Question 1

Rhonda has a 30% interest in the capital and profits of the ABC Partnership.In the first year of the partnership,2014,it earned $150,000.However,the partners agreed that nothing would be distributed until after the end of March 2015,before Rhonda filed her 2014 tax return.The distributions were to be delayed because it was unclear as to whether business conditions would remain good in 2015.Things were going well in 2015 and therefore the partnership distributed $30,000 to Rhonda at the end of March,as a portion of her share of the partnership's 2014 earnings.The partnership's income for 2015 was $60,000.As a result,Rhonda must recognize $30,000 of gross income in 2014 and $18,000 in 2015.

Accepted Answer

Rhonda must recognize in 2014 her 30% of the partnership's income ($45,000)regardless of whether it is distributed to her.

Question 2

After the divorce,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

The alimony taxable to Darlene is only $12,000.Because of the contingency related to the child,the additional $6,000 is child support (nondeductible to Jeff and not included in Darlene's gross income).

Question 3

Mark is a cash basis taxpayer.He is a partner in the M&M partnership,and his share of the partnership's profits for 2014 is $90,000.Only $40,000 was distributed to him in January 2014,and this was his share of the 2013 partnership profits.None of the 2014 profits were distributed.Mark's gross income from the partnership for 2014 is $40,000.

Accepted Answer

Each partner must report his or her distributive share of the partnership's income and deductions for the partnership's tax year ending within or with the partner's tax year even if such income is not actually distributed.So Mark should report $90,000 for 2014.

Question 4

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 31,2014,the accrued interest on the bond was $100.On December 31,2014,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

The interest accrued at the date of the gift becomes gross income to the cash basis donor when the interest is collected by the donee.Thus,Samantha is taxed on $100 and Brent is taxed on $300 of interest that was earned and collected after he owned the bond (between March 31 and December 31).

Question 5

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

Dividends are included in the gross income of the person who receives them.Because the stock was sold before the record date,the buyer received the dividend.The price of the stock may in fact include the value of the dividend,but the tax law does not include this refinement.

Question 6

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 occurs if there is a substantial decrease in the amount of the alimony payments during the first three years.

Question 7

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 accrued interest of $100 is included in the gross income of the seller rather than in Tom's gross income.Tom's gross income was $400,and he recovered the $100 cost of the accrued interest purchased.The same result would be achieved if Tom were an accrual basis taxpayer.

Question 8

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

This result occurs only in certain community property states.

Question 9

Jake is the sole shareholder of an S corporation that earned $60,000 in 2014.The corporation was short on cash and therefore distributed only $15,000 to Jake in 2014.Jake is required to recognize $60,000 of income from the S corporation in 2014.

Accepted Answer

Jake is taxed on his share of the income earned by the S corporation of $60,000 ($60,000 × 100%),rather than the amount of his distributions.

Question 10

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

The net effect is that the excessive payment is treated as a nondeductible and nonincludible property settlement.So the payor's AGI increases and the payee's AGI decreases.

Question 11

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 loan is classified as a gift loan.Since the amount of the loan is greater than $10,000,the imputed interest rules apply.However,since the loan is not greater than $100,000,the imputed interest is limited to Son's net investment income of $1,600.

Question 12

George and Erin are divorced,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

George is allowed to deduct the alimony of $20,000 from his gross income and Erin includes the alimony of $20,000 in her gross income.Thus,the alimony rules tax the person who benefits from the income rather than the person who earned the income.

Question 13

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 basis is $75,000,the same as Paula's basis.So Fred's recognized gain is $25,000 ($100,000 - $75,000).

Question 14

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

Property transfers incident to a divorce are classified as a property settlement rather than as alimony.Moreover,the property settlement is nontaxable to Jacob,and Emily's basis in the interest purchased from Jacob is the same as Jacob's basis in the residence.

Question 15

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

A shareholder is required to recognize his or her share of S corporation income even if it is not distributed to the shareholder.

Question 16

Ted earned $150,000 during the current year.He paid Alice,his former wife,$75,000 in alimony.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

The alimony rules tax the person who benefits from the $75,000,which is Alice,and the person who makes the payment,Ted,is allowed a deduction.

Question 17

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 30,2014,the partnership had $400,000 net income and for fiscal year ending September 30,2015,the partnership had $300,000 net income.April withdrew $100,000 in December of each year.April's gross income from the partnership for 2014 is $160,000 ($400,000 × 40%).

Accepted Answer

April is taxed on her share of the profits ($160,000)for the partnership's tax year that ends within her calendar tax year.The withdrawals of $100,000 are a distribution of her capital investment,a nontaxable recovery of her capital.

Question 18

Alvin is the sole shareholder of an S corporation that earned $200,000 in 2014 and distributed $75,000 to Alvin.Alvin must recognize $75,000 as income from the S corporation in 2014.

Accepted Answer

Alvin must recognize $200,000 as income.

Question 19

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 income from the partnership flows to the partner whether or not the partner receives any assets from the partnership during the year.Bryan's share of the profits is $70,000 (50% × $140,000).

Question 20

Linda delivers pizzas for a pizza shop.On Wednesday,December 31,2014,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 2,2015.The pizza shop owner recognizes the income of $400 when he receives it from Linda in 2015.

Accepted Answer

Linda is her employer's agent.Therefore,the employer must include the $400 in gross income in 2014,the tax year in which the income was received by the employer's agent.

Quiz 4: Gross Income: Concepts and Inclusions