Question 1

In which of the following situations does the taxpayer have a claim of right to the payment received?
I.Ellen is on the Carlyle city council.She accepts $5,000 from a contractor who is seeking rezoning of his land before the commission on the condition that Ellen supports the rezoning.The payment is illegal under state law and Ellen will have to repay the $5,000 if the arrangement with the contractor is discovered.
II.Alan's automobile is damaged in an automobile accident.Because he uses the automobile in his job,his employer gives him $4,000 to have the car repaired.The employer will withhold $100 per paycheck until the $4,000 is repaid.

Accepted Answer

The answer of In which of the following situations does...

Question 2

It was stated in the text that realized gains from certain types of transactions (e.g.,like-kind exchanges)are deferred for recognition in a future period.The basis of this treatment is the
I.Annual Accounting Period Concept.
II.Legislative Grace Concept.
III.Wherewithal-to-Pay Concept.
IV.Capital Recovery Concept.

Accepted Answer

The legislative grace concept is the basis for the deferral of realized gains from certain types of transactions, as stated in the text. The wherewithal-to-pay concept may also play a role in the decision to defer recognition of gains. The annual accounting period concept is not directly related to this treatment, while the capital recovery concept is more related to the recovery of an asset's cost over its useful life. Therefore, statements II and III are correct, making option D the best choice.

Question 3

The Claim-of-Right Doctrine
I.explains why Carla does not report $10,000 of income on her tax return when she borrows $10,000 from the First Savings Bank.
II.differs from the constructive receipt doctrine in that constructive receipt applies where an amount has been received,and the tax question is whether the amount is taxable in the current year.
III.explains why Samuel reports $45 of interest credited to his savings account on December 31,2013,on his 2013 tax return,even though he does not actually receive the cash in 2013.
IV.applies when a taxpayer has no definitive obligation to repay the amount received.

Accepted Answer

Statement I is correct because under the Claim-of-Right Doctrine, a taxpayer does not need to report income if they honestly believe that they have a right to it, even if that belief is later determined to be incorrect. Statement IV is also correct because if the taxpayer has no obligation to repay the amount received, then the Claim-of-Right Doctrine can apply. Statements II and III are incorrect because they describe the Constructive Receipt Doctrine, which is a separate concept from the Claim-of-Right Doctrine.

Question 4

On December 20,2013,Thomas,the CEO of Lifetime Corporation issues a $10,000 bonus check to Ana Maria.Thomas asks Ana Maria to hold the check until at least January 4,2014,when there will be enough deposits to cover the check.Ana Maria is not required to recognize the $10,000 in 2013 because of which of the following?

Accepted Answer

The answer of On December 20,2013,Thomas,the CEO of Lifetime Corporation...

Question 5

Beth is an accrual basis taxpayer.A renter pays Beth the January 2013 rent in December 2012.What are the tax effects of this transaction?
I.Beth will recognize rent income in 2012.
II.The wherewithal-to-pay concept requires Beth to recognize the income in 2012.

Accepted Answer

As an accrual basis taxpayer, Beth must recognize income when it is earned, regardless of when it is received. The fact that the rent payment was received in December 2012 does not change the fact that it relates to January 2013 rent, so Beth must recognize the income in 2012. This is in accordance with the wherewithal-to-pay concept, which requires income to be recognized in the period in which the taxpayer has the economic resources to pay the associated tax liability. Therefore, both statements I and II are correct.

Question 6

Joline is a cash basis taxpayer.A renter pays Joline the January 2013 rent in December 2012.What are the tax effects of this transaction?
I.Joline will recognize rent income for tax purposes in 2013.
II.The wherewithal-to-pay concept is the basis for Joline's recognition of the income in 2013.

Accepted Answer

The answer of Joline is a cash basis taxpayer.A renter...

Question 7

The primary difference(s)between the claim-of-right doctrine and the constructive receipt doctrine is/are
I.Claim of right applies when the taxpayer has not yet physically received an item of income.
II.Constructive receipt applies after the taxpayer has received an item of income.

Accepted Answer

The claim-of-right doctrine applies when a taxpayer has received income and has an unrestricted right to it, even if they choose not to use or spend it. Constructive receipt applies when income is made available to a taxpayer without restrictions, even if not physically in possession. Both statements as presented are incorrect in describing these doctrines.

Question 8

Jane owns 100% of the stock of Lacy Corporation.Jane's son,Lee,is employed by Lacy Corporation as a consultant.Which of the following concepts or doctrines is least helpful in determining the tax consequences of any payments Lacy makes to Lee?

Accepted Answer

The Entity Concept is least helpful in this context because it primarily deals with the distinction between the business entity and its owners for legal and tax purposes, rather than the specifics of transactions between the company and its employees or consultants. The other options (Arm's-Length Transaction Concept, Substance Over Form Doctrine, Assignment of Income Doctrine, and Business Purpose Concept) are more directly relevant to analyzing the tax implications of payments made to an employee or consultant, especially in situations involving related parties.

