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Exam 4: Gross Income

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Question 31

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Theresa, a cash basis taxpayer, purchased a bond on July 1, 2014, for $10,000, plus $400 of accrued interest.The bond paid $800 of interest each December 31.On March 31, 2019, she sold the bond for $9,800, which included $200 of accrued interest.

A) Theresa has $200 interest income and a $400 loss from the bond in 2019.
B) Theresa has $200 interest income and a $200 gain from the bond in 2019.
C) Theresa has a $100 loss from the sale of the bond and no interest income.
D) Theresa's loss on the sale of the bond is $600.
E) None of these.

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

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Question 32

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In 2009, Terry purchased land for $150,000.He also received $10,000 from a local cable television company in exchange for allowing the company to run an underground cable across his property.Terry is not required to recognize income from receiving the $10,000 because it was a return of his capital invested in the land.

A) True
B) False

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Question 33

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What are the effects of a below-market loan for $100,000 made by a corporation to its chief executive officer as an enticement to get him to remain with the company?

مم -Determine the proper tax year for gross income inclusion in each of the following cases. a.A cash basis landlord makes new tenants pay first and last month's rent at the start of the lease.How does the landlord report these items? Purple Corporation, an exterminating company, is a calendar year taxpayer.It contracts to a.Both cash and accrual basis landlords report both months rent payments when received.The income deferral rule for accrual method taxpayers does not apply to rent.The payments are not considered nontaxable deposits. b.provide service to homeowners once a month under a one-, two-, or three-year contract.For financial reporting purposes, Purple reports the income ratably over the months of the contract.On April 1 of the current year, the company sold a customer a one-year contract for $120.How much of the $120 is taxable in the current and subsequent years if the company is an accrual basis taxpayer? If the $120 is payment on a two-year contract, how much is taxed in the year the contract is sold and in the following years? If the $120 is payment on a three-year contract, how much is taxed in the year the contract is sold and in the following years? c.Pink, Inc., an accrual basis taxpayer, owns an amusement park whose fiscal year ends September 30.To increase business during the fall and winter months, Pink sold passes that would allow the holder to ride "free" during the months of October through March.During the month of September, $6,000 was collected from the sale of passes for the upcoming fall and winter.When will the $6,000 be taxable to Pink? d.A taxpayer is in the office equipment rental business and uses the accrual basis of accounting.In December he collected $5,000 in rents for the following January.When is the $5,000 taxable?

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

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

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.

On January 1, 2019, Faye gave Todd, her son, a 36-month certificate of deposit she had purchased on December 31, 2017, for $8,638.The certificate had a maturity value of $10,000 and the yield to maturity was 5%.On November 30, 2019, 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 2019?

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:

Perry, a single taxpayer, has taxable income of $178,000 and is in the 32% tax bracket.During 2019, he had the following capital asset transactions: Perry's tax consequences from these gains are as follows:

Turquoise Company purchased a life insurance policy on the company's chief executive officer, Joe.After the company had paid $400,000 in premiums, Joe died, and the company collected the $1.5 million face amount of the policy.The company also purchased group term life insurance on all its employees.Joe had included $16,000 in gross income for the group term life insurance premiums.Joe's widow, Rebecca, received the $100,000 proceeds from the group term life insurance policy.

On December 1, 2019, Daniel, an accrual basis taxpayer, collects $12,000 rent for December 2019 and $12,000 for January 2020.Daniel must include the $24,000 in 2019 gross income.

For a person who is in the 35% marginal tax bracket, $1,000 of tax-exempt income is equivalent to $1,350 of income that is subject to tax.

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.

Barry, a solvent individual but a recovering alcoholic, embezzled $6,000 from his employer.In the same year that he embezzled the funds, his employer discovered the theft.His employer did not fire him and told him he did not have to repay the $6,000 if he would attend Alcoholics Anonymous.Barry met the conditions and his employer canceled the debt.

In 2019, 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 four years beginning in 2020.The team accepted the counteroffer.Juan constructively received $3 million in 2019.

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.He 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% is 1.5981, which alternative should Roy choose?

Gary cashed in an insurance policy on his life.He needed the funds to pay for his terminally ill wife's medical expenses.He had paid $12,000 in premiums and he collected $30,000 from the insurance company.Gary is not required to include the gain of $18,000 ($30,000 - $12,000) in gross income.

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?

Mike, a medical doctor, contracted with Kram Company, Mike's controlled corporation.The contract provided that Mike 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.