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Exam 4: Gross Income: Concepts and Inclusions

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Question 61

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Your client is considering transferring $25,000 from his savings account in a local bank paying 2% interest to a bank in Mexico City fully-insured bank paying 3%. What do you advise?

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You should warn the client about complic...

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Question 62

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On January 1, 2018, an accrual basis taxpayer entered into a contract to provide termite inspection service each month for 24 months. The amount received for the contract was $2,400. The taxpayer reported $1,200 as income on its financial statement for 2018, and should do the same for its tax return.

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Question 63

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Jay, a single taxpayer, retired from his job as a public school teacher in 2018. 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?

On December 1, 2018, Daniel, an accrual basis taxpayer, collects $12,000 rent for December 2018 and $12,000 for January 2019. Daniel must include the $24,000 in 2018 gross income.

With respect to income from services, which of the following is true?

The financial accounting principle of conservatism is not well-suited to the task of measuring taxable income.

Margaret made a $90,000 interest-free loan to her son, Adam, who used the money to retire a mortgage on his personal residence and to buy a certificate of deposit. Adam's only income for the year is his salary of $35,000 and $1,400 interest income on the certificate of deposit. Assume the relevant Federal interest rate is 8% compounded semiannually. The loan is outstanding for the entire year. a. Based on the above information, what is the effect of the loan on Margaret's gross income for the year? b. The facts are the same as above, except you discovered that Margaret had made an additional loan of $15,000 to Adam in the previous year. Adam used the funds to pay his child's private school tuition. What are the effects of the loans on Margaret's gross income?

In the case of a gift loan of less than $100,000, the imputed interest rules apply if the donee has net investment income of over $1,000.

Freddy purchased a certificate of deposit for $20,000 on July 1, 2018. The certificate's maturity value in two years (June 30, 2020) is $21,218, yielding 3% before-tax interest.

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?

The alimony rules applicable to divorces entered into before 2019:

Turner, a successful executive, is negotiating a compensation plan with his potential employer. The employer has offered to pay Turner a $600,000 annual salary, payable at the rate of $50,000 per month. Turner counteroffers to receive a monthly salary of $40,000 ($480,000 annually) and a $180,000 bonus in 5 years when Turner will be age 65.

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

Jerry purchased a U.S. Series EE savings bond for $744. The bond has a maturity value in 10 years of $1,000 and yields 3% interest. This is the first Series EE bond that Jerry has ever owned.

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.

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

Rhonda has a 30% interest in the capital and profits of the ABC Partnership. In the first year of the partnership, 2018, it earned $150,000. However, the partners agreed that nothing would be distributed until after the end of March 2019, before Rhonda filed her 2018 tax return. The distributions were to be delayed because it was unclear as to whether business conditions would remain good in 2019. Things were going well in 2019 and therefore the partnership distributed $30,000 to Rhonda at the end of March, as a portion of her share of the partnership's 2018 earnings. The partnership's income for 2019 was $60,000. As a result, Rhonda must recognize $30,000 of gross income in 2018 and $18,000 in 2019.

Melissa is a compulsive coupon clipper. She often brags about the time she purchased a cart full of groceries for $5.00, when the cost without coupons would have been $50. Discuss whether Melissa realizes gross income from her coupon clipping.

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.

Betty purchased an annuity for $24,000 in 2018. Under the contract, Betty will receive $300 each month for the rest of her life. According to the actuarial estimates, Betty will live to receive 96 payments and will receive a 3% return on her original investment.