Question 1

If the employer provides all employees with group term life insurance equal to twice the employee's annual salary,an employee with a salary of $40,000 has no gross income from the life insurance protection provided by the employer.

Accepted Answer

The IRS allows the first $50,000 of employer-provided group term life insurance to be excluded from gross income. Since twice $40,000 is $80,000, the excess $30,000 is taxable.

Question 2

The amount of an individual's salary withheld and paid into the Social Security program reduces the amount of benefits received that must be included in gross income after the individual reaches retirement age.

Accepted Answer

The amount withheld for Social Security does not affect the taxable portion of Social Security benefits received during retirement. The taxable portion depends on total income and filing status during retirement.

Question 3

The annual increase in the cash surrender value of a life insurance policy:
A)Is taxed according to the original issue discount rules.
B)Is not included in gross income because the policy must be surrendered to receive the cash surrender value.
C)Reduces the deduction for life insurance expense.
D)Is exempt because it is life insurance proceeds.
E)None of the above.

Accepted Answer

The annual increase in the cash surrender value of a life insurance policy is not included in gross income because the policy must be surrendered to receive the cash surrender value. This increase is considered a return of the policyholder's investment in the policy and is not taxable until the policy is surrendered for its cash value.

Question 4

Detroit Corporation sued Chicago Corporation for intentional damage to Detroit's goodwill.Detroit had created its goodwill through providing high-quality services to its customers.Thus,no basis for the goodwill appeared on Detroit's balance sheet.The suit was settled and Detroit received $1,000,000 for the damages to its goodwill.
A)The $1,000,000 is taxable because Detroit has no basis in the goodwill.
B)The $1,000,000 is not taxable because Detroit did nothing to earn the money.
C)The $1,000,000 is taxable because it represents a recovery of capital.
D)The $1,000,000 is not taxable because Detroit settled the case.
E)None of the above.

Accepted Answer

The answer of Detroit Corporation sued Chicago Corporation for intentional...

Question 5

If a lottery prize winner transfers the prize to a qualified government unit or nonprofit organization,then the prize is excluded from the winner's gross income if the amount of the prize does not exceed 25% of the winner's AGI.

Accepted Answer

Lottery winnings are generally included in gross income regardless of whether they are transferred to a government unit or nonprofit organization. The exclusion based on a percentage of AGI does not apply to lottery winnings.

Question 6

The annual increase in the cash surrender value of a life insurance policy:
A)Is taxed when the individual dies and the heirs collect the insurance proceeds.
B)Must be included in gross income each year under the original issue discount rules.
C)Reduces the deduction for life insurance expense.
D)Is not included in gross income each year because of the substantial restrictions on gaining access to the policy's value.
E)None of the above.

Accepted Answer

The cash surrender value of a life insurance policy is not included in gross income each year because of the substantial restrictions on gaining access to the policy's value. However, if the policy is surrendered for cash or if the individual dies and the heirs collect the insurance proceeds, there may be tax consequences.

Question 7

The Blue Utilities Company paid Sue $1,500 for the right to lay an underground electric cable across her property anytime in the future.
A)Sue must recognize $1,500 gross income in the current year if the company did not install the cable during the year.
B)Sue must recognize $1,500 gross income in the current year regardless of whether the company installed the cable during the year.
C)Sue must recognize $1,500 gross income in the current year,and when the cable is installed she must reduce her cost basis in the land by $1,500.
D)Sue is not required to recognize gross income from the receipt of the funds,but she must reduce her cost basis in the land by $1,500.
E)None of the above.

Accepted Answer

The answer of The Blue Utilities Company paid Sue $1,500...

Question 8

Turner,a successful executive,is negotiating a compensation plan with his potential employer.The employer has offered to pay Turner a $720,000 annual salary,payable at the rate of $60,000 per month.Turner counteroffers to receive a monthly salary of $50,000 ($600,000 annually)and a $180,000 bonus in 5 years when Turner will be age 65.
A)If the employer accepts Turner's counteroffer,Turner will recognize $65,000 ($780,000 $\div$  12)each month.
B)If the employer accepts Turner's counteroffer,Turner will be in constructive receipt of $60,000 per month.
C)If the employer accepts Turner's counteroffer,Turner will be in constructive receipt of $60,000 per month and the $180,000 bonus.
D)If the employer accepts Turner's counteroffer,Turner will recognize as gross income $50,000 per month and $180,000 in year 5.
E)None of the above.

