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Exam 4: Gross Income: Concepts and Inclusions

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Question 61

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Rachel owns rental properties. When she rents to a new tenant, she usually requires the tenant to pay an amount in addition to the first month's rent. The additional amount serves as security for damages to the property and the tenant's failure to pay future rents. How should the payments be characterized (e.g., on lease documents) to minimize Rachel's current tax liability?

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The payments should be characterized as ...

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Question 62

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Melissa is a compulsive coupon clipper. She often brags about the time she purchased a cart full of groceries for $5.00 when the cost without coupons would have been $50. Discuss whether Melissa realizes gross income from her coupon clipping.

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Under the all-inclusive concept of gross...

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Question 63

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The alimony rules applicable to divorces entered into before 2019:

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.

Mark is a cash basis taxpayer. He is a partner in the M&M partnership, and his share of the partnership's profits for 2019 is $90,000. Only $40,000 was distributed to him in January 2019, and this was his share of the 2018 partnership profits. None of the 2019 profits was distributed. Mark's gross income from the partnership for 2019 is $40,000.

In 2009, Terry purchased land for $150,000. He also received $10,000 from a local cable television company in exchange for allowing the company to run an underground cable across his 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.

On January 1, 2019, Faye gave Todd, her son, a 36-month certificate of deposit she had purchased on December 31, 2017, for $8,638. The certificate had a maturity value of $10,000 and the yield to maturity was 5%. On November 30, 2019, ABC, Inc., had declared a dividend of $1.00 payable to stockholders of record on December 5th. How much interest and dividends should Todd include in his gross income for 2019?

The Blue Utilities Company paid Sue $2,000 for the right to lay an underground electric cable across her property anytime in the future.

On a particular Saturday, Tom had planned to paint a room in his house, but his employer gave him the opportunity to work that day. If Tom works, he must hire a painter for $120. For Tom to have a positive cash flow from working and hiring the painter:

Rachel, who is in the 35% marginal tax bracket, is considering purchasing an annuity that will pay her $10,000 per year for the remainder of her life. Her life expectancy is 15 years. The cost of the annuity is $97,120, and the cost is calculated to yield her an expected 6% return on her investment. As an alternative, Rachel could place the $97,120 in a savings account yielding 6% and she could withdraw $10,000 each year for 15 years (reducing the value of the account to zero at the end of 15 years). How might the tax laws applicable to annuities affect Rachel's decision?

With respect to income from services, which of the following is true?

On December 1, 2019, Daniel, an accrual basis taxpayer, collects $12,000 rent for December 2019 and $12,000 for January 2020. Daniel must include the $24,000 in 2019 gross income.

Green Company, an accrual basis taxpayer, provides business-consulting services. Clients generally pay a retainer at the beginning of a 12-month period. This entitles the client to no more than 40 hours of services. Once the client has received 40 hours of services, Green charges $500 per hour. Green Company allocates the retainer to income based on the number of hours worked on the contract. At the end of the tax year for contracts entered into for the current year, the company had $50,000 of unearned revenues from these contracts. The company also had $10,000 in unearned rent income received this year from excess office space leased to other companies. Based on this, Green must include in gross income for the subsequent tax year:

Thelma and Mitch were divorced in 2018. The couple had a joint brokerage account that included stocks with a basis of $600,000 and a fair market value of $1,000,000. Under the terms of the divorce agreement, Mitch would receive the stocks and Mitch would pay Thelma $100,000 each year for six years, or until Thelma's death, whichever should occur first. Thelma and Mitch lived apart when the payments were made by Mitch. He paid the $600,000 to Thelma over the six-year period. The divorce agreement did not contain the word "alimony." Then, Mitch sold the stocks for $1,300,000. Mitch's recognized gain from the sale is:

Jake is the sole shareholder of an S corporation that earned $60,000 in 2019. The corporation was short on cash and therefore distributed only $15,000 to him in 2019. Jake is required to recognize $60,000 of income from the S corporation in 2019.

Rhonda has a 30% interest in the capital and profits of the ABC Partnership. In the first year of the partnership, 2019, it earned $150,000. However, the partners agreed that nothing would be distributed until after the end of March 2020, before Rhonda filed her 2019 tax return. The distributions were to be delayed because it was unclear as to whether business conditions would remain good in 2020. Things were going well in 2020 and therefore the partnership distributed $30,000 to Rhonda at the end of March, as a portion of her share of the partnership's 2019 earnings. The partnership's income for 2020 was $60,000. As a result, Rhonda must recognize $30,000 of gross income in 2019 and $18,000 in 2020.

Office Palace, Inc., leased an all-in-one printer to a new customer, Ashley, on December 27, 2019. The printer was to rent for $600 per month for a period of 36 months beginning January 1, 2020. Ashley was required to pay the first and last month's rent at the time the lease was signed. Ashley was also required to pay a $1,500 damage deposit. Office Palace must recognize as income for the lease:

Judy is a cash basis attorney. This year, 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 the current year.

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. 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.

Margaret owns land that appreciates at the rate of 10% each year. Ralph owns a zero-coupon (i.e., all of the interest is paid at maturity but is taxed annually) corporate bond with a yield to maturity of 10%. At the end of 10 years, the bond will mature and the land will be sold. At the end of the 10 years,