Question 1

Sonya and Butch divorce during the current year.Their divorce agreement requires Sonya to pay Butch alimony of $2,500 monthly.When their son,Bubba,attains the earliest of either the age 23 or graduates from college,the payments will cease.
I.Butch must recognize gross income of $2,500 monthly.
II.Sonya may deduct $2,500 monthly from her gross income.
III.Butch will not recognize any gross income due to the payments.
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Question 2

Which of the following never generate taxable income?
I.Interest free loan from family member.
II.Interest free loan from employer.
III.Interest free loan under $10,000.
IV.Interest free loan over $100,000.
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Accepted Answer

The answer of Which of the following never generate taxable...

Question 3

Nathan loans $50,000 to Ramona on January 1 of the current year.The terms of the loan require Ramona to pay Nathan $5,000 per year on December 31 each year for the next 10 years (i.e.,no interest is charged on the loan).Assuming that the applicable federal rate is 6% and Ramona has total investment income of $1,200 during the current year:
I.If Ramona is Nathan's sister,Nathan must recognize $3,000 of interest income from the loan.
II.If Ramona is an employee of Nathan's,Nathan must recognize interest income of $3,000 and receives a deduction for compensation paid of $3,000.
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Accepted Answer

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Question 4

On January 1,Sandi borrows $40,000 from G&H Accounting firm,her employer,to pay-off charge accounts and other personal loans.Sandi must repay the $40,000 loan at the end of 5 years.Because Sandi has been loyal to her job,G&H is not charging Sandi interest on the $40,000 loan.The applicable federal interest rate is 6%.If Sandi has total net investment income for the current year of $200:
I.Sandi has compensation income of $2,400.
II.Sandi has a nontaxable gift from her employer of $2,400.
III.G&H is allowed a deduction for $2,400 of compensation paid to SandI.IV.There are no tax effects because Sandi's net investment income is less than $1,000.
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Accepted Answer

Statement I is correct because Sandi has compensation income from her job, which is unrelated to the loan from G&H.

Statement II is incorrect because there is no mention of Sandi receiving a nontaxable gift from her employer.

Statement III is correct because G&H can take a deduction for the compensation paid to Sandi as it is a business expense.

Statement IV is incorrect because there are tax effects to consider. Sandi must report the $200 net investment income on her tax return and may owe taxes on it depending on her overall income and tax situation.

Question 5

One type of imputed income that always escapes taxation is

Accepted Answer

The value of growing one's own vegetables for personal consumption is not considered imputed income and therefore is not subject to taxation.

Question 6

Karl is an employee of Cars-R-Us.As part of their employment agreement,Cars-R-Us loans Karl $1,000,000 interest-free to assist in the purchase of a car dealership.Assume the federal rate of interest is 8%.What is the tax treatment of the loan?
I.The arrangement has no tax consequences to Karl.
II.Cars-R-Us is deemed to have paid Karl compensation of $80,000.
III.Karl is deemed to have paid Cars-R-Us $80,000 of interest.
IV.Cars-R-Us' net income tax effect is zero due to this arrangement.
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Accepted Answer

The correct tax treatment involves recognizing imputed interest. Cars-R-Us is deemed to have paid Karl compensation equivalent to the interest that would have been earned at the federal rate (statement II), and Karl is deemed to have paid that interest back to Cars-R-Us (statement III). The net income tax effect for Cars-R-Us is zero because the deemed interest income is offset by the deemed interest expense (statement IV).

Question 7

The intent of the alimony recapture rules is to

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Question 8

Glenn and Vera divorce during the current year.Per their divorce agreement,Glenn receives their former personal residence valued at $180,000 with a basis of $100,000.Also,Glenn will pay Vera $5,000 annually for eight years.If Vera dies before the end of the eight years,the balance of the payments is to be paid to Vera's estate in a lump sum.The couple has not lived together for the past two years.

Accepted Answer

Vera does not recognize any income from the property or cash transactions as part of the divorce agreement. The transfer of the property to Glenn is part of the property settlement, and there is no recognition of gain or loss. The annual payments from Glenn to Vera are not considered alimony because they are not contingent upon Vera's death and are not made in cash or property. Therefore, the payments are not deductible by Glenn or taxable to Vera.

