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Exam 4: Gross Income

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Question 21

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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 2017 collected in 2016 is income for 2016.
D) All of these.
E) None of these.

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

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Question 22

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Juan, was considering purchasing an interest in a tax-exempt bond fund for $100,000, when he discovered that the interest must be included on his state income tax return. The interest rate is 5%. His marginal Federal tax rate is 35%, and his marginal state income tax rate is 10%. Juan itemizes his deductions on his Federal income tax return. As an alternative, Juan can purchase a state bond (a "double-exempt bond") yielding 4.9% interest that is exempt from both Federal and state income tax. Which investment would yield the greater after-tax return?

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Juan will receive $5,000 before-tax from...

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Question 23

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Zork Corporation was very profitable and had accumulated excess cash. The company decided to repurchase some of its bonds that had been issued for $1,000,000. Because of an increase in market interest rates, Zork was able to retire the bonds for $900,000. The company is not required to recognize $100,000 of income from the discharge of its indebtedness but must reduce the basis in its assets.

In December 2015, Mary collected the December 2015 and January 2016 rent from a tenant. Mary is a cash basis taxpayer. The amount collected in December 2015 for the 2016 rent should be included in her 2016 gross income.

Sally and Ed each own property with a fair market value less than the amount of the outstanding mortgage on the property and also less than the original cost basis. They each were able to convince the mortgage holder to reduce the principal amount on the mortgage. Sally's mortgage is on her personal residence and Ed's mortgage is on rental property he owns. Both debts are recourse. a.​Explain whether each of these individuals has realized income from the reduction in the debt. b.​​Assume that under the current system of measuring income, each of these taxpayers realized income from the reductions in the mortgages. Should either of these taxpayers be permitted to exclude any of the debt discharge income?

Heather's interest and gains on investments for the current year are as follows: ​ Heather's adjusted gross income from the above is: or; Heather must report gross income in the amount of: ​

If a tax-exempt bond will yield approximately .65 (1 - .35) times the yield on a taxable bond of equal risk, who benefits from the tax exemption: the Federal government, the state and local governments who issue the bonds, or the investors?

In early 2016, Ben sold a yacht, held for 9 months and for pleasure, for a $5,000 gain. Concerned about offsetting the gain before year-end, Ben is considering selling one of the following-each of which would yield a $5,000 loss: ∙ Houseboat used for recreation. ∙ Truck used in business. ∙ Stock investment held for 13 months. Evaluate each choice.

Kirby is in the 15% tax bracket and had the following capital asset transactions during 2016: Kirby's tax consequences from these gains are as follows:

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.

When stock is sold after the date of declaration but before the record date, the buyer must recognize as income the dividend declared.

Detroit Corporation sued Chicago Corporation for intentional damage to Detroit's goodwill. Detroit had created its goodwill through providing high-quality services to its customers. Thus, no basis for the goodwill appeared on Detroit's balance sheet. The suit was settled and Detroit received $1,500,000 for the damages to its goodwill.

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. Roy 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% the factor is 1.5981, which alternative should Roy choose?

On January 1, Father (Dave) loaned Daughter (Debra) $100,000 to purchase a new car and to pay off college loans. There were no other loans outstanding between Dave and Debra. The relevant Federal rate on interest was 6 percent. The loan was outstanding for the entire year.

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?

During 2016, Jackson had the following capital gains and losses: ​ a.How much is Jackson's tax liability if he is in the 15% tax bracket? b.If his tax bracket is 33% (not 15%)?

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

The purpose of the tax rules that apply to below-market loans between family members is to:

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.

As a general rule: I.Income from property is taxed to the person who owns the property. II.Income from services is taxed to the person who earns the income. III.The assignee of income from property must pay tax on the income. IV.The person who receives the benefit of the income must pay the tax on the income.