Exam 3: Income Sources

Patti sells a painting that has a fair market value of $9,000 to James for $6,000. Which of the following statements about the tax effect of the sale is/are correct? I.If James is an employee of Patti's, no income is recognized from the sale. II.If James is Patti's brother, James does not recognize any income from the sale. III.If Patti is an art dealer and she sold the painting to James because she needed cash quickly, James does not recognize any income from the sale. IV.If James owns 60% of Patti's company, James does not recognize any income from the sale. ​

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. ​

Ruth purchased an annuity contract for $10,000. When she turns 65, she will receive $150 a month for the rest of her life. The first $10,000 she receives is a return of her capital and is not taxable.

Julian is operating an illegal gambling operation. Even though the income is not legal, it is classified as earned.

Which of the following items is not a capital asset in the hands of the taxpayer?

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. ​

National Corporation allows an employee, Phyllis, to use a company car for her vacation to San Diego. I.The employer/employee relationship indicates that the receipt of the use of the car is a type of compensation for services rendered. II.Income recognition is not necessary in this case. ​

Determine the amount of gross income the taxpayer must report in each of the following situations. Explain why the amount is taxable and how you determined the taxable amount. a.National Corporation receives a $12,000 bill for legal fees from its attorney in December. National paid the bill promptly and deducted the $12,000 as a legal expense for its year ending December 31. During the audit of its financial statements, the auditor determines that the attorney had double billed the corporation for $3,000 of expenses. National sent a copy of the auditor's findings in March. The attorney agrees with the auditor and sends National a check for $3,000 in April. b.Greta spends a week in Las Vegas. While cashing in some of her chips at the cashier's window, she looks down and sees a $1,000 bill lying crumpled on the floor. She picks up the bill and puts it in her pocket. c.Akron Living, Inc., an accrual basis corporation, owns an apartment building. On November 1, it rents an apartment for $400 per month. Per the terms of the rental agreement, the tenant pays the corporation $1,100 on November. The $1,100 consists of the first and last months rent and a $300 cleaning deposit. The cleaning deposit will be used at the end of the lease and any amount not used for cleaning will be returned to the tenant. Very little is usually returned. d.Anthony is an employee of the Channel Company. Channel Company institutes a computer upgrade and offers its old computers for sale for $700. Anthony offers Channel $500 for one of the computers. Because they have not been selling well, Channel accepts Anthony's offer and sells him a computer for $500. e.James owns Argyle Co. as a sole proprietorship. In November, James pays a $600 bill for supplies and deducts it on his tax return. The following February, the supplier sends James a check for $120. A letter accompanying the check indicated that the supplier had overcharged Argyle Co. and the check was to adjust for the overcharge.

Dan is the owner of VHS Video's Inc. VHS rents videos for overnight use and also sells videos from stock. It gross receipts always exceed $30 million. In accounting for VHS transactions, Dan I.May use either the cash or the accrual method. II.Must use the cash method to account for video rentals. III.Must use the accrual method for video sales and purchases. IV.May elect to use the accrual method for all sales and rental revenues and the cash method for purchases of videos and all other business expenses. ​

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

Jennifer owns 60% of the stock in Heath Corporation. During the current year, Heath Corporation has taxable income of $80,000 and pays dividends of $30,000. Which of the following statements about Jennifer's income from Heath Corporation is/are correct? I.If Heath Corporation is an S corporation, Jennifer must recognize $48,000 of income. II.If Heath Corporation is a corporation, Jennifer must recognize $18,000 of income. ​

Nellie, a single individual age 77, receives Social Security benefits of $7,000 during the current year. Her only other income consists of $5,000 of interest from bank CDs and $1,000 of tax exempt interest distributed from a trust fund. Nellie's gross income is:

Cathy, an attorney, bills a client $12,000 for services rendered in November 2018. The client is having cash flow problems and Cathy accepts 1,000 shares of Petrol Corporation common stock in full satisfaction of the account on July 5, 2019. On July 5, 2019, the Petrol stock is selling for $10 per share. Cathy sells the Petrol stock on August 10, 2019, for $11 per share. What is the effect of the transactions on Cathy's 2019 taxable income if a.Cathy is a cash basis taxpayer? b.Cathy is an accrual basis taxpayer?

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: Conrad Corporation pays $400,000 of dividends. Explain the effect of the above information on Arnold's adjusted gross income. Sales \ 4,000,000 Cost of goods sold (1,700,000) Operating expenses (1,200,000) Sal aries (includes Amold's salary) (600,000) Capital loss (200,000) Net income \ 300,000

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. ​

Rae is a retired corporate executive. He and his wife, Pat, receive pensions totaling $82,000 and $8,000 of Social Security benefits during the current year. Rae and Pat's adjusted gross income is

Match each statement with the correct term below. -Installment sale

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. ​

Ursula owns an annuity that pays her $850 per month until she dies. Which of the following income tax concepts provides for the tax treatment of the annuity payments Ursula receives (and the treatment in the year of death)? I.Administrative Convenience Concept II.Annual Accounting Period Concept III.Capital Recovery Concept IV.Constructive Receipt Doctrine ​

The intent of the alimony recapture rules is to