Question 9

A corporation is allowed to deduct all of its ordinary and necessary business expenses.Which of the following Concepts is least helpful in determining this treatment?

Accepted Answer

The All-inclusive Income Concept states that all income received by the corporation, whether it is from sales, investments, or otherwise, should be included in the corporation's taxable income. This concept does not relate to the deductibility of expenses, so it is the least helpful in determining the treatment of ordinary and necessary business expenses. The Entity Concept relates to treating the corporation as a separate entity from its owners, while the Capital Recovery Concept relates to the recovery of costs associated with acquiring and improving assets. The Legislative Grace Concept acknowledges that the tax code is a result of legislative action, and the Business Purpose Concept requires that expenses be related to the corporation's business activities.

Question 10

Television station Channel 2 receives $200,000 from Harry's Auto Parts,Inc.,to air Harry's commercials during a local automotive repair talk show in December 2013.December's ratings drop sharply when the show's star quits to work as a mechanic with a NASCAR team.Shortly thereafter,Harry contacts Channel 2 indicating that he wants to discontinue his sponsorship and requests return of $125,000 of the payment.The station continues to air the commercials and keeps the $200,000.Harry initiates a legal suit to recover the $125,000.Why is the $200,000 included in Channel 2's 2013 gross income?
I.All-inclusive Income Concept.
II.Capital Recovery Concept.
III.Wherewithal-To-Pay Concept.
IV.Claim of Right Doctrine.
V.Constructive Receipt Doctrine.

Accepted Answer

The answer of Television station Channel 2 receives $200,000 from...

Question 11

When Kerri filed her 2013 tax return on April 15,2014,she did not include a $2,000 bonus received from her employer on January 10,2014 relating to her work performance during 2013.What concept,construct,or doctrine supports Kerri's actions?

Accepted Answer

The Constructive Receipt Doctrine states that income is taxable when it is constructively received, meaning when it is credited to an account or made available to the taxpayer, even if it is not physically received. In this scenario, even though Kerri did not physically receive the bonus until January 2014, it relates to her work performance during 2013 and therefore should have been included as income on her 2013 tax return.

Question 12

Deduction concepts need to resolve certain questions.Some of these are:
I.How much is deductible?
II.When can the deduction be taken?
III.What types of expenditures are deductible?
IV.What entity is entitled to the deduction?

Accepted Answer

All four statements are correct as they represent fundamental questions that need to be addressed when considering deduction concepts in taxation. These include determining the amount that can be deducted, the timing of the deduction, the nature of the expenditures that qualify for deductions, and the entity that is eligible to claim the deduction.

Question 13

Television station Channel 2 receives $200,000 from Harry's Auto Parts,Inc.,to air Harry's commercials during a local automotive repair talk show in December 2013.December's ratings drop sharply when the show's star quits to work as a mechanic with a NASCAR team.Shortly thereafter,Harry contacts Channel 2 indicating that he wants to discontinue his sponsorship and requests return of $125,000 of the payment.The station continues to air the commercials and keeps the $200,000.Harry initiates a legal suit to recover the $125,000.Which of the following dictate that the $200,000 be included in Channel 2's 2013 gross income?
I.Capital Recovery Concept.
II.Claim of Right Doctrine.

Accepted Answer

According to the Claim of Right Doctrine, income must be recognized when it is received by the taxpayer without restriction or limitation. In this case, Channel 2 received the $200,000 from Harry's Auto Parts, Inc. without any restrictions or limitations, and thus it must be included in their gross income for 2013. The Capital Recovery Concept is not applicable in this situation.

Question 14

Occasionally,realized gains are not recognized for tax purposes.These situations occur because
I.certain gains are excluded due to legislative grace.
II.gains are deferred on certain types of property transactions where the wherewithal-to-pay the tax resulting from the transaction is lacking.

Accepted Answer

Both statement I and II are correct. Legislative grace can exclude certain gains from being taxed, and gains can be deferred in property transactions if the taxpayer does not have the resources to pay the resulting taxes.

Question 15

Mario is an employee of Flores Company.The company regularly pays its employees by direct deposit on or before the last day of each month.Mario's regular paycheck is deposited on Dec.31,2013,but Mario was away on vacation and didn't return until January 15,2014.The gross amount of the check is included in Mario's 2013 income.Which of the following concepts or doctrines best explains this treatment?

Accepted Answer

The Constructive Receipt Doctrine states that income is taxable when it is credited to the taxpayer's account, set apart for the taxpayer, or made available to the taxpayer. In this case, even though Mario was not physically present to receive the direct deposit on Dec. 31, 2013, the gross amount of the check was made available to him and credited to his account, which triggers the recognition of income for tax purposes.

