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Exam 4: Gross Income: Concepts and Inclusions

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Question 51

Multiple Choice

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The purpose of the tax rules that apply to below-market loans between family members is to:

A) Discourage loans between related parties.
B) Prevent shifting of income among family members.
C) Prevent gifts from being disguised as bad debt expenses.
D) Prevent gift tax avoidance.
E) None of these is true.

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

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Question 52

True/False

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Rhonda has a 30% interest in the capital and profits of the ABC Partnership.In the first year of the partnership,2017,it earned $150,000.However,the partners agreed that nothing would be distributed until after the end of March 2018,before Rhonda filed her 2017 tax return.The distributions were to be delayed because it was unclear as to whether business conditions would remain good in 2018.Things were going well in 2018 and therefore the partnership distributed $30,000 to Rhonda at the end of March,as a portion of her share of the partnership's 2017 earnings.The partnership's income for 2018 was $60,000.As a result,Rhonda must recognize $30,000 of gross income in 2017 and $18,000 in 2018.

A) True
B) False

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Question 53

Multiple Choice

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Teal company is an accrual basis taxpayer.On December 1,2017,a customer paid for an item that was on hand,but the customer wanted the item delivered in early January 2018.Teal delivered the item on January 4,2018.Teal included the sale in its 2017 income for financial accounting purposes.

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.

Alvin is the sole shareholder of an S corporation that earned $200,000 in 2017 and distributed $75,000 to Alvin.Alvin must recognize $75,000 as income from the S corporation in 2017.

Margaret made a $90,000 interest-free loan to her son,Adam,who used the money to retire a mortgage on his personal residence and to buy a certificate of deposit.Adam's only income for the year is his salary of $35,000 and $1,400 interest income on the certificate of deposit.The relevant Federal interest rate is 8% compounded semiannually.The loan is outstanding for the entire year. a.​​Based on the above information, what is the effect of the loan on Margaret's gross income for the year? b.​​The facts are the same as above, except you discovered that Margaret had made an additional loan of $15,000 to Adam in the previous year. Adam used the funds to pay his child's private school tuition. What are the effects of the loans on Margaret's gross income?

Terri purchased an annuity for $100,000.She was to receive $10,000 per year and her life expectancy was 20 years.She died after receiving 8 payments.Terri's final return should reflect a loss of $20,000 ($100,000 - $80,000).

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

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

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 an 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?

Under the terms of a divorce agreement,Lanny was to pay his wife Joyce $2,000 per month in alimony and $500 per month in child support.For a twelve-month period,Lanny can deduct from gross income (and Joyce must include in gross income) :

The alimony recapture rules are intended to:

On January 1,2017,an accrual basis taxpayer entered into a contract to provide termite inspection service each month for 36 months.The amount received for the contract was $2,400.The taxpayer should report $1,600 of income in 2018.

Norma's income for 2017 is $27,000 from part-time work and $9,000 of Social Security benefits.Norma is not married.A portion of her Social Security benefits must be included in her gross income.

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:

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.

On January 1,Father (Dave) loaned Daughter (Debra) $100,000 to purchase a new car and to pay off college loans.There were no other loans outstanding between Dave and Debra.The relevant Federal rate on interest was 6 percent.The loan was outstanding for the entire year.

The taxable portion of Social Security benefits may be affected by:

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.]

Melissa is a compulsive coupon clipper.She often brags about the time she purchased a cart full of groceries for $5.00,when the cost without coupons would have been $50.Discuss whether Melissa realizes gross income from her coupon clipping.