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Exam 4: Gross Income: Concepts and Inclusions

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Question 61

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José,a cash method taxpayer,is a partner in J&T Accounting Services,a calendar year partnership.Under the partnership agreement,José is to receive 20% of the partnership's profits or losses.Each partner is allowed to withdraw $10,000 each month for his or her living expenses.José withdrew $120,000 during the year as his monthly draw in 2017.However,in December the partnership was short on cash and José was required to invest an additional $10,000 in the partnership.In March 2017,José received $40,000 as his share of distributed 2016 profits.The partnership earnings before partners' withdrawals for 2017 totaled $1 million.Compute José's gross income from the partnership for 2017.

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Question 62

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Margaret owns land that appreciates at the rate of 10% each year.Ralph owns a zero coupon (i.e.,all of the interest is paid at maturity but is taxed annually) corporate bond with a yield to maturity of 10%.At the end of 10 years,the bond will mature and the land will be sold.At the end of the 10 years,

A) Margaret and Ralph will have accumulated the same after-tax amounts.
B) Ralph will have accumulated a greater after-tax amount because the interest on the bond is tax-exempt.
C) Margaret will have accumulated the greater after-tax amount because the gain on the land is tax-exempt.
D) Margaret will have accumulated the greater after-tax amount but only if her marginal tax rate never exceeds 27%.
E) Margaret will accumulate the greater after-tax amount because she earns a return on the deferred taxes.

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

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Question 63

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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.

In 2017,Juan,a cash basis taxpayer,was offered $3 million for signing a professional baseball contract.He counter offered that he would receive $900,000 per year for 4 years beginning in 2018.The team accepted the counteroffer.Juan constructively received $3 million in 2017.

In the case of a person with other income of $300,000,15% of his or her Social Security benefits received are excluded from gross income.

Office Palace,Inc.,leased an all-in-one printer to a new customer,Ashley,on December 27,2017.The printer was to rent for $600 per month for a period of 36 months beginning January 1,2018.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:

Turner,a successful executive,is negotiating a compensation plan with his potential employer.The employer has offered to pay Turner a $600,000 annual salary,payable at the rate of $50,000 per month.Turner counteroffers to receive a monthly salary of $40,000 ($480,000 annually) and a $180,000 bonus in 5 years when Turner will be age 65.

Under the alimony rules:

Linda delivers pizzas for a pizza shop.On Wednesday,December 31,2017,Linda made several deliveries and collected $400 from customers.However,Linda forgot to turn in the proceeds for the day to her employer until the following Friday,January 2,2018.The pizza shop owner recognizes the income of $400 when he receives it from Linda in 2018.

Rachel owns rental properties.When Rachel rents to a new tenant,she usually requires the tenant to pay an amount in addition to the first month's rent.The additional amount serves as security for damages to the property and the tenant's failure to pay future rents.How should the payments be characterized (e.g.,on lease documents) to minimize Rachel's current tax liability?

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

Sarah,a majority shareholder in Teal,Inc.,made a $200,000 interest-free loan to the corporation.Sarah is not an employee of the corporation.

Travis and Andrea were divorced.Their only marital property consisted of a personal residence (fair market value of $400,000,cost of $200,000) ,and publicly-traded stocks (fair market value of $800,000,cost basis of $500,000) .Under the terms of the divorce agreement,Andrea received the personal residence and Travis received the stocks.In addition,Andrea was to receive $50,000 for eight years. I.If the $50,000 annual payments are to be made to Andrea or her estate (if she dies before the end of the eight years) ,the payments will qualify as alimony. II.Andrea has a taxable gain from an exchange of her one-half interest in the stocks for Travis' one-half interest in the house and cash. III.If Travis sells the stocks for $900,000,he must recognize a $400,000 gain.

Harry and Wanda were married in Texas,a community property state,but moved to Virginia,a common law state.The calculation of their income on a joint return:

In some foreign countries,the tax law specifically designates the types of income items that are includible in gross income.How does this approach compare with the U.S.Internal Revenue Code (§ 61)? What is a major advantage to the approach used in the U.S.tax law?

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?

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.

Mark is a cash basis taxpayer.He is a partner in the M&M partnership,and his share of the partnership's profits for 2017 is $90,000.Only $40,000 was distributed to him in January 2017,and this was his share of the 2016 partnership profits.None of the 2017 profits were distributed.Mark's gross income from the partnership for 2017 is $40,000.

Jim and Nora,residents of a community property state,were married in early 2016.Late in 2016 they separated,and in 2017 they were divorced.Each earned a salary,and they received income from community owned investments in all relevant years.They filed separate returns in 2016 and 2017.

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.