Accepted Answer

If the employer accepts Turner's counteroffer, he will receive a monthly salary of $50,000 ($600,000 annually) and a $180,000 bonus in year 5. He will recognize as gross income $50,000 per month and $180,000 in year 5, as the bonus will be deferred until that year. Therefore, Option D is the correct answer. Option A is incorrect as Turner will not recognize $65,000 each month as he has negotiated for a lower monthly salary. Option B is incorrect as Turner will not be in constructive receipt of $60,000 per month. Option C is incorrect as the bonus will be deferred until year 5.

Question 9

The tax concept and economic concept of income are in agreement on which of the following:
A)The fair rental value of an owner-occupied home should be included in income.
B)The increase in value of assets held for the entire year should be included in income for the year.
C)The decrease in value of assets held for the entire year should reduce income for the year.
D)All of the above.
E)None of the above.

Accepted Answer

The tax concept of income does not include unrealized gains or losses, nor does it include imputed income like the fair rental value of an owner-occupied home, which differs from some economic concepts of income.

Question 10

In the case of a below-market gift loan for which there is no exception to the imputed interest rules,the lender is deemed to have received interest income even though no interest is charged and collected.

Accepted Answer

This is true. The imputed interest rules require that interest be imputed or calculated and treated as if it were received, even if no interest is actually charged or collected on a below-market gift loan.

Question 11

Norma's income for 2010 is $27,000 from part-time work and $9,000 of Social Security benefits.Norma is not married.A portion of her Social Security benefits must be included in her gross income.

Accepted Answer

A portion of Social Security benefits may be included in taxable income, depending on the taxpayer's total income and filing status. Since Norma's income includes both part-time work and Social Security benefits, it is likely that a portion of her benefits will be taxable.

Question 12

Lois,who is single,received $9,000 of Social Security benefits.She also received $30,000 from dividends,interest,and her employer's pension plan.If Lois sells a capital asset that produces a $1,000 recognized loss,Lois's taxable income will decrease by less than $1,000.

Accepted Answer

The $1,000 recognized loss from selling a capital asset will offset $1,000 of Lois's other income (dividends, interest, pension) for tax purposes. Therefore, Lois's taxable income will decrease by exactly $1,000.

Question 13

On a particular Saturday,Tom had planned to paint a room in his house,but his employer gave him the opportunity to work that day.If Tom works,he must hire a painter for $100.For Tom to have a positive cash flow from working and hiring the painter:
A)Tom must earn at least $125 if Tom is in the 25% marginal tax bracket.
B)Tom must earn at least $150 if Tom is in the 33% marginal tax bracket.
C)Tom must earn at least $150 if he is in the 25% marginal tax bracket.
D)Tom must earn at least $115 if he is in the 15% marginal tax bracket.
E)None of the above.

Accepted Answer

If Tom works, he will earn some income, but he will also have to pay $100 to hire a painter. Therefore, Tom's net income from working will be his income minus $100. In order for him to have a positive cash flow, his net income must be greater than $0.
Let X be the amount Tom earns if he works. Then:
For someone in the 25% marginal tax bracket: 
Net income = X - $100 - 0.25X
Therefore, X - $100 - 0.25X > 0 
0.75X > $100 
X > $133.33
For someone in the 33% marginal tax bracket:
Net income = X - $100 - 0.33X
Therefore, X - $100 - 0.33X > 0 
0.67X > $100
X > $149.25
Since Tom must earn at least this amount to have a positive cash flow from working and hiring the painter, the correct answer is B) Tom must earn at least $150 if Tom is in the 33% marginal tax bracket.

Question 14

Susan purchased an annuity for $120,000.She is to receive $15,000 each year and her life expectancy is 12 years.If Susan collects under the annuity for 13 years,the entire $15,000 received in the 13th year must be included in her gross income.

Accepted Answer

The entire $15,000 received in the 13th year would be considered an excess distribution and must be included in Susan's gross income if she collects under the annuity for more than her life expectancy.

Question 15

Under the original issue discount (OID)rules as applied to a three-year certificate of deposit:
A)All of the income must be recognized in the year of purchase.
B)The OID will not be included in gross income until the end of the third year.
C)The interest income for the first year will be greater than the interest income for the second year.
D)The original issue discount must be amortized using the effective interest method.
E)None of the above is correct.

Accepted Answer

Under the OID rules, the original issue discount must be amortized using the effective interest method. This means that the discount is allocated to each year of the investment based on the effective interest rate, and the interest income recognized each year will vary. Therefore, option A is not correct since all of the income is not recognized in the year of purchase. Option B is also not correct since the OID will be included in gross income each year based on the effective interest method. Option C is incorrect since it makes a generalized assumption about the interest income, which will depend on the specific terms of the certificate of deposit.

Question 16

In the case of a gift loan of less than $100,000,the imputed interest rules apply if the donee has net investment income of over $1,000.

Accepted Answer

According to the IRS, the imputed interest rules apply to gift loans of less than $100,000 if the donee has net investment income of over $1,000.

Question 17

Terri purchased an annuity for $100,000.She was to receive $8,000 per year and her life expectancy was 20 years.She died after receiving 15 payments.Terri's final return should reflect a loss of $40,000 (5 payments not made * $8,000).

Accepted Answer

The question is asking if Terri's final return should reflect a loss of $40,000, which implies that the full $100,000 should have been paid out over the 20-year life expectancy. However, since Terri only received 15 payments, she would have been paid out $120,000 and therefore actually received a profit of $20,000 ($120,000 - $100,000). There is no loss of $40,000 to be reflected in her final return.

Question 18

Maroon Corporation is considering deferred compensation plans for its executive employees over age 55.All of the employees use the cash method of accounting.One plan is to allow the employee to make an election at the beginning of the year to defer 10% of his or her salary until retirement,at which time the executive would receive the deferred pay plus 6% interest.
A)The 10% of salary and the interest must be included in gross income before retirement.
B)The employee cannot defer the income (both the salary and the interest)for tax purposes because it is constructively received each year.
C)The employee must recognize the salary each year,but can defer the interest.
D)The salary and the related interest can be deferred from inclusion in gross income until they are received.
E)None of the above is correct.

Accepted Answer

The salary and the related interest can be deferred from inclusion in gross income until they are received, as long as the deferred compensation plan meets certain requirements.

Question 19

Father made an interest-free loan of $15,000 to Son who used the money to buy a certificate of deposit.If Son's investment income for the year is less than $1,000,Father is not required to impute interest income.

Accepted Answer

This statement is true. According to the Internal Revenue Service (IRS), if the loan is interest-free and the total amount of investment income earned by the borrower is less than $1,000 in a year, the lender is not required to impute interest income.

Question 20

For purposes of determining gross income,which of the following is true?
A)A taxpayer who finds a wallet full of money is not required to recognize income because someone will eventually ask for the return of the money.
B)A mechanic completed repairs on an automobile during the year and collects money from the customer.The customer was not satisfied with the repairs and sued the mechanic for a refund.The mechanic cannot defer recognition of the income until the suit has been settled.
C)Embezzlement proceeds are not included in the embezzler's gross income because the embezzler has an obligation to repay the owner.
D)All of the above are true.
E)None of the above is true.

Accepted Answer

Under the accrual basis of accounting, income is recognized when earned, regardless of when payment is received. Therefore, the mechanic must recognize the income from the repair work in the year it was completed, even if a lawsuit has been filed for a refund.

A is incorrect because finding money and not reporting it as income is considered tax evasion.

C is incorrect because embezzlement proceeds are considered income and should be included in gross income. The obligation to repay the owner does not affect the recognition of income.

D and E are incorrect because only choice B is true.

Quiz 4: Gross Income: Concepts and Inclusions

If the employer provides all employees with group term life insurance equal to twice the employee's annual salary,an employee with a salary of $40,000 has no gross income from the life insurance protection provided by the employer.

The amount of an individual's salary withheld and paid into the Social Security program reduces the amount of benefits received that must be included in gross income after the individual reaches retirement age.

The annual increase in the cash surrender value of a life insurance policy:

If a lottery prize winner transfers the prize to a qualified government unit or nonprofit organization,then the prize is excluded from the winner's gross income if the amount of the prize does not exceed 25% of the winner's AGI.

The annual increase in the cash surrender value of a life insurance policy:

The Blue Utilities Company paid Sue $1,500 for the right to lay an underground electric cable across her property anytime in the future.

The tax concept and economic concept of income are in agreement on which of the following: