Question 1

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 31,2012,the accrued interest on the bond was $100.On December 31,2012,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, Brent must report the $400 interest received on the bond in 2012, which includes $100 of accrued interest earned before the gift and $300 of interest earned after the gift. Therefore, he must include the $300 interest earned after the gift in his gross income.

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

Jeff's annual payment of $18,000 was required under the divorce agreement, and therefore constitutes alimony. However, the provision for a reduction in payment to $12,000 in the event of the child's death or reaching age 21 suggests that a portion of the payment may be considered child support. If Jeff had paid only the reduced amount of $12,000, that portion of the payment would be considered nontaxable child support for Darlene, but since he paid the full $18,000, she must include the excess $6,000 in her gross income.

Question 3

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 statement is true. The alimony recapture rules require the recipient of alimony to decrease their AGI by a portion of the amount included in gross income as alimony in a prior year or years if certain conditions are met.

Question 4

Jacob and Emily were co-owners of a personal residence.As part of their divorce agreement,Emily received sole ownership of their personal residence.This property transfer is classified as a property settlement rather than as alimony as the transfer was a result of a divorce.

Accepted Answer

The transfer of the personal residence is classified as a property settlement as it was awarded to Emily as part of the divorce agreement, rather than as alimony.

Question 5

Mark is a cash basis taxpayer.He is a partner in the M&M partnership,and his share of the partnership's profits for 2012 is $90,000.Only $40,000 was distributed to him in January 2012,and this was his share of the 2011 partnership profits.None of the 2012 profits were distributed although Mark's share of the 2012 profits was $90,000.Mark's gross income from the partnership for 2012 is $40,000.

Accepted Answer

Mark is a cash basis taxpayer so he only reports income when it is actually received. He received $40,000 in January 2012, which was his share of the 2011 profits, but did not receive any distribution of the 2012 profits. Therefore, his gross income from the partnership for 2012 is $0, not $90,000.

Question 6

Linda delivers pizzas for a pizza shop.On Wednesday,December 31,2012,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 2,2013.The pizza shop owner recognizes the income of $400 when he receives it from Linda in 2013.

Accepted Answer

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

Question 7

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

This statement is true. The person who benefits from the income (in this case, Ted) is responsible for paying the tax on that income, regardless of who earned it.

Question 8

Rhonda has a 30% interest in the capital and profits of the ABC Partnership.Her share of the profits for 2012 was $90,000.She withdrew $40,000 from the partnership in 2012.In January 2013,after her share of the profits for 2012 had been computed,she withdrew her remaining $50,000 share of 2012 profits.As a result,Rhonda must recognize $40,000 of gross income in 2012 and $50,000 in 2013.

Accepted Answer

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

Question 9

Jake is the sole shareholder of an S corporation that earned $50,000 in 2012.The corporation was short on cash and therefore distributed only $15,000 to Jake in 2012.Jake is required to recognize $15,000 of income from the S corporation in 2012.

Accepted Answer

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

Question 10

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 are triggered if there is a substantial decrease in the amount of the alimony payments in the second and third years after the divorce. The purpose of the recapture rule is to prevent taxpayers from front-loading alimony payments in the first year in order to take advantage of the tax deduction, only to reduce the payments in the following years.

Question 11

In some 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

In community property states such as Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin, income from property that was inherited by a spouse after the marriage is considered separate property and is treated as all earned by the spouse who inherited the property. This means that the income generated by the inherited property is not considered community property and is not subject to division in a divorce settlement.

Question 12

When stock is sold after the record date for a dividend that has been declared,the seller must recognize as income the dividend received.

Accepted Answer

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

Question 13

ABC Corporation mails out its annual Christmas bonuses to employees on December 24th.Ed,a cash basis taxpayer,is an employee who is on a ski trip until January 7th of the new year,but is aware that his annual Christmas bonus arrives on the 28th of December.Ed cannot delay reporting the income from the bonus until the new year.

Accepted Answer

As a cash basis taxpayer, Ed must report the income from the Christmas bonus in the year that he receives it, regardless of whether he is out of town or not. Therefore, he cannot delay reporting the income until the new year.

Question 14

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 statement is true. S corporations are pass-through entities, meaning that the profits and losses are reported on the individual shareholder's tax returns. Regardless of whether the S corporation distributes the income to the shareholders, they are still responsible for paying taxes on their portion of the income.

Question 15

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 30,2012,the partnership had $400,000 net income and for fiscal year ending September 30,2013,the partnership had $300,000 net income.April withdrew $100,000 in December of each year.April's gross income from the partnership for 2012 is $160,000 ($400,000 ´ 40%).

Accepted Answer

April's gross income from the partnership for 2012 is $160,000 ($400,000 x 40%). Since April is a calendar year taxpayer, she would report this income on her 2012 tax return.

Question 16

The B & W partnership earned taxable income of $100,000 for the year.Bryan is entitled to 50% of the profits,but Bryan withdrew only $40,000 during the year.Bryan must include in gross income his $50,000 share of the profits from the partnership.

Accepted Answer

Bryan is entitled to 50% of the profits, regardless of the amount he withdrew during the year. Therefore, he must include his share of the profits ($50,000) in his gross income.

Question 17

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 not required to include the alimony payments in gross income because George earned the income and therefore he should pay the tax on the income.

Accepted Answer

Alimony payments are taxable to the recipient and must be included in their gross income. George cannot pay the tax on the alimony because it is a deduction for him. Therefore, Erin must include the $20,000 in her gross income and pay the tax on it.

Question 18

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 bond on...

Question 19

Alvin is the sole shareholder of an S corporation that earned $200,000 in 2012 and distributed $75,000 to Alvin.Alvin must recognize $75,000 as income from the S corporation in 2012.

Accepted Answer

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

Question 20

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

Since the transfer was pursuant to a divorce agreement, it is considered a transfer incident to divorce which means Fred's cost basis in the stock will be Paula's cost basis of $75,000. Therefore, Fred's recognized gain from the sale of the stock will be $25,000 ($100,000 - $75,000) instead of $5,000.

Quiz 4: Gross Income: Concepts and Inclusions