Question 16

Sidney,a cash basis contractor,builds an apartment building for Jerry.The building is completed,and the bill is given to Jerry.Jerry pays $200,000 (1/4 of the bill)in 2013.Subsequently,Jerry files suit for damages based on alleged faulty construction.Sidney is required to recognize $200,000 of income in 2013 based upon
I.Constructive Receipt Doctrine.
II.Claim-of-Right Doctrine.
III.Realization Concept.
IV.Tax Benefit Rule.

Accepted Answer

The answer of Sidney,a cash basis contractor,builds an apartment building...

Question 17

Sandra directed her employer to withhold $500 of her wages each month for deposit to her mother's checking account.Which of the following concepts,constructs,or doctrines is the least helpful in determining how Sandra should report the arrangement for tax purposes?

Accepted Answer

The ability-to-pay concept is the least relevant in determining how Sandra should report this arrangement for tax purposes as it deals with a taxpayer's ability to pay taxes rather than the proper reporting of income. The other doctrines and concepts listed are all related to income tax reporting and would be more relevant in determining how Sandra should report the arrangement for tax purposes.

Question 18

Arnold sells a parcel of investment real estate to Oswald for $600,000 in 2013.Arnold will receive $200,000 annually,plus interest at 8%,from 2014 through 2016.Arnold will recognize no gross income on this sale in 2013.Which of the following determines this treatment?

Accepted Answer

The answer of Arnold sells a parcel of investment real...

Question 19

Alexis,a cash basis contractor,builds a storage building for Jones.The building is completed,and the bill is given to Jones.Jones pays $60,000 in 2013.Subsequently,Jones files suit for damages based on alleged faulty construction.Alexis required to recognize $60,000 of income in 2013 based upon
I.Constructive Receipt Doctrine.
II.Claim-of-right Doctrine.

Accepted Answer

The answer of Alexis,a cash basis contractor,builds a storage building...

Question 20

In which of the following will the Constructive Receipt Doctrine require reporting income in 2013?
I.Cornell's December 2013 salary check is withheld until January 15,2014,because the employer does not have sufficient cash to cover its December payroll.
II.Donnie is an employee of Holt Corporation.The corporation regularly mails payroll checks to employees to arrive on or before the last day of each month.Donnie's check arrives in the mail at his house on December 31,2013.However,Donnie was vacationing in Cancun and did not return until January 8,2014.Donnie deposited the check into his account the next day.
III.In December 2013,Cory signs a contract to play basketball for the Rhythms.He receives a signing bonus of $2,000,000 to be paid over 5 years beginning in 2014.His regular salary of $800,000 will be paid monthly during the season that begins in 2014.

Accepted Answer

The answer of In which of the following will the...

Quiz 2: Income Tax Concepts

Beth is an accrual basis taxpayer.A renter pays Beth the January 2013 rent in December 2012.What are the tax effects of this transaction? I.Beth will recognize rent income in 2012. II.The wherewithal-to-pay concept requires Beth to recognize the income in 2012.

Joline is a cash basis taxpayer.A renter pays Joline the January 2013 rent in December 2012.What are the tax effects of this transaction? I.Joline will recognize rent income for tax purposes in 2013. II.The wherewithal-to-pay concept is the basis for Joline's recognition of the income in 2013.

The primary difference(s) between the claim-of-right doctrine and the constructive receipt doctrine is/are I.Claim of right applies when the taxpayer has not yet physically received an item of income. II.Constructive receipt applies after the taxpayer has received an item of income.

Jane owns 100% of the stock of Lacy Corporation.Jane's son,Lee,is employed by Lacy Corporation as a consultant.Which of the following concepts or doctrines is least helpful in determining the tax consequences of any payments Lacy makes to Lee?

A corporation is allowed to deduct all of its ordinary and necessary business expenses.Which of the following Concepts is least helpful in determining this treatment?

When Kerri filed her 2013 tax return on April 15,2014,she did not include a $2,000 bonus received from her employer on January 10,2014 relating to her work performance during 2013.What concept,construct,or doctrine supports Kerri's actions?

Deduction concepts need to resolve certain questions.Some of these are: I.How much is deductible? II.When can the deduction be taken? III.What types of expenditures are deductible? IV.What entity is entitled to the deduction?

Occasionally,realized gains are not recognized for tax purposes.These situations occur because I.certain gains are excluded due to legislative grace. II.gains are deferred on certain types of property transactions where the wherewithal-to-pay the tax resulting from the transaction is lacking.

Sandra directed her employer to withhold $500 of her wages each month for deposit to her mother's checking account.Which of the following concepts,constructs,or doctrines is the least helpful in determining how Sandra should report the arrangement for tax purposes?

Arnold sells a parcel of investment real estate to Oswald for $600,000 in 2013.Arnold will receive $200,000 annually,plus interest at 8%,from 2014 through 2016.Arnold will recognize no gross income on this sale in 2013.Which of the following determines this treatment?