Question 9

Ralph and Renee are negotiating a divorce settlement.Renee has an option of taking a property settlement of $100,000 or alimony payments of $12,000 per year for 10 years.Without considering the time value of money,which of the following statements is true?
I.If Renee expects that she will be in the 25% marginal tax bracket,she should take the property settlement of $100,000.
II.If Renee expects that she will be in the 25% marginal tax bracket,she should take the alimony of $12,000 per year for 10 years.
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Accepted Answer

If Renee takes the property settlement of $100,000, it is considered a capital gain rather than taxable income, so she will not have to pay taxes on it. However, if she takes the alimony payments of $12,000 per year, it is considered taxable income, and she will have to pay taxes on it at the marginal tax rate of 25%. Therefore, statement I is correct, and statement II is incorrect.

Question 10

As a result of their divorce this year,Carlos made the following payments to Michelle,his former wife:  How much gross income should Michelle report as a result of the above transfers?

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Question 11

Which of the following always generate taxable income?
I.Interest free loan over $10,000 from family member.
II.Interest free loan over $10,000 from employer.
III.Interest free loan under $10,000.
IV.Interest free loan over $100,000.
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Accepted Answer

Interest-free loans over $10,000 from an employer and interest-free loans over $100,000 can generate taxable income due to the imputed interest rules. Loans under $10,000 and from family members do not automatically generate taxable income under these rules.

Question 12

How much gross income does Ron have from the following items of economic income?  ​

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The answer of How much gross income does Ron have...

Question 13

Art has worked for Denver's Diamond Dealers (DDD)for ten years.During the current year,Art marries and moves from his downtown apartment to a house in the suburbs.Before he was married,Art always rode the bus to work.Because there is no bus service to his new home,Art needs to purchase a car.Wayne,the owner of DDD gives Art $17,000 to purchase a used car.Which of the following statements concerning the $17,000 payment is/are correct?
I.If DDD does not require Art to repay the $17,000,Art has $17,000 of compensation income.
II.If DDD requires Art to repay the $17,000,Art has no compensation income from the receipt of the $17,000.
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Accepted Answer

If DDD does not require Art to repay the $17,000, Art has $17,000 of compensation income because it is a payment from his employer to cover a personal expense (buying a car). This is considered taxable income for Art. 
If DDD requires Art to repay the $17,000, Art would not have any compensation income as the payment was not a true gift or bonus from the employer, but instead a loan. Therefore, it would not be considered taxable income for Art.

Question 14

Imputed interest rules and policies include which of the following?
I.Gift loans have no income tax effect to the lender.
II.Any loan of $10,000 or less is exempted from imputed interest rules.
III.On gift loans of $100,000 or less,the imputed interest on the loan cannot exceed the borrower's net investment income for the year.
IV.With a loan to a shareholder,a corporation can deduct the imputed payment.
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Accepted Answer

Statements II and III are correct. Statement II is accurate because small loans of $10,000 or less are indeed exempt from imputed interest rules under certain conditions. Statement III correctly outlines the limitation on imputed interest for gift loans of $100,000 or less, where the imputed interest cannot exceed the borrower's net investment income for the year. Statement I is incorrect because gift loans can have tax implications under the imputed interest rules, affecting the lender. Statement IV is incorrect because a corporation cannot deduct imputed interest payments as if they were actual payments.

Question 15

Which of the following interest-free loans is subject to the imputed interest rules?
I.Lena needed $5,000 to pay off some gambling debts.Her employer loans her the $5,000.
II.Sherry loans her son $130,000 to purchase a motor home to use in his landscaping business.Her son has no investment income for the year.
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Accepted Answer

Loan II is subject to the imputed interest rules because the loan amount is greater than $10,000 and the borrower has no investment income. Lena's loan does not exceed $10,000, so it is exempt from the imputed interest rules.

