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Exam 4: Gross Income: Concepts and Inclusions

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Question 21

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Office Palace, Inc., leased an all-in-one printer to a new customer, Ashley, on December 27, 2018. The printer was to rent for $600 per month for a period of 36 months beginning January 1, 2019. Ashley was required to pay the first and last month's rent at the time the lease was signed. Ashley was also required to pay a $1,500 damage deposit. Office Palace must recognize as income for the lease:

A) $0 in 2018, if Office Palace is an accrual basis taxpayer.
B) $7,800 in 2019, if Office Palace is a cash basis taxpayer.
C) $2,700 in 2018, if Office Palace is a cash or accrual basis taxpayer.
D) $1,200 in 2018, if Office Palace is a cash or accrual basis taxpayer.
E) None of these.

F) C) and D)
G) A) and D)

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Question 22

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On November 1, 2018, Bob, a cash basis taxpayer, gave Dave common stock. On October 30, 2018, the corporation had declared the dividend payable to shareholders of record as of November 22, 2018. The dividend was paid on December 15, 2018. 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, 2018:

A) Bob must include $1,000 10/12 x $1,200) of the dividend in his gross income.
B) Bob must include all of the dividend in his gross income.
C) Dave must include all of the dividend in his gross income.
D) Dave should treat the $1,200 as a recovery of capital.
E) None of these is correct.

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

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Question 23

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Ralph purchased his first Series EE bond during the year. He paid $709 for a 10-year bond with a $1,000 maturity value. The yield to maturity on the bonds was 3.5%. Ralph is not required to recognize the $291 $1,000 - $709) original issue discount until the bond matures. However, Ralph can elect to amortize the discount over the ten-year period.

The constructive receipt doctrine requires that income 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.

Under the formula for taxing Social Security benefits, low income taxpayers are not required to include any of the Social Security benefits in gross income. But as income increases, 50% of the Social Security benefits may be included in gross income. Further increases in income will cause as much as 85% of the Social Security benefits being subject to tax. Does this mean that the taxation of Social Security benefits is more or less progressive than the taxation of other types of income?

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 December 2018?

On January 1, 2018, Faye gave Todd, her son, a 36-month certificate of deposit she purchased December 31, 2016, for $8,638. Faye gave Todd 1,000 shares of ABC, Inc., on December 2, 2018. The certificate had a maturity value of $10,000 and the yield to maturity was 5%. On November 30, 2018, 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 2018?

Lois, who is single, received $9,000 of Social Security benefits. She also received $25,000 from dividends, interest, and her employer's pension plan. If Lois sells a capital asset that produces a $1,000 recognized loss, Lois's taxable income will decrease by more than $1,000.

ABC Corporation declared a dividend for taxpayers of record as of December 24, 2017. The dividend checks were mailed on December 31, 2017. Ed, a cash basis shareholder, received the dividend check on January 2, 2018. Ed cannot delay reporting the income from the dividend until 2018.

Ted was shopping for a new automobile. He found one that met his needs and agreed to purchase it for $23,000. He had shopped around and concluded that he could not get a better price from another dealer. After he had paid for the automobile, the dealer called to notify Ted that he was entitled to a manufacturer's rebate of $1,500. The next week he received a $1,500 check from the manufacturer. How much should Ted include in gross income?

Jay, a single taxpayer, retired from his job as a public school teacher in 2018. He is to receive a retirement annuity of $1,200 each month and his life expectancy is 180 months. He contributed $36,000 to the pension plan during his 35- year career; so his adjusted basis is $36,000. Jay collected 192 payments before he died. What is the correct method for reporting the pension income?

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

The tax concept and economic concept of income are in agreement on which of the following:

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

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?

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.

Mark a calendar year taxpayer, purchased an annuity for $50,000 in 2016. The annuity was to pay him $3,000 on the first day of each year, beginning in 2016, for the remainder of his life. Mark's life expectancy at the time he purchased the annuity was 20 years. In 2018 Mark developed a deadly disease, and doctors estimated that he would live for no more than 24 months.

Under the alimony rules:

April, a calendar year taxpayer, is a 40% partner in Pale Partnership, whose fiscal year ends on September 30th. For the fiscal year ending September 30, 2018, the partnership had $400,000 net income and for fiscal year ending September 30, 2019, the partnership had $300,000 net income. April withdrew $100,000 in December of each year. April's gross income from the partnership for 2018 is $160,000 $400,000 × 40%).

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