Question 1

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.

Accepted Answer

The answer of Rhonda has a 30% interest in the...

Question 2

If the alimony recapture rules apply, the recipient of the alimony decreases his or her AGI by a portion of the amount included in gross income as alimony in a prior year or years.

Accepted Answer

This is true. The alimony recapture rules require the recipient of alimony to include as income a portion of the alimony received in the first two years, but then potentially allows for a reduction in income in the third year if certain conditions are met.

Question 3

When stock is sold after the date of declaration but before the record date, the buyer must recognize as income the dividend declared.

Accepted Answer

The answer of When stock is sold after the date...

Question 4

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.

Accepted Answer

The answer of The B & W Partnership earned taxable...

Question 5

Jake is the sole shareholder of an S corporation that earned $60,000 in 2018. The corporation was short on cash and therefore distributed only $15,000 to Jake in 2018. Jake is required to recognize $60,000 of income from the S corporation in 2018.

Accepted Answer

As the sole shareholder of an S corporation, Jake is required to include the entire amount of the corporation's income on his personal tax return, regardless of whether or not the income was distributed to him. Therefore, Jake must recognize $60,000 of income from the S corporation on his 2018 tax return. The fact that he only received a $15,000 distribution does not change the amount of income he must recognize.

Question 6

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, 2018, the accrued interest on the bond was
$100. On December 31, 2018, Brent collected $400 interest on the bond. Brent must include in gross income the
$300 interest earned after the date of the gift.

Accepted Answer

As a cash basis taxpayer, Brent must report the interest income in the year it is received, not when it accrues. Since Brent received $400 in interest after the date of the gift, he must include that $400 in gross income. The $100 of accrued interest that had already accrued before the gift was made is not included in Brent's gross income, since it was not received by him.

Question 7

In all community property states, the income from property that was inherited by a spouse after the marriage is treated as all earned by the spouse who inherited the property.

Accepted Answer

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Question 8

Paula transfers stock to her former spouse, Fred. The transfer is pursuant to a divorce agreement. Paula's cost of the stock was $75,000 and its fair market value on the date of the transfer is $95,000. Fred later sells the stock for
$100,000. Fred's recognized gain from the sale of the stock is $5,000.

Accepted Answer

Because the transfer was pursuant to a divorce agreement, it qualifies as a transfer incident to divorce and is therefore not taxable. Fred's cost basis in the stock would be the same as Paula's, which is $75,000. Thus, his recognized gain from the sale of the stock would be $25,000, not $5,000.

Question 9

Alvin is the sole shareholder of an S corporation that earned $200,000 in 2018 and distributed $75,000 to Alvin. Alvin must recognize $75,000 as income from the S corporation in 2018.

Accepted Answer

The answer of Alvin is the sole shareholder of an...

Question 10

Jacob and Emily were co-owners of a personal residence. As part of their divorce agreement entered into in 2016, 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.

Accepted Answer

The answer of Jacob and Emily were co-owners of a...

Question 11

Mark is a cash basis taxpayer. He is a partner in the M&M partnership, and his share of the partnership's profits for 2018 is $90,000. Only $40,000 was distributed to him in January 2018, and this was his share of the 2017 partnership profits. None of the 2018 profits were distributed. Mark's gross income from the partnership for 2018 is $40,000.

Accepted Answer

As a cash basis taxpayer, Mark must report income in the year that he receives it. Therefore, his gross income from the partnership for 2018 should be $90,000, not just the $40,000 that was distributed to him in January 2018 for the 2017 profits.

Question 12

After the divorce in 2015, Jeff was required to pay $18,000 per year to his former spouse, Darlene, who had custody of their child. Jeff's payments will be reduced to $12,000 per year in the event the child dies or reaches age 21. During the year, Jeff paid the $18,000 required under the divorce agreement. Darlene must include the $12,000 in gross income.

Accepted Answer

Jeff's payments were reduced to $12,000 per year if either of the mentioned events occurs, but during the year, he paid the full amount required under the divorce agreement, which was $18,000. Therefore, Darlene must include the full $18,000 in gross income.

Question 13

Father made an interest-free loan of $25,000 to Son who used the money to buy an SUV. Son had $1,600 interest income from a certificate of deposit for the year. Father is not required to impute interest income.

Accepted Answer

The answer of Father made an interest-free loan of $25,000...

Question 14

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, 2018, the partnership had $400,000 net income and for fiscal year ending September 30, 2019, the partnership had $300,000 net income. April withdrew $100,000 in December of each year. April's gross income from the partnership for 2018 is $160,000 $400,000 × 40%).

Accepted Answer

April's share of net income for the fiscal year ending September 30, 2018, was $160,000 ($400,000 × 40%). Even though she withdrew $100,000 in December, her gross income from the partnership for 2018 is still $160,000 because the withdrawal does not affect her share of partnership income.

Question 15

Tom, a cash basis taxpayer, purchased a bond on March 31 for $10,000, plus $100 accrued interest. In December, Tom collected $500 interest from the bond. Tom's interest income from the bond for the year is $500.

Accepted Answer

The answer of Tom, a cash basis taxpayer, purchased a...

Question 16

Alimony recapture may occur if there is a substantial decrease in the amount of the alimony payments in the second year.

Accepted Answer

Alimony recapture rules apply if the alimony payments decrease substantially in the second or third year of the payments. This is done to prevent front-loading of alimony payments as a tax shelter. If the payments decrease, the payer may be required to recapture (pay back) some of the tax deductions taken in the prior years.

Question 17

Linda delivers pizzas for a pizza shop. On Wednesday, December 31, 2018, 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, 2019. The pizza shop owner recognizes the income of $400 when he receives it from Linda in 2019.

Accepted Answer

The answer of Linda delivers pizzas for a pizza shop....

Question 18

When a business is operated as an S corporation, a disadvantage is that the shareholder must pay the tax on his or her share of the S corporation's income even though the S corporation did not distribute the income to the shareholder.

Accepted Answer

This is true. S corporations are pass-through entities, which means that the income and losses of the business pass through to the shareholders' personal tax returns. Even if the S corporation does not distribute the income to the shareholder, the shareholder is still responsible for paying taxes on their share of the income.

Question 19

George and Erin divorced in 2019, and George is required to pay Erin $20,000 of alimony each year. George earns
$75,000 a year. Erin is required to include the alimony payments in gross income although George earned the income.

Accepted Answer

The answer of George and Erin divorced in 2019, and...

Question 20

Ted earned $150,000 during the current year. He paid Alice, his former wife, $75,000 in alimony. The couple divorced in 2016. Under these facts, the tax is paid by the person who benefits from the income rather than the person who earned the income.

Accepted Answer

Alimony is taxable income for the recipient and a deduction for the payer. Therefore, Alice would pay taxes on the $75,000 she received in alimony, while Ted would still pay tax on the remaining $75,000 of income he earned.

Quiz 4: Gross Income: Concepts and Inclusions