Exam 3: Determining Gross Income

A nonresident alien can only file a joint return with a United States citizen or resident if they both agree to be taxed on their worldwide income.

Explain the tax treatment of a gift loan.

In 2018 Potrus, an accrual basis corporate taxpayer, received a $40,000 advance for a series of eight lectures by various employees for the Art Institute. After delivering five lectures, the series was cancelled for poor attendance. Potrus refused to return any of the advance payment, so the Art Institute sued. In 2019, Potrus was ordered by the court to repay $15,000. Potrus's net income was $426,000 in 2019 and $298,000 in 2018. How should Potrus treat the repayment to obtain the best tax result?

Explain the normal tax treatment of life insurance proceeds.

Put T for Taxable income or N for Nontaxable income beside each item below as it normally would be treated for tax purposes. -Workers compensation payment

Cash dividends from a U.S. corporation paid to a nonresident alien.

Carbon Corporation had a $2,000,000 contract to build a small hospital with total costs estimated at $1,600,000. It received the following payments and incurred the following expenses over the three-year contract period: Year Payments Expenses 1 $ 400,000 $300,000 2 $1,200,000 $900,000 3 $ 400,000 $550,000 Under the competed contract method of accounting, how much profit (loss) should Carbon recognize in years 1, 2, and 3 respectively?

What are acceptable fiscal years for tax purposes?

Under the source principle of international taxation, income will be taxed in a particular jurisdiction if the source of that income is a business operating in that jurisdiction.

Which of the following is not a government transfer payment?

Brandon and Jessica, a married couple, receive $21,000 in Social Security benefits in the current year. They receive $88,000 in taxable pension payments and $6,000 in municipal bond interest income. How much of their Social Security benefits are included in gross income?

In January, Zelda borrows $7,000 from her mother for moving expenses and clothes for starting her new job after graduating from college. She told her mother she would pay her 9 percent interest on the money but made no payments in the current year. If the applicable federal interest rate is 5 percent, how much interest income must Zelda's mother recognize?

Bigtown Advertising Agency, a calendar-year, accrual basis taxpayer, was paid $60,000 for a three-year advertising contract on July 1, 2017, and $36,000 for a 12-month contract on December 1, 2017 How much income must Bigtown recognize for these contracts in years 2017 and 2018, respectively?

Settlement for loss of finger in industrial accident

Put T for Taxable income or N for Nontaxable income beside each item below as it normally would be treated for tax purposes. -Punitive damages received

Dividend to a U.S. corporation from a 10% owned foreign corporation in 2018.

Put T for Taxable income or N for Nontaxable income beside each item below as it normally would be treated for tax purposes. -Lottery winnings

Which of the following types of income would a nonresident alien avoid paying tax on in the U.S.?

All stock dividends are nontaxable.

Shelly is in the 24 percent tax bracket and expects to remain in that bracket in the future. She has $100,000 to invest for 5 years and has the following alternatives: (a) corporate bonds paying 7 percent; (b) tax-exempt bonds paying 4.5 percent; (c) land that is expected to increase in value to $140,000 in 5 years. Interest on either the corporate bonds or the tax-exempt bonds can be reinvested at 7 percent interest. Any gain on the sale of the land will be eligible for the 15 percent long-term capital gain tax rate. Calculate the after-tax return for each investment. Which investment do you recommend she choose?