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Exam 4: Gross Income: Concepts and Inclusions

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Question 61

Multiple Choice

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

A) Is taxed according to the original issue discount rules.
B) Is not included in gross income because the policy must be surrendered to receive the cash surrender value.
C) Reduces the deduction for life insurance expense.
D) Is exempt because it is life insurance proceeds.
E) None of these.

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

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Question 62

True/False

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In December 2014,Mary collected the December 2014 and January 2015 rent from a tenant.Mary is a cash basis taxpayer.The amount collected in December 2014 for the 2015 rent should be included in her 2015 gross income.

A) True
B) False

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Question 63

Multiple Choice

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The Maroon & Orange Gym,Inc. ,uses the accrual method of accounting.The corporation sells memberships that entitle the member to use the facilities at any time.A one-year membership costs $480 ($480/12 = $40 per month) ;a two-year membership costs $720 ($720/24 = $30 per month) .Cash payment is required at the beginning of the membership period.On July 1,2015,the company sold a one-year membership and a two-year membership.The company should report as gross income from the two contracts:

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 30,2015,the partnership had $400,000 net income and for fiscal year ending September 30,2016,the partnership had $300,000 net income.April withdrew $100,000 in December of each year.April's gross income from the partnership for 2015 is $160,000 ($400,000 × 40%).

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."

In 2015 Todd purchased an annuity for $150,000.The annuity is to pay him $2,500 per month for the rest of his life.His life expectancy is 100 months.Which of the following is correct?

In 2006,Terry purchased land for $150,000.In 2015,Terry received $10,000 from a local cable television company in exchange for Terry allowing the company to run an underground cable across Terry's 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 cash basis taxpayer purchased a certificate of deposit for $1,000 on July 1,2014 that will pay $1,100 upon its maturity on June 30,2016.The taxpayer must recognize a portion of the income in 2015.

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?

Arnold was employed during the first six months of the year and earned a $90,000 salary.During the next 6 months,he collected $7,200 of unemployment compensation,borrowed $6,000 (using his personal residence as collateral),and withdrew $1,000 from his savings account (including $60 interest).When he left his former employer,he withdrew his retirement benefits (a qualified annuity) in a lump-sum of $50,000.He made no contributions to the plan.Arnold's parents loaned him $10,000 (interest-free) on July 1 of the current year,when the Federal rate was 3%.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.

Gordon,an employee,is provided group term life insurance coverage equal to twice his annual salary of $125,000 per year.According to the IRS Uniform Premium Table (based on Gordon's age) ,the amount is $12 per year for $1,000 of protection.The cost of an individual policy would be $15 per year for $1,000 of protection.Since Gordon paid nothing towards the cost of the $250,000 protection,Gordon must include in his 2015 gross income which of the following amounts?

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.

Which of the following is not a requirement for an alimony deduction?

On January 1,2015,an accrual basis taxpayer entered into a contract to provide termite inspection service each month for 36 months.The amount received for the contract was $2,400.The taxpayer should report $1,600 of income in 2016.

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 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.]

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

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?

Father made an interest-free loan of $25,000 to Son who used the money to buy an SUV.Son had $1,600 interest income from a certificate of deposit for the year.Father is not required to impute interest income.

Judy is a cash basis attorney.In 2015,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 2015.

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?