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Exam 4: Gross Income: Concepts and Inclusions

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Question 21

True/False

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The B & W partnership earned taxable income of $100,000 for the year. Bryan is entitled to 50% of the profits, but Bryan withdrew only $40,000 during the year. Bryan must include in gross income his $50,000 share of the profits from the partnership.

A) True
B) False

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Question 22

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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 six-year 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:

A) $0.
B) $1,000,000 ($1,300,000 - $300,000) .
C) $700,000 ($1,300,000 - $600,000) .
D) $300,000 ($1,300,000 - $1,000,000) .
E) None of the above.

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

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Question 23

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Jim and Nora, residents of a community property state, were married in early 2010.Late in 2010 they separated, and in 2012 they were divorced.Each earned a salary, and they received income from community owned investments in all relevant years.They filed separate returns in 2010 and 2011.

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.

The Blue Utilities Company paid Sue $2,000 for the right to lay an underground electric cable across her property anytime in the future.

An advance payment received in June 2012 by an accrual basis and calendar year taxpayer for services to be provided over a 36-month period can be spread over four tax years.

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.

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?

Green, Inc., provides group term life insurance for all of its employees.The coverage equals twice the employee's annual salary.Sam, a vice-president, worked all year for Green, Inc.and received $250,000 of coverage for the year at a cost to Green of $3,000.The Uniform Premiums (based on Sam's age) are $.30 per month for $1,000 of protection.How much must Sam include in gross income this year?

If the employer provides all employees with group term life insurance equal to twice the employee's annual salary, an employee with a salary of $50,000 has no gross income from the life insurance protection provided by the employer.

Determine the proper tax year for gross income inclusion in each of the following cases.

Darryl, a cash basis taxpayer, gave 1,000 shares of Copper Company common stock to his daughter on September 29, 2012.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, 2012.

The Purple & Gold 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 $360 ($360/12 = $30 per month) ; a two-year membership costs $600 ($600/24 = $25 per month) .Cash payment is required at the beginning of the membership period. On July 1, 2012, the company sold a one-year membership and a two-year membership.The company should report as gross income from the two contracts:

Turner, Inc., provides group term life insurance to the officers of the corporation only.Janet, a vice-president, received $400,000 of coverage for the year at a cost to Turner, Inc.of $5,600.The Uniform Premiums (based on Janet's age) are $15 a year for $1,000 protection.How much of this must Janet include in gross income this year?

Arnold was employed during the first six months of the year and earned a $86,000 salary.During the next 6 months, he collected $4,800 of unemployment compensation, borrowed $6,000 (using his personal residence as collateral), and withdrew $1,000 from his savings account (including $60, interest).His luck was not all bad, for in December he won $800 in the lottery on a $20 ticket.Because of his dire circumstances, Arnold's parents loaned him $10,000 (interest-free) on July 1 of the current year, when the Federal rate was 8%.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.

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) :

In 2012, Todd purchased an annuity for $200,000.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?

Paula transfers stock to her former spouse, Fred.The transfer is pursuant to a divorce agreement.Paula's cost of the stock was $75,000 and its fair market value on the date of the transfer is $95,000.Fred later sells the stock for $100,000.Fred's recognized gain from the sale of the stock is $5,000.

The taxable portion of Social Security benefits is dependent upon:

On January 5, 2012, Tim purchased a bond paying interest at 6% for $30,000. On September 30, 2012, he gave the bond to Jane.The bond pays $1,800 interest on December 31.Tim and Jane are cash basis taxpayers.When Jane collects the interest in December 2012: