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Exam 4: Gross Income: Concepts and Inclusions

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Question 1

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Darryl,a cash basis taxpayer,gave 1,000 shares of Copper Company common stock to his daughter on September 29,2017.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 18,2017.

A) The daughter must recognize the income because she owned the stock when the dividend was declared and she received the $2,000.
B) Darryl must recognize the income of $2,000 because the purpose of the gift was to avoid taxes.
C) Darryl must recognize $1,500 of the dividend because he owned the stock for three-fourths of the year.
D) Darryl must recognize the $2,000 dividend as his income because he constructively received the dividend.
E) None of these.

F) B) and C)
G) None of the above

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A

Question 2

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

A) The fair rental value of an owner-occupied home should be included in income.
B) The increase in value of assets held for the entire year should be included in income for the year.
C) Rent income for 2018 collected in 2017 is income for 2017.
D) All of these.

E) B) and C)
F) A) and B)

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Question 3

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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 gift loan of less than $100,000,the imputed interest rules apply if the donee has net investment income of over $1,000.

For purposes of determining gross income,which of the following is true?

The constructive receipt doctrine requires that income must 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.

Theresa,a cash basis taxpayer,purchased a bond on July 1,2013,for $10,000,plus $400 of accrued interest.The bond paid $800 of interest each December 31.On March 31,2017,she sold the bond for $9,800,which included $200 of accrued interest.

The alimony rules:

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.

Mark a calendar year taxpayer,purchased an annuity for $50,000 in 2015.The annuity was to pay him $3,000 on the first day of each year,beginning in 2015,for the remainder of his life.Mark's life expectancy at the time he purchased the annuity was 20 years.In 2017 Mark developed a deadly disease,and doctors estimated that he would live for no more than 24 months.

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.

ABC Corporation declared a dividend for taxpayers of record as of December 24,2016.The dividend checks were mailed on December 31,2016.Ed,a cash basis shareholder,received the dividend check on January 2,2017.Ed cannot delay reporting the income from the dividend until 2017.

The financial accounting principle of conservatism is not well-suited to the task of measuring taxable income.

Jay,a single taxpayer,retired from his job as a public school teacher in 2017.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?

Orange Cable TV Company,an accrual basis taxpayer,allows its customers to pay by the year in advance ($500 per year) ,or two years in advance ($950) .In September 2017,the company collected the following amounts applicable to future services: As a result of the above,Orange Cable should report as gross income:

Our tax laws encourage taxpayers to ____ assets that have appreciated in value and ____ assets that have declined in value.

The fact that the accounting method the taxpayer uses to measure income is consistent with GAAP does not assure that the method will be acceptable for tax purposes.

Freddy purchased a certificate of deposit for $20,000 on July 1,2017.The certificate's maturity value in two years (June 30,2019) is $21,218,yielding 3% before-tax interest.

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?

The Green Company,an accrual basis taxpayer,provides business-consulting services.Clients generally pay a retainer at the beginning of a 12-month period.This entitles the client to no more than 40 hours of services.Once the client has received 40 hours of services,Green charges $500 per hour.Green Company allocates the retainer to income based on the number of hours worked on the contract.At the end of the tax year,the company had $50,000 of unearned revenues from these contracts.The company also had $10,000 in unearned rent income received from excess office space leased to other companies.Based on the above,Green must include in gross income for the current year: