Exam 3: Income Sources

According to the U.S.Supreme Court,income may be defined as the gain derived from capital,from labor,or from both combined provided it is understood to include profit gained through sale or conversion of capital assets.

The income tax treatment of payments from annuity contracts is based on the: I.Capital Recovery Concept II.Assignment of Income Doctrine III.Annual Accounting Period Concept IV.Arm's-Length Transaction Concept

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.

Waldo and Fern are negotiating a divorce settlement.Waldo has offered to pay Fern $12,000 each year for a guaranteed 10 years.What are the tax implications of this proposition? I.Since the payments are periodic and in cash,the payments qualify as alimony. II.If the payments qualify as child support,Fern recognizes gross income and Waldo has a deduction from Adjusted Gross Income.

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.

Helena and Irwin are married taxpayers who file jointly.Their taxable income before considering capital gains and losses is $120,000.They have long-term capital gains of $8,000,short-term capital losses of $4,000,and short-term capital gains of $5,000.What are the tax effects of these events? I.The short-term capital losses can offset only $3,000 of the short-term capital gains. II.The net capital gains will add $1,450 to the couple's tax liability.

In what circumstances would some portion of the Social Security benefits received by a single taxpayer be subject to taxation? Assume that all sources of income are listed.

Match each statement with the correct term below. -Original issue discount security

Elizabeth sells a painting that has a fair market value of $9,000 to Jonathan for $6,000.Which of the following statements about the tax effect of the sale is/are correct? I.If Elizabeth is an art dealer and she sold the painting to Jonathan because she needed cash quickly,Jonathan does not recognize any income from the sale. II.If Jonathan owns 60% of Elizabeth's company,Jonathan does not recognize any income from the sale.

Benjamin has the following capital gains and losses for the current year: $\begin{array}{llcc} \text {Long-term capital loss}&\$(13,000) \\ \text {Long-term capital gain}& 6,000\\ \text {Short-term capital loss}& (10,000) \\ \text {Short-term capital gain}&12,000 \\\end{array}$ What is Benjamin's net capital gain or loss for the year?

Arnold is the President of Conrad Corporation.Arnold owns 30% of Conrad,which is organized as an S corporation.Arnold's salary is $100,000.Conrad reports the following for the current year: Sales \ 4,000,000 Cost of goods sold (1,700,000) Operating expenses (1,200,000) Salaries (includes Arnold's salary) (600,000) Capital loss Net income Conrad Corporation pays $400,000 of dividends.Explain the effect of the above information on Arnold's taxable income.

Jerry purchased an annuity contract at the beginning of 2002 for $144,000.The contract specified that he and his wife would receive $1,000 per month for life.Jerry receives his first payment on February 1,2013 when he is 59 years old and his wife is 56 years old.What amount of gross income should Jerry and his wife report on their 2013 income tax return from this annuity contract?

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

Belina and Harry form the B&H Partnership in 2013.Belina contributes $15,000 for a 25% interest in the partnership.Harry contributes a building worth $45,000 for a 75% interest in the partnership.During 2013,B&H reports an income of $12,000 from operations.Belina withdraws $6,000 and Harry withdraws $12,000 from the partnership.How much gross income will Belina and Harry report from their investment in B&H and what are their bases in the partnership at the end of 2013?

Dahlia rents a condo owned by Bonnie.Both individuals are cash basis taxpayers.Dahlia uses the condo as her personal residence.Dahlia pays Bonnie $1,000 monthly,and pays $1,200 on October 1^st and April 1^st of each year as part of the lease agreement.The $1,200 payments are made directly to the county treasurer for real estate property taxes.What is the income tax treatment of these events? I.Bonnie can deduct the $1,200 payments for adjusted gross income as a property tax. II.Bonnie includes the $1,000 monthly receipts in her gross income. III.Bonnie must include the $1,200 payments in her gross income. IV.Dahlia can deduct the $1,000 monthly payments from her adjusted gross income.

Sophi finds a chest inscribed "Captain Hook" that contains $500,000 of cash while fishing off the shore around New Orleans.The US Customs and the DEA denied knowledge of the cash,so Sophi keeps it. I.Sophi will not recognize any gross income if the chest contained jewels valued at $500,000,rather than cash at the time of discovery. II.Recognition is necessary because this is a treasure trove and it is comprised of cash.

Nora receives a salary of $55,000 during the current year.She sells some land that she held as an investment at a loss of $15,000 and some stock at a gain of $10,000.Nora's adjusted gross income is:

Match each statement with the correct term below. -Imputed income

Explain why the taxpayer in each of the following situations either does or does not have taxable income and determine the amount,if any,that the taxpayer would have to recognize. a.Rafael works as a salesman of Dependable Cars Inc.Because Rafael is the year's top salesman,Dependable Cars allows Rafael to purchase a car for $30,000,which normally sells for $35,000 (Dependable Car's cost was $28,000). b.Janine's brother Barry is laid off from his job for the first half of the year.Because Barry is having trouble paying all of his bills,Janine tells Barry that she will help him out and pay the property taxes on Barry's house.The property taxes amount to $1,000. c.Thomas works as a production manager for Healthy Body,Inc.Because Thomas's unit had not had a work related accident for 2 years,Healthy Body gives Thomas a weight machine that was worth $500. d.Emmett was out for his daily walk when he spots an old shirt on the side of the road.Upon inspection,he determines it to be an old baseball uniform,which is in good enough condition that he takes it home and washes it.At a party two months later,Mark,a baseball memorabilia collector,tells him that it might be worth something.Emmett takes the shirt down to the local collector's shop where he learns that the shirt was once worn by Willie Mays and is worth at least $7,000. e.Helen invests $10,000 for a 25% interest in Lockport Landscaping,an S corporation,on January 1,2013.During 2013,Lockport pays Helen $45,000 in wages for her services as the general manager and $2,000 in cash dividends on her stock.Lockport reports a 2013 net income of $80,000. f.Amber wins $10,000 in the state lottery from a ticket given to her by her cousin,Beverly.

The income tax concept that is primarily responsible for the treatment of installment sales of property is the: