Ch 5

Hall, a divorced person and custodian of her 12-year-old child, filed her current year federal income tax return as head of a household. She submitted the following information to the CPA who prepared her return: The divorce agreement, executed in 2017, provides for Hall to receive $3,000 per month, of which $600 is designated as child support. After the child reaches 18, the monthly payments are to be reduced to $2,400 and are to continue until remarriage or death. However, for the current year, Hall received a total of only $5,000 from her former husband. Hall paid an attorney $2,000 in the current year in a suit to collect the alimony owed. In June of the current year, Hall's mother gifted her 100 shares of a listed stock. The donor's basis for this stock, which she bought 20 years ago, was $4,000, and market value on the date of the gift was $3,000. Hall sold this stock in July of the current year for $3,500. The donor paid no gift tax. During the year, Hall spent a total of $1,000 for state lottery tickets, and her lottery winnings totaled $200. Hall earned a salary of $25,000 in the current year. Hall was not covered by any type of retirement plan, but contributed $2,000 to an IRA this year. During the year, Hall sold an antique that she bought 10 years ago to display in her home. Hall paid $800 for the antique and sold it for $1,400, using the proceeds to pay a court-ordered judgment. Hall paid the following expenses in the current year pertaining to the home that she owns: realty taxes, $3,400; mortgage interest, $7,000; casualty insurance, $490; assessment by city for construction of a sewer system, $910; interest of $1,000 on a personal, unsecured bank loan, the proceeds of which were used for home improvements. Hall does not rent out any portion of the home. What amount should be reported in Hall's current year tax return as alimony income?

$0 Alimony income exists if actual receipt > child support Monthly child support $600 Actual Receipt: $5,000 $600 x 12 = $7,200

Roger, age 19, is a full-time student at State College and a candidate for a bachelor's degree. During the year, he received the following payments: State scholarship for ten months (tuition and books) $3,000 Loan from college financial aid office 1,500 Cash support from parents 3,000 Cash dividends 700 Cash prize awarded in a contest 500 What is Roger's adjusted gross income for the year?

$1,200

Charles and Marcia are married cash-basis taxpayers. In Year 8, they had interest income as follows: $500 interest on federal income tax refund $600 interest on state income tax refund $800 interest on federal government obligations $1,000 interest on state government obligations What amount of interest income is taxable on Charles and Marcia's Year 8 joint income tax return?

$1,900 The $500 interest on federal income tax refund, the $600 interest on state income tax refund, and the $800 interest on federal government obligations are taxable, for a total of $1,900. The $1,000 interest on state government obligations is normally not taxable. Recall that to determine whether or not a state tax refund is taxable for federal tax purposes, we must know if the taxpayer took the standard deduction in the prior year or itemized deductions. This is not the case for interest on a tax refund. Interest on a federal or state income tax refund is included in taxable income.

Rick owed Dennis $20,000. In payment of this debt, Rick transferred to Dennis a life insurance policy on Rick. Dennis paid Rick $10,000 to acquire ownership of the life policy. The face value of the policy is $200,000. Dennis names himself as the beneficiary of the policy and continues to make the premium payments. After Dennis has paid $25,000 in premiums, Rick dies and Dennis collects $200,000. Is any of the $200,000 Dennis received taxable?

$145k I.R.C. §101(a)(2) When proceeds are paid under the policy, they are taxable to the extent they exceed the amount of consideration given for the policy ($10,000 cash, plus $20,000 note receivable) and any premiums paid on the policy ($25,000).

Under a $150,000 insurance policy on her deceased father's life, May Green is to receive $12,000 per year for 15 years. Of the $12,000 received in the current year, the amount subject to income tax is:

$2,000 $12k - ($150k/15yrs) = $2k

During the current year, Adler had the following cash receipts: Wages $18,000 Interest income from investments in municipal bonds 400 Unemployment compensation 3,900 What is the total amount that must be included in gross income on Adler's current year income tax return?

$21,900

Kim was seriously injured at her job. As a result of her injury, she received the following payments: $5,000 reimbursement from employer-provided health insurance for medical expenses paid by Kim. The premiums this year paid by Kim's employer totaled $6,000. $15,000 disability pay. Kim has disability insurance provided by her employer as a nontaxable fringe benefit. Kim's employer paid $6,000 in disability premiums this year on behalf of Kim. $10,000 received for damages for personal physical injury. $200,000 for punitive damages. What amount is taxable to Kim?

$215,000

During the year Kay received interest income as follows: On U.S. Treasury certificates 4,000 On refund of prior year's federal income tax 500 The total amount of interest subject to tax in Kay's current year tax return is:

$4,500

Porter was unemployed for part of the year. Porter received $35,000 of wages, $6,400 from a state unemployment compensation plan, and $2,000 from his former employer's company-paid supplemental unemployment benefit plan. What is the amount of Porter's

$43,400

Klein, a master's degree candidate at Blair University, was awarded a $12,000 scholarship from Blair in Year 8. The scholarship was used to pay Klein's Year 8 university tuition and fees. Also in Year 8, Klein received $5,000 for teaching two courses at a nearby college. What amount is includable in Klein's Year 8 gross income?

$5,000

Perle, a dentist, billed Wood $600 for dental services. Wood paid Perle $200 cash and built a bookcase for Perle's office in full settlement of the bill. Wood sells comparable bookcases for $350. What amount should Perle include in taxable income as a result of this transaction?

$550

In the current year Jensen had the following items: Salary $50,000 Inheritance 25,000 Alimony from ex-spouse (divorce agreement finalized in 2015) 12,000 Child support from ex-spouse 9,000 Capital loss on investment stock sale (6,000) What is Jensen's AGI for the current year?

$59,000 Salary, alimony, capital loss (max 3000)

During Year 9, Ash had the following cash receipts: Wages 13,000 Interest income from U.S. Treasury bonds 350 Workers' compensation following a job-related injury 8,500 What is the total amount that must be included in gross income on Ash's Year 9 income tax return

13,350

Which one of the following will result in an accruable expense for an accrual-basis taxpayer?

A repair completed prior to year end but not invoiced.

Determine the taxpayer's gross income for tax purposes in each of the following situations: a. Dana, a cash basis taxpayer, sold a corporate bond with accrued interest of $200 for $10,500. Dana's cost of the bond was $10,000. b. Dana needed $10,000 to make a down payment on her house. She instructed her broker to sell some stock to raise the $10,000. Dana's cost for the stock is $3,000. Based on her broker's advice, instead of selling the stock, she borrowed the $10,000 using the stock as collateral for the debt. c. Dana owns a vacant lot that has been zoned for residential housing. She spends $900 in attorney fees to get the property rezoned as commercial. The property's value increases by $10,000 as a result of the rezoning.

A) Dana has $200 of interest income and a recognized gain of $300 ($10,500-$200-$10,000) B) Dana does not recognize income from using the stock as collateral for the debt. Her assets and liabilities increased by the same amount and she continued to own the stock. Thus, there is no realized gain C) Mere increases in value of an asset are not included in gross income. The attorneys fee should be added to Dana's cost of the property in calculating her basis for the

Debra Kim sued her former boss and recovered the following awards: - Damage to her car the boss caused when Debra broke up with him- $3,000 - Physical damage caused by her boss when he punched her- $4,000 - Loss of income while her face was healing - $9,000 - Punitive damages- $20,000 A) What effect do these recoveries have on Debra's gross income? B) Assume that Debra also collected $60,000 of damages for libel arising out of her former boss's written defamatory statement published on the company's intranet. Is that amount included in Debra's gross income?

A) Debra must include in gross income the punitive damages of $20,000. The other amounts ($4,000 and $9,000) may be excluded as arising out of the physical injury. The $3,000 amount received for damage to her automobile is excluded because this amount is a nontaxable recovery of capital (i.e., it reduces her basis for the automobile by $3,000) B) The $60,000 is included in Debra's gross income because it did not arise out of a physical personal injury.

Mingfang and Kiren are partners in a law firm. The partners have entered into an arm's length agreement requiring Mingfang to purchase Kiren's partnership interest from Kiren's estate if she dies before him. The price is set at 125% of the book value of Kiren's partnership interest at the time of her death. Mingfang purchased an insurance policy on Kiren's life to fund this agreement. After Mingfang had paid $20,000 in premiums, Kiren died due to lung cancer, and Mingfang collected one million dollars of life insurance proceeds. Mingfang used the life insurance proceeds to purchase Kiren's partnership interest. A) What amount should Mingfang include in his gross income from receiving the life insurance proceeds? B) The insurance company paid $10,000 interest on the life insurance proceeds during the period Kiren's estate was in administration. During this period, Mingfang had left the insurance proceeds with the insurance company. Is this interest taxable? C) When Mingfang purchased Kiren's partnership interest for one million dollars, as determined by the agreement, the fair market value of Kiren's interest was $1.5 million. How much should Mingfang include in his gross income from this bargain purchase?

A) Mingfang is the beneficiary of the life insurance policy and can exclude the proceeds of one million dollars from his gross income B) The $10,000 of interest earned on the life insurance proceeds left with the insurance company is included in Mingfang's gross income C) Mingfang did not recognize a gain on the bargain purchase. Mingfang simply got a good price on the purchase under an arm's length contract.

Determine the taxable life insurance proceeds in the following cases: When Jared died, his wife, who was the beneficiary, collected $50,000 on a group term insurance policy purchased by Jared's employer. Jared had never included the premiums in gross income. The Matador Software Company purchased an insurance policy on the life of one of its officers. After his passing, the company, which already previously paid $50,000 in premiums, collected $750,000 of insurance proceeds.

A) The life insurance proceeds of $50,000 were paid to the beneficiary as the result of the death of the insured, and therefore, are excludable from the gross income of Jared's wife B) The proceeds of $750,000 were paid to the beneficiary upon the death of the insured. Therefore, Matador can exclude the insurance proceeds from its gross income.

Donavan & Rex Landscaping is a Limited Liability Company (LLC). How does the tax benefit rule apply to Donavan & Rex in the following transactions: A) In 2021, Donovan & Rex paid Liz $5,000 for referring a client. The deal fell through, and in 2022, Liz refunded the $5,000 to the LLC B) In 2021, Donovan and Rex paid a title company $400 for services in connection with a title search. Because the title company was negligent, the LLC incurred some additional costs in acquiring the building. In 2022, the title company refunded the $400 fee to Donovan and Rex.

A) The receipt of the $5,000 represents a possible recovery of a deduction taken in prior years. If White and Swan had sufficient income to utilize the deduction in the previous year, the $5,000 recovery must be included in gross income B) The receipt of the $400 is not taxable. The amount paid the title company was not deductible in the previous year because it was a capital expenditure for land. The recovery will reduce the cost of the building.

For each of the following, determine the amount that should be included in gross income: A) Tim Sternberg was selected as the most valuable player of the NBA. In recognition of this, he was awarded $100,000 in cash. B) Cynthia West was selected as Ms. California in its annual beauty contest and received a sports car valued at $40,000 from the sponsor of the event. As a condition of the award, Ms. West is required to exhibit with the sports car during the next 12 months. C) Dr. Warshel was awarded the Nobel Prize in Chemistry. He directed the Nobel Committee to pay the $1.4 million prize to a homeless shelter foundation.

A) Yes B) Yes C) No, awards for scientific, literary, or charitable achievement are excluded from gross income, but only if (1) the recipient was selected without any action on his part to enter the contest or proceeding, (2) the recipient is not required to render substantial future services as a condition to receive the prize or award, and (3) the payor of the prize or award transfers the prize or award to a federal, state, or local governmental unit or qualified charity such as a church, school, or charitable organization designated by the taxpayer

Michael is the president of the T Corporation. He and other members of his family control the corporation. Michael has a temporary need for $45,000, and the corporation has excess cash. He could borrow the money from a bank at 9%, and T Corporation is earning 6% on its temporary investments. The federal published lending rate is 8%. T Corporation has made loans to other employees on several occasions. Therefore, Michael is considering borrowing $45,000 from the corporation. He will repay the loan principal in two years plus interest at 5%. Is the corporation required to impute interest income on the loan to Michael? Is Michael required to recognize income from the loan proceeds? Is Michael required to recognize income with respect to the favorable interest rate?

A) Yes, since the loan is below market rate. The interest income imputed should be based on the difference between rate offered by the federal government and published by the IRS and 5%. (i.e., 3%) B) No, receipt of a loan is a liability, not income generating event. C) Yes, if he obtained the loan in his capacity as an employee, then he has to recognize compensation earnings. If he received it in his shareholder capacity, then it would be recognized as dividend income. Would Michael prefer to regard it as dividends or compensation? - Accepting it as dividends would be less beneficial for the corporation because it would not be deductible. However, dividends distribution would be taxed at a lower rate for him as an individual as compared to regular compensation.

Which of the following amounts represents an adjustment to adjusted gross income (AGI) for the current tax year?

Alimony paid to a former spouse pursuant to a divorce agreement executed in 2014

Jay received a court award for damages to his personal reputation by the National Gossip. He also received punitive damages. Which of the following statements is true?

All of the damages are taxable

DAC Foundation awarded Kent $75,000 in recognition of lifelong literary achievement. Kent was not required to render future services as a condition to receive the $75,000. What condition(s) must have been met for the award to be excluded from Kent's gross income? I. Kent was selected for the award by DAC without any action on Kent's part. II. Pursuant to Kent's designation, DAC paid the amount of the award either to a governmental unit or to a charitable organization.

Both I and II

Which of the following conditions must be present in a divorce agreement executed on or before December 31, 2018, for a payment to qualify as deductible alimony? I. Payments must be in cash or its equivalent. II. The payments must end at the recipient's death

Both I and II

Charles visits Reno, Nevada, once each year to gamble. This year his gambling loss was $15,000. He commented to you, "At least I did not have to pay for my airfare and hotel room. The casino paid that because I am such a good customer. That was worth at least $2,500." What are the relevant tax issues for Charles?

Charles received something of value from the casino. Under the broad concept of income, the airfare and hotel accommodations would be considered income. However, Charles could argue that the income should be matched with his $15,000 in gambling losses on the trip

David is a CPA and enjoys playing the lottery. This year, David won $10,000 in lottery scratch-off tickets. He spent $200 purchasing the tickets. Which statement is true regarding David's winnings?

David must include the $10,000 in gross income and can deduct $200 as an itemized deduction.

Derek is a cash basis taxpayer. He sold 100 shares of Zinc Inc., stock for $20,000. The cost to him was $1,000. Shortly before Derek sold the stock, Zinc Inc. decided to distribute unneeded assets to its shareholders. Therefore, Zinc Inc. declared a large dividend. Derek would have been entitled to a $10,000 dividend, but he sold his shares after the dividend declaration date and before the record date. What are the effects of the stock sale and the dividends on Derek's gross income?

Derek has a recognized gain of $19,000 ($20,000 amount realized -$1,000 adjusted basis) from the sale of his stock. The $10,000 dividend is taxable to the new owner, who was the owner on the record date.

With regard to the inclusion of Social Security benefits in gross income, for the Year 8 tax year, which of the following statements is correct?

Eighty-five percent of the Social Security benefits is the maximum amount of benefits to be included in gross income.

A cash basis taxpayer should report gross income:

For the year in which income is either actually or constructively received, whether in cash or in property.

Mr. and Mrs. Williams decided during the tax year to purchase their first new home. The fair market value of the home was $275,000, and a 20 percent down payment was required to secure a mortgage in the amount of $220,000 at 5 percent for 30 years. The Williams' decided to utilize $10,000 that was kept in an Individual Retirement Account owned by Mrs. Williams. This amount was withdrawn on June 12 and used to fund the down payment on July 1. These amounts had been previously deducted as an adjustment by her on an individual tax return in the year of contribution. The remaining $12,000 for the down payment was drawn from a savings account. How much of the distribution from the Individual Retirement Account is subject to the premature distribution penalty tax, and how much must be included in the Williams' joint tax return in the year of distribution as gross income?

Penalty Tax: 0 Gross Income: 10k Generally, a premature distribution (prior to retirement or other allowable age) from an individual retirement account is subject to a 10 percent penalty tax. Certain exceptions to this tax are available and are contained in the mnemonic "HIM DEAD." Home buyer (1st time) $10,000 max if used toward first home Insurance (medical) Medical expenses in excess of percentage of AGI floor Disability Education Adoption or birth of child made within one year from the date of birth or adoption ($5,000 maximum exclusion) Death

Monica Lee, who is single, listed her townhouse in Brentwood for sale with a realtor at a price of $750,000. She purchased it ten years earlier for $650,000. She ended up selling the property for $745,000 and incurred the following expenses and payments as part of the closing: real estate agent commission $29,000; appraisal fee $500; recording fees $500; payment to Bank of America on account of the mortgage $680,000. Monica then purchased another residence for $710,000.

Recognized Gain: $0 745k - 29k - 500 - 500 = 715k - 650k = 65k - 250k (max exclusion) = -195k => $0 Adjusted Basis of NEW home: $710k Recognized Gain if 1.23 million: $300k 1.23m - 29k - 500 - 500 = 1.2m - 650k = 550k - 250k (max exclusion) = 300k

Which of the following statements regarding the self-employment tax is true?

Self-employment income is subject to both federal income tax and self-employment tax.

When Lili, a forklift operator working for the state govenment, was injured on the job, she was allowed under her contract with the state to choose between a $1,000 weekly sick-pay distribution or a $800 weekly workers' compensation payment. Assume Lili is in the 28% tax bracket and that she elected to receive the $1,000 weekly pay. Are these payments taxable?

Sick pay is taxable as salary whereas workers compensation is excludable from income. Therefore, Lili made a poor choice because her sick pay is taxable in full and her net receipt of proceeds is only $720. She would have been able to keep $800 had she selected the workers' compensation option. Reg. 1.104-1(b).

Ania received a $400 state income tax refund this year. Ania deducted $1,000 of state income taxes paid in the prior year as part of her itemized deductions. Which of the following statements regarding the taxability of Ania's refund is true?

The $400 is taxable if Ania's itemized deductions in the prior year exceeded the standard deduction by $400

Darr, an employee of Sorce C Corporation, is not a shareholder. Which of the following would be included in a taxpayer's gross income?

The dividend income on shares of stock that the taxpayer received for services rendered