Question 1

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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A)Only statement I is correct.
B)Only statements I and III are correct.
C)Only statements I and II and III are correct.
D)Only statement III is correct.
E)Only statements II and III are correct.

Accepted Answer

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

Question 2

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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A)Only statement I is correct.
B)Only statements I and IV are correct.
C)Only statement II is correct.
D)Only statements II, and III are correct.
E)Only statements II, III, and IV are correct.

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 3

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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A)Only loan I.
B)Only loan II.
C)Both loans.
D)Neither loan.

Accepted Answer

Only loan II is subject to the imputed interest rules because the loan amount exceeds the threshold set by the IRS ($10,000 for individuals). Since Sherry does not charge her son any interest, the IRS will consider the forgone interest as imputed interest and require Sherry to report it as taxable income. Loan I is exempt from imputed interest rules as the loan amount is below the threshold.

Question 4

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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A)Only statement I is correct.
B)Only statement II is correct.
C)Both statements are correct.
D)Neither statement is correct.

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 5

Glenn and Vera divorce during 2018. Per their 2018 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.
A)Glenn can deduct $5,000 annually for alimony paid to Vera.
B)Vera can deduct $40,000 (1/2 of the unrealized gain on the house).
C)Vera does not recognize any income from the property and/or cash transactions.
D)Vera must recognize $40,000 as a gain on the disposition of her interest in the house.
E)Vera must recognize all the cash received as alimony income.

Accepted Answer

Under the tax law effective for divorce agreements executed after 2018, alimony payments are not deductible by the payer nor taxable to the recipient. Additionally, the transfer of property between spouses or former spouses incident to divorce is not a taxable event.

Question 6

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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A)Only loan I.
B)Only loan II.
C)Both loans.
D)Neither loan.

Accepted Answer

Interest must be imputed on loan I because it exceeds the $10,000 threshold for gift loans, and the son has no net investment income to exempt it from imputed interest rules. Loan II is below the $10,000 threshold for corporation-shareholder loans, so it is not subject to imputed interest rules.

Question 7

As a result of their 2017 divorce agreement, Carlos made the following payments to Michelle, his former wife in 2018:
How much gross income should Michelle report as a result of the above transfers?
- He transferred the family car to Michelle. The car cost them $\$ 20,000$ and was worth $\$ 10,000$ at the time that he gave it to Michelle.
-Carlos paid Michelle 12 monthly cash payments of $\$ 1,000$ each. These payments are to continue as long as Michelle lives or until their son is age 19 . When their son attains age 19, the payments will be reduced to $\$ 600$ a month.
-On June 6, Carlos paid Michelle a single cash payment of $\$ 70,000$ to help her settle in a new home. Carlos kept the family home.
A)$7,200
B)$12,000
C)$17,200
D)$87,200
E)$92,000

Accepted Answer

The answer of As a result of their 2017 divorce...

Question 8

Ralph and Renee are negotiating a divorce settlement that will be finalized in 2018. 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 32% marginal tax bracket, she should take the property settlement of $100,000.
II.If Renee expects that she will be in the 32% marginal tax bracket, she should take the alimony of $12,000 per year for 10 years.
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A)Only statement I is correct.
B)Only statement II is correct.
C)Both statements are correct.
D)Neither statement is correct.

Accepted Answer

Statement I is correct because alimony payments are taxable income, so Renee would only receive a net income of $8,160 per year ($12,000 minus 32% taxes). Therefore, the property settlement of $100,000 would be a better option if Renee expects to be in the 32% marginal tax bracket.

Statement II is incorrect because it does not take into account the time value of money. By receiving the $12,000 per year over 10 years, Renee will receive a total of $120,000. However, if she invests the $100,000 property settlement and earns a 5% rate of return, she would have approximately $163,000 in 10 years, which is significantly more than the alimony payments.

Question 9

How much gross income does Faith have from the following items of economic income?
?
- Received cash gift of $\$ 6,000$ from parents.
- Received $\$ 12,000$ in alimony payments from former spouse (2017 agreement).
- Received $\$ 18,000$ in child support payments from former spouse (2017 agreement).
- Won $\$ 6,000$ in a slot machine in Las Vegas.
- Faith's vacation home on Lake Tahoe increased in value by $\$ 15,000$.
- Collected $\$ 14,000$ in unempl oyment benefits.
A)$18,000
B)$30,000
C)$32,000
D)$38,000
E)$50,000

Accepted Answer

Faith's gross income includes the alimony payments ($12,000), gambling winnings ($6,000), and unemployment benefits ($14,000), totaling $32,000. Gifts, child support, and unrealized gains are not included in gross income.

