TAX 4001 - Chapter 4 Part 1

Theresa, a cash basis taxpayer, purchased a bond on July 1, 2010, for $10,000, plus $400 of accrued interest. The bond paid $800 of interest each December 31. On March 31, 2014, she sold the bond for $9,800, which included $200 of accrued interest.

Gordon, an employee, is provided group term life insurance coverage equal to twice his annual salary of $125,000 per year. According to the IRS Uniform Premium Table (based on Gordon’s age), the amount is $12 per year for $1,000 of protection. The cost of an individual policy would be $15 per year for $1,000 of protection. Since Gordon paid nothing towards the cost of the $250,000 protection, Gordon must include in his 2014 gross income which of the following amounts?

Wayne owns a 30% interest in the capital and profits of Emerald Company (a calendar year partnership). For tax year 2013, the partnership earned revenue of $900,000 and had operating expenses of $660,000. During the year, Wayne withdrew from the partnership a total of $90,000. He also invested an additional $30,000 in the partnership. For 2013, Wayne’s gross income from the partnership is:

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

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

Tim and Janet were divorced. Their only marital property was a personal residence with a value of $120,000 and cost of $50,000. Under the terms of the divorce agreement, Janet would receive the house and Janet would pay Tim $15,000 each year for 5 years, or until Tim’s death, whichever should occur first. Tim and Janet lived apart when the payments were made to Tim. The divorce agreement did not contain the word “alimony.”

Which of the following is not a requirement for an alimony deduction?

Darryl, a cash basis taxpayer, gave 1,000 shares of Copper Company common stock to his daughter on September 29, 2014. 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, 2014.

On January 5, 2014, Tim purchased a bond paying interest at 6% for $30,000. On March 31, 2014, 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 2014:

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’ one­half interest in the house and cash.
III. If Travis sells the stocks for $900,000, he must recognize a $400,000 gain.

On November 1, 2014, Bob, a cash basis taxpayer, gave Dave common stock. On October 30, 2014, the corporation had declared the dividend payable to shareholders of record as of November 22, 2014. The dividend was paid on December 15, 2014. The corporation has paid the $1,200 dividend once each year for the past ten years, during which Bob owned the stock. When Dave collected the dividend on December 15, 2014:

Under the terms of a divorce agreement, Lanny was to pay his wife Joyce $2,000 per month in alimony and $500 per month in child support. For a twelve-month period, Lanny can deduct from gross income (and Joyce must include in gross income):

The Maroon & Orange Gym, Inc., uses the accrual method of accounting. The corporation sells memberships that entitle the member to use the facilities at any time. A one-year membership costs $480 ($480/12 = $40 per month); a two-year membership costs $720 ($720/24 = $30 per month). Cash payment is required at the beginning of the membership period. On July 1, 2014, the company sold a one-year membership and a two-year membership. The company should report as gross income from the two contracts:

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?

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

Teal Company is an accrual basis taxpayer. On December 1, 2014, a customer paid for an item that was on hand, but the customer wanted the item delivered in early January 2015. Teal delivered the item on January 4, 2015. Teal included the sale in its 2014 income for financial accounting purposes.

The alimony rules:

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.

In 2014, Todd purchased an annuity for $150,000. The annuity is to pay him $2,500 per month for the rest of his life. His life expectancy is 100 months. Which of the following is correct?

Under the alimony rules:

The Green Company, an accrual basis taxpayer, provides business-consulting services. Clients generally pay a retainer at the beginning of a 12-month period. This entitles the client to no more than 40 hours of services. Once the client has received 40 hours of services, Green charges $500 per hour. Green Company allocates the retainer to income based on the number of hours worked on the contract. At the end of the tax year, the company had $50,000 of unearned revenues from these contracts. The company also had $10,000 in unearned rent income received from excess office space leased to other companies. Based on the above, Green must include in gross income for the current year:

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

The effects of a below-market loan for $100,000 made by a corporation to its chief executive officer as an enticement to get him to remain with the company are:

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.

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.

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

For purposes of determining gross income, which of the following is true?

Mark a calendar year taxpayer, purchased an annuity for $50,000 in 2012. The annuity was to pay him $3,000 on the first day of each year, beginning in 2012, for the remainder of his life. Mark’s life expectancy at the time he purchased the annuity was 20 years. In 2014 Mark developed a deadly disease, and doctors estimated that he would live for no more than 24 months.

As a general rule:
I. Income from property is taxed to the person who owns the property.
II. Income from services is taxed to the person who earns the income.
III. The assignee of income from property must pay tax on the income.
IV. The person who receives the benefit of the income must pay the tax on the income.

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.

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

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.

Daniel purchased a bond on July 1, 2014, at par of $10,000 plus accrued interest of $300. On December 31, 2014, Daniel collected the $600 interest for the year. On January 1, 2015, Daniel sold the bond for $10,200.

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.

Under the terms of a divorce agreement, Ron is to pay his former wife Jill $10,000 per month. The payments are to be reduced to $7,000 per month when their 15 year-old child reaches age 18. During the current year, Ron paid $120,000 under the agreement. Assuming all of the other conditions for alimony are satisfied, Ron can deduct from gross income (and Jill must include in gross income) as alimony:

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

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?

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.

The alimony recapture rules are intended to:

Thelma and Mitch were divorced. The couple had a joint brokerage account that included stocks with a basis of $600,000 and a fair market value of $1,000,000. Under the terms of the divorce agreement, Mitch would receive the stocks and Mitch would pay Thelma $100,000 each year for 6 years, or until Thelma’s death, whichever should occur first. Thelma and Mitch lived apart when the payments were made by Mitch. Mitch paid the $600,000 to Thelma over the six­year period. The divorce agreement did not contain the word “alimony.” Then, Mitch sold the stocks for $1,300,000. Mitch’s recognized gain from the sale is:

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 for December 2014.

Betty purchased an annuity for $24,000 in 2014. 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.

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:

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:

Office Palace, Inc., leased an all-in-one printer to a new customer, Ashley, on December 27, 2014. The printer was to rent for $600 per month for a period of 36 months beginning January 1, 2015. 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:

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):

Orange Cable TV Company, an accrual basis taxpayer, allows its customers to pay by the year in advance ($500 per year), or two years in advance ($950). In September 2014, the company collected the following amounts applicable to future services:

October 2014-September 2016 services (two-year contracts) .......$144,000
October 2014-September 2015 services (one-year contracts) .........128,000
Total ....................................................................................$272,000
As a result of the above, Orange Cable should report as gross income:

Jim and Nora, residents of a community property state, were married in early 2013. Late in 2013 they separated, and in 2014 they were divorced. Each earned a salary, and they received income from community owned investments in all relevant years. They filed separate returns in 2013 and 2014.

The tax concept and economic concept of income are in agreement on which of the following:

Sharon made a $60,000 interest­free 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: