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Exam 4: Gross Income: Concepts and Inclusions

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Question 1

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Mike contracted with Kram Company, Mike's controlled corporation. Mike was a medical doctor and the contract provided that he would work exclusively for the corporation. No other doctor worked for the corporation. The corporation contracted to perform an operation for Rosa for $8,000. The corporation paid Mike $6,500 to perform the operation under the terms of his employment contract.

A) Mike's gross income is $6,500.
B) Mike must recognize the $8,000 gross income because he provided the service.
C) Mike must recognize $8,000 gross income since the patient obviously wanted him to perform the operation.
D) The Kram Company corporation's gross income is $1,500.
E) None of the above.

F) A) and B)
G) A) and C)

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Question 2

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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, 2014, the partnership had $400,000 net income and for fiscal year ending September 30, 2015, the partnership had $300,000 net income. April withdrew $100,000 in December of each year. April's gross income from the partnership for 2014 is $160,000 ($400,000 × 40%).

A) True
B) False

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Question 3

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Freddy purchased a certificate of deposit for $20,000 on July 1, 2014. The certificate's maturity value in two years (June 30, 2016) is $21,218, yielding 3% before-tax interest.

A cash basis taxpayer purchased a certificate of deposit for $1,000 on July 1, 2013 that will pay $1,100 upon its maturity on June 30, 2015. The taxpayer must recognize a portion of the income in 2014.

The amount of Social Security benefits received by an individual that he or she must include in gross income:

Debbie is age 67 and unmarried and her only sources of income are $200,000 in taxable interest and $20,000 of Social Security benefits. Debbie's adjusted gross income for the year is:

Under the terms of a divorce agreement, Kim was to pay her husband Tom $7,000 per month in alimony. Kim's payments will be reduced to $3,000 per month when their 9 year-old son becomes 21. The husband has custody of their son. For a twelve-month period, Kim can deduct from gross income (and Tom must include in gross income) :

Susan purchased an annuity for $200,000. She is to receive $18,000 each year and her life expectancy is 13 years. If Susan collects under the annuity for 14 years, the entire $18,000 received in the 14th year must be included in her gross income.

Jay, a single taxpayer, retired from his job as a public school teacher in 2014. 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?

In all community property states, the income from property that was inherited by a spouse after the marriage is treated as all earned by the spouse who inherited the property.

Determine the proper tax year for gross income inclusion in each of the following cases. a. An automobile dealer has several new cars in inventory, but often does not have the right combination of body style, color, and accessories. In some cases the dealer makes an offer to sell a car at a certain price, accepts a deposit, and then orders the car from the manufacturer. When the car is received from the manufacturer, the sale is closed, and the dealer receives the balance of the sales price. At the end of the current year, the dealer has deposits totaling $8,200 for cars that have not been received from the manufacturer. When is the $8,200 subject to tax? b. Purple Corporation, an exterminating company, is a calendar year taxpayer. It contracts to provide service to homeowners once a month under a one-, two-, or three-year contract. On April 1 of the current year, the company sold a customer a one-year contract for $120. How much of the $120 is taxable in the current year if the company is an accrual basis taxpayer. If the $120 is payment on a two-year contract, how much is taxed in the year the contract is sold and in the following year? If the $120 is payment on a three-year contract, how much is taxed in the year the contract is sold and in the following year? c. Pink, Inc., an accrual basis taxpayer, owns an amusement park whose fiscal year ends September 30. To increase business during the fall and winter months, Pink sold passes that would allow the holder to ride "free" during the months of October through March. During the month of September, $6,000 was collected from the sale of passes for the upcoming fall and winter. When will the $6,000 be taxable to Pink? d. The taxpayer is in the office equipment rental business and uses the accrual basis of accounting. In December he collected $5,000 in rents for the following January. When is the $5,000 taxable?

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?

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 an $8,000 gain. What will be the increase in Sarah's gross income as a result of the sale of the stock?

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

On January 1, 2014, Faye gave Todd, her son, a 36-month certificate of deposit she purchased December 31, 2012, for $8,638. Faye gave Todd 1,000 shares of ABC, Inc., on December 2, 2014. The certificate had a maturity value of $10,000 and the yield to maturity was 5%. On November 30, 2014, ABC, Inc., had declared a dividend of $1.00 payable to stockholders of record on December 5th. How much interest and dividends should Todd include in his gross income for 2014?

On December 1, 2014, Daniel, an accrual basis taxpayer, collects $12,000 rent for December 2014 and $12,000 for January 2015. Daniel must include the $24,000 in 2014 gross income.

Mark is a cash basis taxpayer. He is a partner in the M&M partnership, and his share of the partnership's profits for 2014 is $90,000. Only $40,000 was distributed to him in January 2014, and this was his share of the 2013 partnership profits. None of the 2014 profits were distributed . Mark's gross income from the partnership for 2014 is $40,000.

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.

Ted was shopping for a new automobile. He found one that met his needs and agreed to purchase it for $23,000. He had shopped around and concluded that he could not get a better price from another dealer. After he had paid for the automobile, the dealer called to notify Ted that he was entitled to a manufacturer's rebate of $1,500. The next week he received a $1,500 check from the manufacturer. How much should Ted include in gross income?

Barney painted his house which saved him $3,000. According to the realization requirement, Barney must recognize $3,000 of income.