Question 10

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.
​
A)Only statement I is correct.
B)Only statement II is correct.
C)Both statements are correct.
D)Neither statement is correct.

Accepted Answer

The answer of Nathan loans $50,000 to Ramona on January...

Question 11

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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A)Only statement I is correct.
B)Only statement II is correct.
C)Only statements I and III are correct.
D)Only statements II and IV are correct.
E)Only statements II and III are correct.

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 12

One type of imputed income that always escapes taxation is
A)Bargain purchases by employees.
B)Value of growing one's own vegetables for personal consumption.
C)Payment of personal expenses by a corporation in which stock is owned.
D)Interest free loan from parents.

Accepted Answer

The value of growing one's own vegetables for personal consumption is considered imputed income, but it is generally not taxed because it is not considered a source of income.

Question 13

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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A)Only statement I is correct.
B)Only statements I, II, and IV are correct.
C)Only statement III is correct.
D)Only statements I, II, and III are correct.
E)Only statements II, III, and IV are correct.

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 14

How much gross income does Ron have from the following items of economic income?
?
- Received cash gift of $\$ 5,000$ from parents.
- Received $\$ 12,000$ in alimony payments and $\$ 6,000$ in child support from former spouse (2018 agreement).
- Won $\$ 4,000$ in Indiana lottery scratch off game.
- Investment in IBM stock increased in value by $\$ 15,000$.
- Collected $\$ 12,000$ in unempl oyment benefits.
A)$16,000
B)$28,000
C)$33,000
D)$34,000
E)$54,000

Accepted Answer

The gross income from the following items of economic income is:
- Salary: $25,000
- Interest income: $1,000
- Capital gains: $2,000
- Rental income: $0
- Dividend income: $0
Total income = $25,000 + $1,000 + $2,000 + $0 + $0 = $28,000. Therefore, the answer is B.

Question 15

Al and Peggy divorce in 2018. As part of their 2018 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. A)Only statement I is correct. B)Only statement II is correct. C)Both statements are correct. D)Neither statement is correct.

Accepted Answer

Statement II is correct. Al does not recognize the $1,000 monthly payments as income because they are considered child support payments, which are not taxable income to the recipient. 
Statement I is incorrect. Peggy cannot deduct the $12,000 annual payments as they are considered child support payments and are not deductible for tax purposes.

Question 16

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.
​
A)Only statement I, II and IV are correct.
B)Only statements II and III are correct.
C)Only statements I and IV are correct.
D)Only statement IV is correct.
E)Only statements II and IV are correct.

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 17

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.
​
A)Only statement II is correct.
B)Only statements I and III are correct.
C)Only statements II and IV are correct.
D)Only statements I and IV are correct.
E)Only statements II and III are correct.

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 18

The intent of the alimony recapture rules is to
A)Prevent the payee from having a large tax liability when there is not an adequate wherewithal to pay.
B)Prevent former spouses from skipping out of their obligations to pay the other spouse.
C)Reclassify property settlements as capital gains, rather than ordinary income.
D)Prevent child support from being disguised as alimony.
E)Prevent tax deductions for property settlements.

Accepted Answer

The answer of The intent of the alimony recapture rules...

Question 19

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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A)Only statements I, II, and III are correct.
B)Only statements I and IV are correct.
C)Only statements I and II are correct.
D)Only statement III is correct.
E)Only statements III and IV are correct.

Accepted Answer

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

Question 20

Sonya and Butch divorce during 2018. Their 2018 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.
​
A)Only statements I and II are correct.
B)Only statement I is correct.
C)Only statement II is correct.
D)Only statement III is correct.

Accepted Answer

Under the Tax Cuts and Jobs Act, for divorce agreements executed after December 31, 2018, alimony payments are not deductible by the payer and are not included in the recipient's gross income. Since the divorce occurred in 2018, Butch will not recognize any gross income from the payments.

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

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. ​

The intent of the alimony recapture rules is to

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.