Question 1

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 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

Since Jeff paid the full amount of $18,000 required under the divorce agreement during the year, there was no reduction in the payments due to the child's death or reaching age 21. Therefore, Darlene must include the $12,000 reduction in gross income as it did not occur during the year.

Question 3

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

As a cash basis taxpayer, Brent must include in his gross income any interest earned after he received the bond as a gift on March 31, 2014. Therefore, he must include the $300 interest earned from April 1, 2014 through December 31, 2014, even though the bond was acquired by gift.

Question 4

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 5

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

In the United States, the person who receives alimony payments must report them as income on their tax return and pay taxes on them, not the person who pays the alimony. Therefore, Ted would be responsible for paying taxes on the $150,000 he earned, while Alice would pay taxes on the $75,000 she received in alimony.

Question 6

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 7

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's gross income from the partnership for 2014 is calculated as her share of the partnership net income, which is $160,000 ($400,000 × 40%). The fact that she withdrew $100,000 in December of that year does not affect her gross income from the partnership.

Question 8

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 can occur if there is a substantial decrease in the amount of the alimony payments in the second year. This is a tax provision designed to prevent front-loading of alimony payments in the first year of a divorce settlement. If the payments decrease by more than $15,000 in the second and third years combined, the payer may have to recapture some of the alimony previously deducted.

Question 9

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

Mark is a cash basis taxpayer, so he only recognizes income when it is actually received. In this case, he only received $40,000 in January 2014, which was his share of the 2013 partnership profits. Therefore, his gross income from the partnership for 2014 is only $40,000, not the full $90,000.

Question 10

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

Alimony payments are taxable income for the recipient and must be included in gross income, regardless of who earned the money.

Question 11

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 is pursuant to a divorce agreement, it qualifies as a transfer incident to divorce and is not subject to tax. Fred's basis in the stock would be Paula's basis ($75,000), so his recognized gain would be $25,000 ($100,000 - $75,000), not $5,000.

Question 12

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 alimony recapture rules require the recipient of alimony to include in his or her income a portion of the alimony payments received in the first and second years, and if total alimony decreases significantly in the third year, the recipient may be required to recapture (refunds) some of the tax deductions taken in the first two years. As a result, the recipient may be able to decrease his or her AGI by a portion of the amount included in gross income as alimony in a prior year or years.

Question 13

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 14

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.

Question 15

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 16

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

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

Question 17

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

As a shareholder of an S corporation, Jake is required to recognize his pro-rata share of the corporation's income regardless of whether or not the corporation distributes that income as a dividend. Therefore, Jake must recognize $60,000 of income for tax purposes, even though he only received a distribution of $15,000 from the corporation.

Question 18

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 19

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...

Question 20

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, which means that the profits and losses of the corporation are passed through to the shareholders and reported on their individual tax returns. Therefore, even if the S corporation does not distribute the income to the shareholder, the shareholder is still responsible for paying tax on their share of the income.

Quiz 4: Gross Income: Concepts and Inclusions