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Exam 4: Gross Income: Concepts and Inclusions

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Question 41

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Judy is a cash basis attorney.In 2012, 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 2012.

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Question 42

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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 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.] $59,669

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The $50,000 salary will be $36,000 [(1 -...

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Question 43

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Susan purchased an annuity for $200,000.She is to receive $18,000 each year and her life expectancy is 13 years.If Susan collects under the annuity for 14 years, the entire $18,000 received in the 14th year must be included in her gross income.

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.

In some 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.

Linda delivers pizzas for a pizza shop.On Wednesday, December 31, 2012, 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, 2013.The pizza shop owner recognizes the income of $400 when he receives it from Linda in 2013.

Daniel purchased a bond on July 1, 2012, at par of $10,000 plus accrued interest of $300.On December 31, 2012, Daniel collected the $600 interest for the year.On January 1, 2013, Daniel sold the bond for $10,200.

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

Darryl, a cash basis taxpayer, gave 1,000 shares of Copper Company common stock to his daughter on September 29, 2012.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, 2012.

In 2012, Juan, a cash basis taxpayer, was offered $3 million for signing a professional baseball contract.He counteroffered that he would receive $900,000 per year for 4 years beginning in 2013. The team accepted the counteroffer. Juan constructively received $3 million in 2012.

If the alimony recapture rules apply, the recipient of the alimony decreases his or her AGI by a portion of the amount included in gross income as alimony in a prior year or years.

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.

Under the alimony rules:

On January 1, 2012, Faye gave Todd, her son, a 36-month certificate of deposit she purchased December 31, 2010, for $8,638.Faye gave Todd 1,000 shares of ABC, Inc., on December 2, 2012.The certificate had a maturity value of $10,000 and the yield to maturity was 5%.On November 30, 2012, ABC, Inc., had declared a dividend of $1.00 payable to stockholders of record on December 5th.How much interest and dividends should Todd include in his gross income for 2012?

Tim and Janet were divorced.Their only marital property was a personal residence with a value of $120,000 and cost of $50,000.Under the terms of the divorce agreement, Janet would receive the house and Janet would pay Tim $15,000 each year for 5 years, or until Tim's death, whichever should occur first.Tim and Janet lived apart when the payments were made to Tim.The divorce agreement did not contain the word "alimony."

Our tax laws encourage taxpayers to ____ assets that have appreciated in value and ____ assets that have declined in value.

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

In the case of a gift loan of less than $100,000, the imputed interest rules apply if the donee has net investment income of over $1,000.

Arnold was employed during the first six months of the year and earned a $86,000 salary.During the next 6 months, he collected $4,800 of unemployment compensation, borrowed $6,000 (using his personal residence as collateral), and withdrew $1,000 from his savings account (including $60, interest).His luck was not all bad, for in December he won $800 in the lottery on a $20 ticket.Because of his dire circumstances, Arnold's parents loaned him $10,000 (interest-free) on July 1 of the current year, when the Federal rate was 8%.Arnold did not repay the loan during the year and used the money for living expenses.Calculate Arnold's adjusted gross income for the year.

On January 5, 2012, Tim purchased a bond paying interest at 6% for $30,000. On September 30, 2012, 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 2012: