CHAPTER 4 GROSS INCOME: CONCEPTS AND INCLUSIONS

1. The realization
requirement gives an incentive to own assets that have increased in value and
to sell assets whose value has decreased.
a. True
b. False

2. Judy is a cash basis
attorney. In 2014, she performed services in connection with the formation of a
corporation and received stock with a value of $4,000 for her services. By the
end of the year, the value of the stock had decreased to $2,000. She continued
to hold the stock. Judy must recognize $4,000 of gross income from the stock
for 2014.
a. True
b. False

3. Barney painted his
house which saved him $3,000. According to the realization requirement, Barney
must recognize $3,000 of income.
a. True
b. False

4. Nicholas owned stock
that decreased in value by $20,000 during the year, but he did not sell the
stock. He earned $45,000 salary, but received only $34,000 because $11,000 in
taxes were withheld. Nicholas saved $10,000 of his salary and used the
remainder for personal living expenses. Nicholas’s economic income for the year
exceeded his gross income for tax purposes.
a. True
b. False

5. The fact that the
accounting method the taxpayer uses to measure income is consistent with GAAP
does not assure that the method will be acceptable for tax purposes.
a. True
b. False

6. The financial
accounting principle of conservatism is not well-suited to the task of
measuring taxable income.
a. True
b. False

7. A cash basis taxpayer
purchased a certificate of deposit for $1,000 on July 1, 2013 that will pay
$1,100 upon its maturity on June 30, 2015. The taxpayer must recognize a
portion of the income in 2014.
a. True
b. False

8. Ralph purchased his
first Series EE bond during the year. He paid $709 for a 10-year bond with a
$1,000 maturity value. The yield to maturity on the bonds was 3.5%. Ralph is notrequired to recognize the $291
($1,000 – $709) original issue discount until the bond matures. However, Ralph
can elect to amortize the discount over the ten-year period.
a. True
b. False

9. A sole proprietorship
purchased an asset for $1,000 in 2014 and its value was $1,500 at the end of
2014. In 2015, the sole proprietorship sold the asset for $1,400. The sole
proprietorship realized a taxable gain of $400 in 2015 but an economic loss of
$100 in 2015.
a. True
b. False

.

10.At the beginning of
2014, Mary purchased a 3-year certificate of deposit (CD) for $8,760. The
maturity value of the certificate was $10,000 and it was to yield 4.5%. She
also purchased a Series EE bond for $6,400 with a maturity value in 10 years of
$10,000. Mary must recognize $1,240 of income from the certificate of deposit
in 2014, and $3,600 from the Series EE bonds in 2023.
a. True
b. False

11.In 2005, Terry
purchased land for $150,000. In 2014, Terry received $10,000 from a local cable
television company in exchange for Terry allowing the company to run an underground
cable across Terry’s property. Terry is not
required to recognize income from receiving the $10,000 because it was a
return of his capital invested in the land.
a. True
b. False

12.In December 2013,
Mary collected the December 2013 and January 2014 rent from a tenant. Mary is a
cash basis taxpayer. The amount collected in December 2013 for the 2014 rent
should be included in her 2014 gross income.
a. True
b. False

13.On December 1, 2014,
Daniel, an accrual basis taxpayer, collects $12,000 rent for December 2014 and
$12,000 for January 2015. Daniel must include the $24,000 in 2014 gross income.
a. True
b. False

14.On January 1, 2014,
an accrual basis taxpayer entered into a contract to provide termite inspection
service each month for 36 months. The amount received for the contract was
$2,400. The taxpayer should report $1,600 of income in 2015.
a. True
b. False

15.An advance payment
received in June 2014 by an accrual basis and calendar year taxpayer for
services to be provided over a 36-month period can be spread over four tax
years.
a. True
b. False

16.In 2014, Juan, a cash
basis taxpayer, was offered $3 million for signing a professional baseball
contract. He counteroffered that he would receive $900,000 per year for 4 years
beginning in 2015. The team accepted the counteroffer. Juan constructively
received $3 million in 2014.
a. True
b. False

17.The constructive
receipt doctrine requires that income must be recognized when it is made
available to the cash basis taxpayer, although it has not been actually
received. The constructive receipt doctrine does notapply to accrual basis taxpayers.
a. True
b. False

18.Fred is a full-time
teacher. He has written a book and receives royalties from it. Fred’s mother,
Mabel, is age 65 and lives on her Social Security benefits and gifts from her
son, Fred. This year Fred directed the publisher to make the royalty check
payable to Mabel because she needs the money for support. Fred must include the
amount of the royalty check in his gross income.
a. True
b. False

19.Jessica is a cash
basis taxpayer. When Jessica failed to repay a loan, the bank garnished her
salary. Each week $60 was withheld from Jessica’s salary and paid to the bank.
Jessica is required to include the $60 each week in her gross income even
though it is the creditor that benefits from the income.
a. True
b. False

20.ABC Corporation
declared a dividend for taxpayers of record as of December 24, 2013. The
dividend checks were mailed on December 31, 2013. Ed, a cash basis shareholder,
received the dividend check on January 2, 2014. Ed cannot delay reporting the
income from the dividend until 2014.
a. True
b. False

21.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.
a. True
b. False

22.When stock is sold
after the date of declaration but before the record date, the buyer must
recognize as income the dividend declared.
a. True
b. False

23.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.
a. True
b. False

24.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.
a. True
b. False

25.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.
a. True
b. False

26.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.
a. True
b. False

27.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.
a. True
b. False

.

28.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.
a. True
b. False

29.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%).
a. True
b. False

30.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.
a. True
b. False

31.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.
a. True
b. False

32.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.
a. True
b. False

33.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.
a. True
b. False

.

34.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.
a. True
b. False

35.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.
a. True
b. False

36.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.
a. True
b. False

37.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.
a. True
b. False

38.Alimony recapture may
occur if there is a substantial decrease in the amount of the alimony payments
in the second year.
a. True
b. False

39.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.
a. True
b. False

40.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 notrequired to impute interest income.
a. True
b. False