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Exam 4: Gross Income Concepts and Inclusions

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Question 41

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Sharon made a $60,000 interest-free loan to her son,Todd,who used the money to start a new business.Todd's only sources of income were $25,000 from the business and $490 of interest on his checking account.The relevant Federal interest rate was 5%.Based on the above information:

A) Todd's business net profit will be reduced by $3,000 (.05 × $60,000) of interest expense.
B) Sharon must recognize $3,000 (.05 × $60,000) of imputed interest income on the below- market loan.
C) Todd's gross income must be increased by the $3,000 (.05 × $60,000) imputed interest income on the below market loan.
D) Sharon does not recognize any imputed interest income and Todd does not recognize any imputed interest expense.
E) None of these is correct.

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

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Question 42

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Norma's income for 2016 is $27,000 from part-time work and $9,000 of Social Security benefits.Norma is not married.A portion of her Social Security benefits must be included in her gross income.

A) True
B) False

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Question 43

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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.

At the beginning of 2016,Mary purchased a 3-year certificate of deposit (CD)for $8,760.The maturity value of the certificate was $10,000 and it was to yield 4.5%.She also purchased a Series EE bond for $6,400 with a maturity value in 10 years of $10,000.Mary must recognize $1,240 of income from the certificate of deposit in 2016,and $3,600 from the Series EE bonds in 2025.

On a particular Saturday,Tom had planned to paint a room in his house,but his employer gave him the opportunity to work that day.If Tom works,he must hire a painter for $120.For Tom to have a positive cash flow from working and hiring the painter:

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.

Alvin is the sole shareholder of an S corporation that earned $200,000 in 2016 and distributed $75,000 to Alvin.Alvin must recognize $75,000 as income from the S corporation in 2016.

Linda delivers pizzas for a pizza shop.On Wednesday,December 31,2016,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 2,2017.The pizza shop owner recognizes the income of $400 when he receives it from Linda in 2017.

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) :

Darryl,a cash basis taxpayer,gave 1,000 shares of Copper Company common stock to his daughter on September 29,2016.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 18,2016.

Terri purchased an annuity for $100,000.She was to receive $10,000 per year and her life expectancy was 20 years.She died after receiving 8 payments.Terri's final return should reflect a loss of $20,000 ($100,000 - $80,000).

The B & W Partnership earned taxable income of $140,000 for the year.Bryan is entitled to 50% of the profits,but Bryan withdrew only $60,000 during the year.Bryan's gross income from the partnership for the year is $60,000.

Jay,a single taxpayer,retired from his job as a public school teacher in 2016.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?

Green,Inc. ,provides group term life insurance for all of its employees.The coverage equals twice the employee's annual salary.Sam,a vice-president,worked all year for Green,Inc. ,and received $200,000 of coverage for the year at a cost to Green of $1,500.The Uniform Premiums (based on Sam's age) are $.25 per month for $1,000 of protection.How much must Sam include in gross income this year?

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 30,2016,the partnership had $400,000 net income and for fiscal year ending September 30,2017,the partnership had $300,000 net income.April withdrew $100,000 in December of each year.April's gross income from the partnership for 2016 is $160,000 ($400,000 × 40%).

On January 5,2016,Tim purchased a bond paying interest at 6% for $30,000.On March 31,2016,he gave the bond to Jane.The bond pays $1,800 interest on December 31.Tim and Jane are cash basis taxpayers.When Jane collects the interest in December 2016: ​

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.

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:

Freddy purchased a certificate of deposit for $20,000 on July 1,2016.The certificate's maturity value in two years (June 30,2018) is $21,218,yielding 3% before-tax interest.

Jessica is a cash basis taxpayer.When Jessica failed to repay a loan,the bank garnished her salary.Each week $60 was withheld from Jessica's salary and paid to the bank.Jessica is required to include the $60 each week in her gross income even though it is the creditor that benefits from the income.