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Exam 4: Gross Income: Concepts and Inclusions

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Question 41

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Under the original issue discount (OID) rules as applied to a three-year certificate of deposit:

A) All of the income must be recognized in the year of maturity by a cash basis taxpayer.
B) The OID will be included in gross income for the year of purchase.
C) The interest income will be the same each year.
D) The interest income will be greater in the third year than in the first year.
E) None of the above is correct.

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

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Question 42

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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?

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The tax laws favor the purchase of the a...

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Question 43

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Orange Cable TV Company, an accrual basis taxpayer, allows its customers to pay by the year in advance ($500 per year), or two years in advance ($950). In September 2014, the company collected the following amounts applicable to future services: $\begin{array}{llr} \text { October 2014-September 2016 services (two-year contracts) } &\$144,000\\ \text { October 2014-September 2015 services (one-year contracts) } &128,000\\ \text { Total} &\$272,000\end{array}$ $\text { As a result of the above, Orange Cable should report as gross income: }$ A) $\$ 272,000$ in 2014 . B) $\$ 128,000$ in 2014 . C) $\$ 168,000$ in 2015 . D) $\$ 222,000$ in 2015 . E)None of the above

Ted and Alice were in the process of negotiating a divorce agreement. They own bonds with a basis of $800,000 and a fair market value of $800,000. They also own common stock with a basis of $600,000 and a fair market value of $800,000. Alice is trying to decide whether to bargain to receive the bonds or the stock. She has no plans for selling the bonds or stock, whichever she receives. a. Which would you advise Alice to receive? b. From Ted's perspective, are the assets of equal value?

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

Linda delivers pizzas for a pizza shop. On Wednesday, December 31, 2014, Linda made several deliveries and collected $400 from customers. However, Linda forgot to turn in the proceeds for the day to her employer until the following Friday, January 2, 2015. The pizza shop owner recognizes the income of $400 when he receives it from Linda in 2015.

In the case of a below-market gift loan for which there is no exception to the imputed interest rules, the lender is deemed to have received interest income even though no interest is charged and collected.

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

Under the alimony rules:

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?

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

Turner, a successful executive, is negotiating a compensation plan with his potential employer. The employer has offered to pay Turner a $600,000 annual salary, payable at the rate of $50,000 per month. Turner counteroffers to receive a monthly salary of $40,000 ($480,000 annually) and a $180,000 bonus in 5 years when Turner will be age 65.

Under the terms of a divorce agreement, Ron is to pay his former wife Jill $10,000 per month. The payments are to be reduced to $7,000 per month when their 15 year-old child reaches age 18. During the current year, Ron paid $120,000 under the agreement. Assuming all of the other conditions for alimony are satisfied, Ron can deduct from gross income (and Jill must include in gross income) as alimony:

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 2014.

In December 2013, Mary collected the December 2013 and January 2014 rent from a tenant. Mary is a cash basis taxpayer. The amount collected in December 2013 for the 2014 rent should be included in her 2014 gross income.

Judy is a cash basis attorney. In 2014, she performed services in connection with the formation of a corporation and received stock with a value of $4,000 for her services. By the end of the year, the value of the stock had decreased to $2,000. She continued to hold the stock. Judy must recognize $4,000 of gross income from the stock for 2014.

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 six­year 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:

On November 1, 2014, Bob, a cash basis taxpayer, gave Dave common stock. On October 30, 2014, the corporation had declared the dividend payable to shareholders of record as of November 22, 2014. The dividend was paid on December 15, 2014. The corporation has paid the $1,200 dividend once each year for the past ten years, during which Bob owned the stock. When Dave collected the dividend on December 15, 2014:

Wayne owns a 30% interest in the capital and profits of Emerald Company (a calendar year partnership) . For tax year 2013, the partnership earned revenue of $900,000 and had operating expenses of $660,000. During the year, Wayne withdrew from the partnership a total of $90,000. He also invested an additional $30,000 in the partnership. For 2013, Wayne's gross income from the partnership is:

In 2005, Terry purchased land for $150,000. In 2014, 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.