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Exam 4: Gross Income: Concepts and Inclusions

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Question 41

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Debbie is age 67 and unmarried and her only sources of income are $200,000 in taxable interest and $20,000 of Social Security benefits.Debbie's adjusted gross income for the year is:

A) $220,000.
B) $217,000.
C) $203,000.
D) $200,000.
E) None of these.

F) A) and E)
G) None of the above

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Question 42

Multiple Choice

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Betty purchased an annuity for $24,000 in 2014.Under the contract,Betty will receive $300 each month for the rest of her life.According to the actuarial estimates,Betty will live to receive 96 payments and will receive a 3% return on her original investment.

A) If Betty collects $3,000 in 2014,her gross income is $630 (.03 × $21,000) .
B) Betty has no gross income until she has collected $24,000.
C) If Betty lives to collect more than 96 payments,all of the amounts collected after the 96th payment must be included in taxable income.
D) If Betty lives to collect only 60 payments before her death,she will report a $6,000 loss from the annuity [$24,000 - (60 × $300) = $6,000] on her final return.
E) None of these.

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

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Question 43

Multiple Choice

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Mark a calendar year taxpayer,purchased an annuity for $50,000 in 2012.The annuity was to pay him $3,000 on the first day of each year,beginning in 2012,for the remainder of his life.Mark's life expectancy at the time he purchased the annuity was 20 years.In 2014 Mark developed a deadly disease,and doctors estimated that he would live for no more than 24 months.

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.

After the divorce,Jeff was required to pay $18,000 per year to his former spouse,Darlene,who had custody of their child.Jeff's payments will be reduced to $12,000 per year in the event the child dies or reaches age 21.During the year,Jeff paid the $18,000 required under the divorce agreement.Darlene must include the $12,000 in gross income.

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:

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.

Darryl,a cash basis taxpayer,gave 1,000 shares of Copper Company common stock to his daughter on September 29,2014.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 18,2014.

Under the terms of a divorce agreement,Kim was to pay her husband Tom $7,000 per month in alimony.Kim's payments will be reduced to $3,000 per month when their 9 year-old son becomes 21.The husband has custody of their son.For a twelve-month period,Kim can deduct from gross income (and Tom must include in gross income) :

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

Jacob and Emily were co-owners of a personal residence.As part of their divorce agreement,Emily paid Jacob cash for his interest in the personal residence.This cash payment results in a taxable gain to Jacob if he receives more cash than his share of the cost of the residence.

Mark is a cash basis taxpayer.He is a partner in the M&M partnership,and his share of the partnership's profits for 2014 is $90,000.Only $40,000 was distributed to him in January 2014,and this was his share of the 2013 partnership profits.None of the 2014 profits were distributed.Mark's gross income from the partnership for 2014 is $40,000.

When stock is sold after the date of declaration but before the record date,the buyer must recognize as income the dividend declared.

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.

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

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:

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

A cash basis taxpayer purchased a certificate of deposit for $1,000 on July 1,2013 that will pay $1,100 upon its maturity on June 30,2015.The taxpayer must recognize a portion of the income in 2014.

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 lump­sum 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.]

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?