Section 2 Part 2.1 Income

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True/False
Indicate whether the statement is true or false.

Judy is a cash basis attorney. In 2018, 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 2018.

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

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

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 cash basis taxpayer purchased a certificate of deposit for $1,000 on July 1, 2017 that will pay $1,100 upon its maturity on June 30, 2018. The taxpayer must recognize a portion of the income in 2018.

In 2005, Terry purchased land for $150,000. In 2018, 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.

On December 1, 2018, Daniel, an accrual basis taxpayer, collects $12,000 rent for December 2018 and $12,000 for January 2019. Daniel must include the $24,000 in 2018 gross income.0 for 2019.

On January 1, 2018, 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 2019.

An advance payment received in June 2018 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.

10.

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.

11.

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.

12.

ABC Corporation declared a dividend for taxpayers of record as of December 24, 2018. The dividend checks were mailed on December 31, 2018. Ed, a cash basis shareholder, received the dividend check on January 2, 2019. Ed cannot delay reporting the income from the dividend until 2019.

13.

When stock is sold after the date of declaration but before the record date, the buyer must recognize as income the dividend declared

14.

The following are taxable forms of Income:

Employee cvompensation
W-2 Wages from an emloyer showing pay received for services
Advanced commissions
Back py awards
Bonuses and awaards
Employee acheivement awards

15.

Reported tip income is money received in cash, check, and debit and credit card transactions of more than $30.

16.

Amounts received for alimony payments are taxable income if:

Payments are made in cash
There is a written agreement
Payments are not disguised child support or property settlement
Payments cannot be made to payee’s estate
Payer and payee do not live in the same household

Multiple Choice
Identify the choice that best completes the statement or answers the question.

17.

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

a.	Sue must recognize $2,000 gross income in the current year if the company did not install the cable during the year.	d.	Sue must recognize $2,000 gross income in the current year, and when the cable is installed, she must reduce her cost basis in the land by $2,000.
b.	Sue is not required to recognize gross income from the receipt of the funds, but she must reduce her cost basis in the land by $2,000.	e.	None of the above.
c.	Sue must recognize $2,000 gross income in the current year regardless of whether the company installed the cable during the year.

18.

For purposes of determining gross income, which of the following is true?

a.	A mechanic completed repairs on an automobile during the year and collects money from the customer. The customer was not satisfied with the repairs and sued the mechanic for a refund. The mechanic can defer recognition of the income until the suit has been settled.	d.	All of the above are false.
b.	A taxpayer who finds a wallet full of money is required to recognize income even though someone may eventually ask for the return of the money.	e.	All of the above are true.
c.	Embezzlement proceeds are not included in the embezzler’s gross income because the embezzler has an obligation to repay the owner.

19.

Detroit Corporation sued Chicago Corporation for intentional damage to Detroit’s goodwill. Detroit had created its goodwill through providing high-quality services to its customers. Thus, no basis for the goodwill appeared on Detroit’s balance sheet. The suit was settled and Detroit received $1,500,000 for the damages to its goodwill.

a.	The $1,500,000 is not taxable because it represents a recovery of capital.	d.	The $1,500,000 is not taxable because Detroit settled the case.
b.	The $1,500,000 is taxable because Detroit has no basis in the goodwill.	e.	None of the above.
c.	The $1,500,000 is not taxable because Detroit did nothing to earn the money.

20.

The annual increase in the cash surrender value of a life insurance policy:

a.	Is taxed when the individual dies and the heirs collect the insurance proceeds.	d.	Is not included in gross income each year because of the substantial restrictions on gaining access to the policy’s value.
b.	Must be included in gross income each year under the original issue discount rules.	e.	None of the above.
c.	Reduces the deduction for life insurance expense.

21.

Turner, a successful executive, is negotiating a compensation plan with his potential employer. The employer has offered to pay Turner a $600,000 annual salary, payable at the rate of $50,000 per month. Turner counteroffers to receive a monthly salary of $40,000 ($480,000 annually) and a $180,000 bonus in 5 years when Turner will be age 65.

a.	If the employer accepts Turner’s counteroffer, Turner will recognize $660,000 at the time the offer is accepted	d.	If the employer accepts Turner’s counteroffer, Turner will recognize $40,000 income each month for the year and $180,000 in year 5.
b.	If the employer accepts Turner’s counteroffer, Turner will recognize as gross income $55,000 per month [($480,000 + $180,000)/12].	e.	None of the above.
c.	If the employer accepts Turner’s counteroffer, Turner must recognize imputed interest income on the $180,000 to be received in 5 years.

22.

Which statement is true?

a.	Interest income accrues daily If interest bearing instrument (e.g., bonds) is transferred, must allocate interest income between transferor and transferee based on the number of days during the period that each owned the property	c.	Income received by the taxpayer’s agent is considered to be received by the taxpayer. A cash basis principal must recognize the income at the time it is received by the agent
b.	Dividends are generally taxed to the party who is entitled to receive them Dividends on stock transferred by gift after declaration date but before record date are generally taxed to the donor	d.	All are correct

Completion
Complete each statement.

23.

Amounts received as prizes and awards are generally taxable. What are exceptions?