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Exam 4: Gross Income: Concepts and Inclusions

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Question 21

True/False

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Father made an interest-free loan of $25,000 to Son who used the money to buy an SUV.If Son's investment income for the year is less than $1,000, Father is not required to impute interest income.

A) True
B) False

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Question 22

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Wayne owns a 25% interest in the capital and profits of Emerald Company (a calendar year partnership) .For tax year 2012, the partnership earned revenue of $900,000 and had operating expenses of $560,000.During the year, Wayne withdrew from the partnership a total of $90,000. He also invested an additional $20,000 in the partnership.For 2012, Wayne's gross income from the partnership is:

A) $70,000.
B) $85,000.
C) $90,000.
D) $110,000.
E) None of the above.

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

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Question 23

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Norma's income for 2012 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.

ABC Corporation mails out its annual Christmas bonuses to employees on December 24th.Ed, a cash basis taxpayer, is an employee who is on a ski trip until January 7th of the new year, but is aware that his annual Christmas bonus arrives on the 28th of December.Ed cannot delay reporting the income from the bonus until the new year.

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 2012.

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.

The amount of Social Security benefits received by an individual that he or she must include in gross 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.

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

Under the terms of a divorce agreement, Kim was to pay her husband Tom $3,000 per month in alimony and $2,000 per month in child support.For a twelve-month period, Kim can deduct from gross income (and Tom must include in gross income) :

When stock is sold after the record date for a dividend that has been declared, the seller must recognize as income the dividend received.

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.

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?

Jessica is a cash basis taxpayer.When Jessica failed to repay a loan, the bank garnished her salary.Each week $60 was withheld from Jessica's salary and paid to the bank.Jessica is required to include the $60 each week in her gross income even though it is the creditor that benefits from the income.

The alimony recapture rules are intended to:

Harry and Wanda were married in Texas, a community property state, but moved to Virginia, a common law state. The calculation of their income on a joint return:

As a general rule:

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?

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.

Sarah, a widow, is retired and receives $20,000 interest income and dividends and $10,000 in Social Security benefits.Sarah is considering selling a stock at a $8,000 gain.What will be the increase in Sarah's gross income as a result of the sale of the stock?