Question 16

Al and Peggy divorce in the current year.As part of their divorce agreement,Peggy is to pay Al $70,000 for his share of their home (the home's fair market value is $140,000).Also,Peggy agrees to pay Al $1,000 monthly.The payment represents the financial support for their 15-year-old son,Bud.It will cease upon Bud's 23^rd birthday or college graduation-whichever comes first.Which of the following explain(s)the tax effects of these events? I.Peggy can deduct $12,000 annually for the monthly payments made this year. II.Al does not recognize the $1,000 monthly payments as income.

Accepted Answer

Statement II is correct, as alimony payments are taxable to the recipient and deductible by the payer. However, statement I is incorrect because the $1,000 monthly payments are not considered alimony, but rather child support, and are not deductible by the payer or taxable to the recipient.

Question 17

Under the imputed interest rules,gift loans between a daughter (lender)and her mother (borrower)may result in
I.No imputed interest income recognized by the mother.
II.No imputed interest deduction by the daughter.
III.Imputed interest income recognized by the daughter.
IV.Deduction allowed for imputed interest expense by the mother.
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Accepted Answer

The answer of Under the imputed interest rules,gift loans between...

Question 18

Which of the following interest-free loans is subject to the imputed interest rules (i.e.,interest must be imputed on the loan)?
I.Benito loans $250,000 to his son.His son uses the money to open a new business.During the current year,the business shows a loss and his son has no other sources of income.
II.Bisbane Corporation loans $8,000 to its principal shareholder.The shareholder uses the funds to buy additional shares of stock in Arcane.The shareholder is deemed to receive $4,000 of dividends from Brisbane during the year.
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Accepted Answer

The answer of Which of the following interest-free loans is...

Question 19

Which of the following interest-free loans is subject to the imputed interest rules (i.e.,interest must be imputed on the loan)?
I.Marilyn loans $24,000 to her grandmother and she uses the money to pay personal expenses and take a vacation.Her grandmother's sole income is from Social Security.
II.Pineview Corporation loans $20,000 to Catherine,an employee.Catherine uses the proceeds as a down payment on a house.Catherine's net investment income for the year is $300.
III.Scott loans $65,000 to his son.His son uses the money to open a new business.During the current year,the business shows a loss and his son has no other sources of income.
IV.Alaric Corporation loans $27,000 to its principal shareholder.The shareholder uses the funds to buy additional shares of stock in Alaric.The shareholder is deemed to receive $8,500 of dividends from Alaric during the year.
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Accepted Answer

Imputed interest rules apply to below-market loans, such as those in statements II and IV. In statement II, the loan to an employee for a down payment on a house is subject to imputed interest if the loan is below-market and does not qualify for any exclusions. In statement IV, a loan to a principal shareholder, which could be seen as a way to transfer value without recognizing income, is also subject to these rules. Statements I and III involve personal loans within families, which may not be subject to the same rules unless they exceed certain thresholds or are used for income-producing purposes, which is not clearly the case here.

Question 20

How much gross income does Faith have from the following items of economic income?  ​

Accepted Answer

The answer of How much gross income does Faith have...

Quiz 3: Income Sources

Which of the following never generate taxable income? I.Interest free loan from family member. II.Interest free loan from employer. III.Interest free loan under $10,000. IV.Interest free loan over $100,000. ​

One type of imputed income that always escapes taxation is

The intent of the alimony recapture rules is to

As a result of their divorce this year,Carlos made the following payments to Michelle,his former wife: How much gross income should Michelle report as a result of the above transfers?

Which of the following always generate taxable income? I.Interest free loan over $10,000 from family member. II.Interest free loan over $10,000 from employer. III.Interest free loan under $10,000. IV.Interest free loan over $100,000. ​

How much gross income does Ron have from the following items of economic income? ​

How much gross income does Faith have from the following items of economic income? ​

Which of the following never generate taxable income? I.Interest free loan from family member. II.Interest free loan from employer. III.Interest free loan under $10,000. IV.Interest free loan over $100,000.

Which of the following always generate taxable income? I.Interest free loan over $10,000 from family member. II.Interest free loan over $10,000 from employer. III.Interest free loan under $10,000. IV.Interest free loan over $100,000.

How much gross income does Ron have from the following items of economic income?

How much gross income does Faith have from the following items of economic income?