Question 1

Alvin is the sole shareholder of an S corporation that earned $200,000 in 2019 and distributed $75,000 to him. Alvin must recognize $75,000 as income from the S corporation in 2019.

Accepted Answer

Alvin must recognize the entire $200,000 as income from the S corporation in 2019 because S corporation income is passed through to the shareholders and taxed on their individual tax returns, regardless of the actual distribution amount.

Question 2

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

When stock is sold after the date of declaration but before the record date, the seller of the stock is entitled to receive the dividend. However, the seller may include a notation or endorse the dividend check to transfer the right to receive the dividend to the buyer. In this case, the buyer must recognize the dividend as income.

Question 3

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, 2019, the partnership had $400,000 net income and for fiscal year ending September 30, 2020, the partnership had $300,000 net income. April withdrew $100,000 in December of each year. April's gross income from the partnership for 2019 is $160,000 ($400,000 × 40%).

Accepted Answer

April's gross income from the partnership is calculated based on the partnership's net income, which for the fiscal year ending September 30, 2019, was $400,000. Therefore, April's gross income from the partnership for 2019 is $160,000 ($400,000 × 40%).

Question 4

Jake is the sole shareholder of an S corporation that earned $60,000 in 2019. The corporation was short on cash and therefore distributed only $15,000 to him in 2019. Jake is required to recognize $60,000 of income from the S corporation in 2019.

Accepted Answer

As the sole shareholder of an S corporation, Jake is required to recognize the entire amount of income earned by the corporation, regardless of whether or not it was distributed to him. Therefore, he must recognize $60,000 of income from the S corporation in 2019, even though he only received $15,000 in distributions.

Question 5

George and Erin divorced in 2020, 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 2020, and...

Question 6

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 7

Mark is a cash basis taxpayer. He is a partner in the M&M partnership, and his share of the partnership's profits for
2019 is $90,000. Only $40,000 was distributed to him in January 2019, and this was his share of the 2018 partnership profits. None of the 2019 profits was distributed. Mark's gross income from the partnership for 2019 is $40,000.

Accepted Answer

As a cash basis taxpayer, Mark only includes income that was actually received in the current year. Therefore, his gross income from the partnership for 2019 would only include the $40,000 that was distributed to him in January 2019 as his share of the 2018 profits. The remaining $50,000 of his share of the 2019 profits would not be included in his gross income until it is actually distributed to him in a future year.

Question 8

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, meaning that the income and losses flow through to the shareholders. Even if the income is not distributed to the shareholders, they must still pay taxes on their portion of the income.

Question 9

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, 2019, the accrued interest on the bond was
$100. On December 31, 2019, 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 cash basis taxpayers, Samantha and Brent only report income when it is actually received. Since Brent received $400 interest on the bond on December 31, 2019, he must include that amount in his gross income for the year. However, the $100 accrued interest that was earned before the date of the gift belongs to Samantha and is not included in Brent's income. Therefore, Brent must include in his gross income only the $300 interest earned after the date of the gift.

Question 10

The B & W Partnership earned taxable income of $140,000 for the year. Bryan is entitled to 50% of the profits, but he withdrew only $60,000 during the year. Bryan's gross income from the partnership for the year is $60,000.

Accepted Answer

Bryan's gross income from the partnership for the year is $70,000, as he is entitled to 50% of the profits ($140,000), regardless of how much he actually withdrew.

Question 11

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

Accepted Answer

Tom's interest income for the year includes the $500 interest collected in December plus the $100 accrued interest he paid when purchasing the bond, totaling $600.

Question 12

Linda delivers pizzas for a pizza shop. On Wednesday, December 31, 2019, 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, 2020. The pizza shop owner recognizes the income of $400 when he receives it from Linda in 2020.

Accepted Answer

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

Question 13

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

Accepted Answer

This is correct. The alimony recapture rules require the recipient of alimony to decrease his or her AGI by a portion of the amount included in gross income as alimony in a prior year or years, if certain conditions are met. This recapture is designed to prevent a front-loading of alimony payments, and the IRS has specific rules governing when this recapture applies.

Question 14

After his 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

Darlene must include the $12,000 in gross income if the child dies or reaches age 21, as it is considered a reduction in alimony payments. However, since Jeff paid the full $18,000 required under the divorce agreement during the year, there was no reduction in payments and thus Darlene does not need to include the $12,000 in gross income for that year.

Question 15

Ted earned $150,000 during the current year. He paid Alice, his former wife, $75,000 in alimony. The couple divorced in 2017. 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 deductible to the person who pays it and is considered taxable income to the person who receives it. Therefore, Alice is responsible for paying taxes on the $75,000 she received from Ted.

Question 16

Rhonda has a 30% interest in the capital and profits of the ABC Partnership. In the first year of the partnership,
2019, it earned $150,000. However, the partners agreed that nothing would be distributed until after the end of March
2020, before Rhonda filed her 2019 tax return. The distributions were to be delayed because it was unclear as to whether business conditions would remain good in 2020. Things were going well in 2020 and therefore the partnership distributed $30,000 to Rhonda at the end of March, as a portion of her share of the partnership's
2019 earnings. The partnership's income for 2020 was $60,000. As a result, Rhonda must recognize $30,000 of gross income in 2019 and $18,000 in 2020.

Accepted Answer

Rhonda must recognize her share of the partnership's income based on the partnership's earnings for the year, not when the distributions are made. For 2019, she must recognize $45,000 (30% of $150,000), and for 2020, she must recognize $18,000 (30% of $60,000), regardless of the actual distribution amounts or timing.

Question 17

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

Accepted Answer

The IRS rules on alimony recapture state that if there is a substantial decrease in the amount of alimony payments during the first three years after a divorce, the recipient may have to include some of it as income, and the payor may be able to deduct some of it. This is intended to prevent people from disguising property settlements as alimony payments to take advantage of tax deductions.

Question 18

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

Fred's recognized gain from the sale of the stock is $25,000 because his basis in the stock is considered to be the same as Paula's original cost basis ($75,000), not the fair market value at the time of transfer. Therefore, when Fred sells the stock for $100,000, his gain is calculated based on the difference between the sale price ($100,000) and his basis in the stock ($75,000).

Question 19

Jacob and Emily were co-owners of a personal residence. As part of their divorce agreement entered into in 2017, 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 transfer of property between spouses or incident to divorce is generally a non-taxable event under Internal Revenue Code Section 1041. Jacob would not recognize a taxable gain simply because he received cash for his interest in the personal residence as part of their divorce agreement.

Question 20

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

The answer of In all community property states, the income...

Quiz 4: Gross Income: Concepts and Inclusions