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Exam 4: Gross Income Concepts and Inclusions

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Question 51

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Under the original issue discount (OID) rules as applied to a three-year certificate of deposit:

A) All of the income must be recognized in the year of maturity by a cash basis taxpayer.
B) The OID will be included in gross income for the year of purchase.
C) The interest income will be the same each year.
D) The interest income will be greater in the third year than in the first year.
E) None of these is correct.

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

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Question 52

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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?

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Roy should select the investment in the ...

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Question 53

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Travis and Andrea were divorced.Their only marital property consisted of a personal residence (fair market value of $400,000,cost of $200,000) ,and publicly-traded stocks (fair market value of $800,000,cost basis of $500,000) .Under the terms of the divorce agreement,Andrea received the personal residence and Travis received the stocks.In addition,Andrea was to receive $50,000 for eight years. I. ​ If the $50,000 annual payments are to be made to Andrea or her estate (if she dies before the end of the eight years) ,the payments will qualify as alimony. II. ​ Andrea has a taxable gain from an exchange of her one-half interest in the stocks for Travis' one-half interest in the house and cash. III. If Travis sells the stocks for $900,000,he must recognize a $400,000 gain.

The annual increase in the cash surrender value of a life insurance policy:

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?

Under the formula for taxing Social Security benefits,low income taxpayers are not required to include any of the Social Security benefits in gross income.But as income increases,50% of the Social Security benefits may be included in gross income.Further increases in income will cause as much as 85% of the Social Security benefits being subject to tax.Does this mean that the taxation of Social Security benefits is more or less progressive than the taxation of other types of income?

In the case of a person with other income of $300,000,15% of his or her Social Security benefits received are excluded from gross income.

Margaret owns land that appreciates at the rate of 10% each year.Ralph owns a zero coupon (i.e. ,all of the interest is paid at maturity but is taxed annually) corporate bond with a yield to maturity of 10%.At the end of 10 years,the bond will mature and the land will be sold.At the end of the 10 years,

Jacob and Emily were co-owners of a personal residence.As part of their divorce agreement,Emily paid Jacob cash for his interest in the personal residence.This cash payment results in a taxable gain to Jacob if he receives more cash than his share of the cost of the residence.

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.

Samantha and her son,Brent,are cash basis taxpayers.Samantha gave Brent a corporate bond with a face amount and fair market value of $10,000.On the date of the gift,March 31,2016,the accrued interest on the bond was $100.On December 31,2016,Brent collected $400 interest on the bond.Brent must include in gross income the $300 interest earned after the date of the gift.

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

Theresa,a cash basis taxpayer,purchased a bond on July 1,2012,for $10,000,plus $400 of accrued interest.The bond paid $800 of interest each December 31.On March 31,2016,she sold the bond for $9,800,which included $200 of accrued interest.

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.

Office Palace,Inc. ,leased an all-in-one printer to a new customer,Ashley,on December 27,2016.The printer was to rent for $600 per month for a period of 36 months beginning January 1,2017.Ashley was required to pay the first and last month's rent at the time the lease was signed.Ashley was also required to pay a $1,500 damage deposit.Office Palace must recognize as income for the lease:

In some foreign countries,the tax law specifically designates the types of income items that are includible in gross income.How does this approach compare with the U.S.Internal Revenue Code (§ 61)? What is a major advantage to the approach used in the U.S.tax law?

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?

In January 2016,Tammy purchased a bond due in 24 months.The cost of the bond is $857 and its maturity value is $1,000.No interest is paid each year,but the compound interest rate on the bond is 8%.Tammy also purchased a Series EE United States Government bond for $558,with a maturity value in 10 years of $1,000.This is the only Series EE bond she has ever owned.The Series EE bond is sold to yield 6% interest.Tammy is 13 years old and has no other source of income.She is claimed as a dependent by her parents.Compute Tammy's gross income from the bond and Series EE bond for 2016 .

Maroon Corporation expects the employees' income tax rates to increase next year.The employees use the cash method.The company presently pays on the last day of each month.The company is considering changing its policy so that the December salaries will be paid on the first day of the following year.What would be the effect on an employee of the proposed change in company policy for paying its salaries beginning December 2016?