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Exam 4: Gross Income

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Question 31

True/False

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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.

A) True
B) False

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Question 32

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

A) sell,keep.
B) sell,sell.
C) keep,sell.
D) keep,keep.
E) None of the above.

F) B) and E)
G) D) and E)

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Question 33

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Mel was the beneficiary of a $45,000 group term life insurance policy on his wife.His wife's employer paid all of the premiums on the policy.Mel used the life insurance proceeds to purchase a United States Government bond,which paid him $2,500 interest during the current year.Mel's Federal gross income from the above is $2,500.

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

During the year,Irv had the following transactions: How are these transactions handled for income tax purposes?

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.

George,an unmarried cash basis taxpayer,received the following amounts during 2013: What amount should George report as gross income from dividends and interest for 2013?

Father made an interest-free loan of $25,000 to Son who used the money to buy an SUV.Son had $1,600 interest income from a certificate of deposit for the year.Father is not required to impute interest income.

Iris collected $150,000 on her deceased husband's life insurance policy.The policy was purchased by the husband's employer under a group policy.Iris's husband had included $5,000 in gross income from the group term life insurance premiums during the years he worked for the employer.She elected to collect the policy in 10 equal annual payments of $18,000 each.

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

Denny was neither bankrupt nor insolvent but was short of cash and could not make the mortgage payments on his personal residence in 2013.The bank that held the mortgage agreed to reduce the principal on the debt from $100,000 to $80,000 so that Denny's monthly mortgage payments could be reduced to a manageable amount.Denny also had a vacation home with a mortgage whose payments were beyond his means.The mortgage holder on the vacation home agreed to reduce the mortgage from $60,000 to $50,000.The value of the personal residence was $80,000 and the value of the vacation home was $45,000 at the dates of the debt reduction.

Swan Finance Company,an accrual method taxpayer,requires all of its customers to carry credit life insurance.If a customer dies,the company receives from the insurance company the balance due on the customer's loan.Ali,a customer,died owing Swan $1,500.The balance due included $200 accrued interest that Swan has included in income.When Swan collects $1,500 from the insurance company,Swan:

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.

Emily is in the 35% marginal tax bracket.She can purchase a York County school bond yielding 3.5% interest and the interest is not subject to a 5% state tax.But she is interested in earning a higher return for comparable risk.

In December 2013,Todd,a cash basis taxpayer,paid $1,200 of fire insurance premiums for the calendar year 2014 on a building he held for rental income.Todd deducted the $1,200 of insurance premiums on his 2013 tax return.He had $150,000 of taxable income that year.On June 30,2014,he sold the building and,as a result,received a $500 refund on his fire insurance premiums.As a result of the above:

During 2013,Addison has the following gains and losses:

On January 1,2013,an accrual basis taxpayer entered into a contract to provide termite inspection service each month for 36 months.The amount received for the contract was $2,400.The taxpayer should report $1,600 of income in 2014.

Zack was the beneficiary of a life insurance policy on his wife.Zack had paid $20,000 in premiums on the policy.He collected $50,000 on the policy when his wife died from a terminal illness.Because it took several months to process the claim,the insurance company paid Zack $53,000,the face amount of the policy plus $3,000 interest.Zack must include $23,000 in his gross income.

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.

For the current year,David has salary income of $80,000 and the following property transactions: What is David's AGI for the current year?