Question 1

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. In the case of alimony payments, the person receiving the alimony (Alice in this case) must pay taxes on the income received, while the person making the alimony payments (Ted in this case) can deduct the payments from their taxable income.

Question 2

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 3

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 4

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 5

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 is true. S corporations pass their income, losses, deductions, and credits through to shareholders for federal tax purposes. This means that shareholders must report the corporation's income on their personal tax returns, even if the corporation didn't distribute any money to them.

Question 6

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 the alimony to decrease his or her AGI by a portion of the amount included in gross income as alimony in a prior year or years. This recapture is triggered if the alimony payments decrease substantially or end entirely within the first three years of the agreement.

Question 7

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 in the stock is the same as Paula's basis, which is $75,000. When he sells the stock for $100,000, his recognized gain would be $25,000.

Question 8

Linda delivers pizzas for a pizza shop. On Wednesday, December 31, 2017, 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, 2018. The pizza shop owner recognizes the income of $400 when he receives it from Linda in 2018.

Accepted Answer

The income should be recognized in the period it was earned, which is December 2017, not when it was received in January 2018.

Question 9

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 may occur if there is a substantial decrease in the amount of the alimony payments in the second year. This means that if the total amount of alimony paid in the second and third year is more than $15,000 greater than the amount paid in the first year, then the recapture rule may apply, which could result in the payer having to include in their income part of the alimony payments that they had previously deducted.

Question 10

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 paid the full $18,000 required under the divorce agreement for that year, so Darlene must include that amount in her gross income. However, if the child were to die or reach age 21, Jeff's payments would be reduced to $12,000 per year, and Darlene would still be required to include that amount in her gross income.

Question 11

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, 2017, the accrued interest on the bond was $100. On December 31, 2017, 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 gross income any interest earned after the date of the gift, which in this case is $300 ($400 - $100 accrued interest at the time of gift). The face amount of the bond and its fair market value are not relevant for determining Brent's taxable income from the gift.

Question 12

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, 2017, the partnership had $400,000 net income and for fiscal year ending September 30, 2018, the partnership had $300,000 net income. April withdrew $100,000 in December of each year. April's gross income from the partnership for 2017 is $160,000 ($400,000 × 40%).

Accepted Answer

April's gross income from the partnership for 2017 is indeed $160,000 ($400,000 × 40%).

Question 13

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 14

Jake is the sole shareholder of an S corporation that earned $60,000 in 2017. The corporation was short on cash and therefore distributed only $15,000 to Jake in 2017. Jake is required to recognize $60,000 of income from the S corporation in 2017.

Accepted Answer

As the sole shareholder of an S corporation, Jake is required to recognize all of the corporation's income, regardless of whether or not it was actually distributed to him. Therefore, Jake must recognize $60,000 of income from the S corporation in 2017, even though he only received $15,000 in distributions.

Question 15

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 16

Mark is a cash basis taxpayer. He is a partner in the M&M partnership, and his share of the partnership's profits for 2017 is $90,000. Only $40,000 was distributed to him in January 2017, and this was his share of the 2016 partnership profits. None of the 2017 profits were distributed. Mark's gross income from the partnership for 2017 is $40,000.

Accepted Answer

Mark is a cash basis taxpayer and therefore only includes income in the year it is actually received. He received $40,000 in January 2017, which was his share of the 2016 partnership profits. None of the 2017 profits were distributed to him, so he should not include them in his gross income for 2017. Therefore, his gross income from the partnership for 2017 is $0, not $40,000.

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 required to include the alimony payments in gross income although George earned the income.

Accepted Answer

According to the IRS, alimony received by the recipient spouse is included in their gross income and must be reported on their tax return. Therefore, Erin would need to report the $20,000 of alimony received from George as part of her gross income.

Question 18

Alvin is the sole shareholder of an S corporation that earned $200,000 in 2017 and distributed $75,000 to Alvin. Alvin must recognize $75,000 as income from the S corporation in 2017.

Accepted Answer

Alvin must recognize the entire $200,000 as income from the S corporation in 2017, not just the $75,000 distributed, because S corporation income is passed through to shareholders regardless of distributions.

Question 19

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

According to the ex-dividend date rules, if a stock is sold on or after the ex-dividend date but before the record date, the seller, not the buyer, will receive the declared dividend. Therefore, the statement in the question is incorrect and the correct statement would be: When stock is sold on or after the ex-dividend date but before the record date, the seller must recognize as income the dividend declared.

Question 20

Rhonda has a 30% interest in the capital and profits of the ABC Partnership. In the first year of the partnership, 2017, it earned $150,000. However, the partners agreed that nothing would be distributed until after the end of March 2018, before Rhonda filed her 2017 tax return. The distributions were to be delayed because it was unclear as to whether business conditions would remain good in 2018. Things were going well in 2018 and therefore the partnership distributed $30,000 to Rhonda at the end of March, as a portion of her share of the partnership's 2017 earnings. The partnership's income for 2018 was $60,000. As a result, Rhonda must recognize $30,000 of gross income in 2017 and $18,000 in 2018.

Accepted Answer

Rhonda must recognize her share of the partnership's income in the year it is earned, not when it is distributed. Therefore, she should recognize $45,000 (30% of $150,000) in 2017 and $18,000 (30% of $60,000) in 2018.

Quiz 4: Gross Income: Concepts and Inclusions