 of interest income in 2019.
E) None of these is correct.

F) B) and C)
G) A) and B)

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Question 2

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The fact that the accounting method the taxpayer uses to measure income is consistent with GAAP does not ensure that the method will be acceptable for tax purposes.

A) True
B) False

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Question 3

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Fred is a full-time teacher.He has written a book and receives royalties from it.Fred's mother, Mabel, is age 65 and lives on her Social Security benefits and gifts from her son.This year Fred directed the publisher to make the royalty check payable to Mabel because she needs the money for support.Fred must include the amount of the royalty check in his gross income.

On January 1, 2019, an accrual basis taxpayer entered into a contract to provide termite inspection service each month for 24 months.The amount received for the contract was $2,400.The taxpayer reported $1,200 as income on its financial statement for 2019, and should do the same for its tax return.

Rhonda has a 30% interest in the capital and profits of the ABC Partnership.In the first year of the partnership, 2019, it earned $150,000.However, the partners agreed that nothing would be distributed until after the end of March 2020, before Rhonda filed her 2019 tax return.The distributions were to be delayed because it was unclear as to whether business conditions would remain good in 2020.Things were going well in 2020 and therefore the partnership distributed $30,000 to Rhonda at the end of March, as a portion of her share of the partnership's 2019 earnings.The partnership's income for 2020 was $60,000.As a result, Rhonda must recognize $30,000 of gross income in 2019 and $18,000 in 2020.

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

In the case of a person with other income of $300,000, 15% of his or her Social Security benefits received are excluded from gross income.

Under the alimony rules:

Alimony recapture may occur if there is a substantial decrease in the amount of the alimony payments in the second year after a divorce.

In 2009, Terry purchased land for $150,000.He also received $10,000 from a local cable television company in exchange for allowing the company to run an underground cable across his 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.

Lois, who is single, received $9,000 of Social Security benefits.She also received $25,000 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 more than $1,000.

Alvin is the sole shareholder of an S corporation that earned $200,000 in 2019 and distributed $75,000 to him.Alvin must recognize $75,000 as income from the S corporation in 2019.

Green, Inc., provides group term life insurance for all of its employees.The coverage equals twice the employee's annual salary.Sam, a vice president, worked all year for Green, Inc., and received $200,000 of coverage for the year at a cost to Green of $1,500.The Uniform Premiums (based on Sam's age) are $0.25 per month for $1,000 of protection.How much must Sam include in gross income this year?

The B & W Partnership earned taxable income of $140,000 for the year.Bryan is entitled to 50% of the profits, but he withdrew only $60,000 during the year.Bryan's gross income from the partnership for the year is $60,000.

Nicholas owned stock that decreased in value by $20,000 during the year, but he did not sell the stock.He earned $45,000 salary, but received only $34,000 because $11,000 in taxes were withheld.Nicholas saved $10,000 of his salary and used the remainder for personal living expenses.Nicholas's economic income for the year exceeded his gross income for tax purposes.

Mike, a medical doctor, contracted with Kram Company, Mike's controlled corporation.The contract provided that Mike 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.

In all community property states, the income from property that was inherited by a spouse after the marriage is treated as all earned by the spouse who inherited the property.

Theresa, a cash basis taxpayer, purchased a bond on July 1, 2014, for $10,000, plus $400 of accrued interest.The bond paid $800 of interest each December 31.On March 31, 2019, she sold the bond for $9,800, which included $200 of accrued interest.

With respect to the unearned income from services, which of the following is true?

Ted earned $150,000 during the current year.He paid Alice, his former wife, $75,000 in alimony.The couple divorced in 2017.Under these facts, the tax is paid by the person who benefits from the income rather than the person who earned the income.