Test bank taxation of individuals and business entities 2015 6e by brian c spilker chap005

Chapter 05
Gross Income and Exclusions
True / False Questions
1. Gross income includes all income realized during the year.
True

False

2. Excluded income will never be subject to the federal income tax.
True

False

3. The all-inclusive definition of income means that gross income is defined very
broadly.
True

False

4. A taxpayer who borrows money will include that amount borrowed in their gross
income under the all-inclusive definition of income.
True

False

5. Income is included in gross income unless a tax provision specifies that it can be
deferred or excluded.
True

False

6. The principle of realization for tax purposes is very different from realization as it is
understood for financial reporting purposes.
True

False

7. Wherewithal to pay represents the principle that a realized transaction should require
a taxpayer to sell other assets in order to pay income taxes.
True

False

8. Barter clubs are an effective means of avoiding realization for tax purposes.
True

False

9. The cash method of accounting requires taxpayers to recognize income only when
that income is received as cash.
True

False

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10. When a carpenter provides $100 of services in exchange for $100 of groceries, the
carpenter has realized $100 of income.

True

False

11. Recognized income may be in the form of cash or property received (but not services
received).
True

False

12. When a taxpayer sells an asset, the entire proceeds from the sale must be included
in gross income regardless of the cost of the asset.
True

False

13. Jake sold his car for $2,400 in cash this year. He will realize a taxable gain of $1,000 if
he purchased the car for $1,400.
True

False

14. When an asset is sold, the taxpayer calculates the gain or loss by subtracting the tax
basis of the asset from the proceeds of the sale.
True

False

15. The tax benefit rule applies when a taxpayer refunds amounts that were previously
included in income.

True

False

16. Jim received a $500 refund of state income taxes this year. Jim will not need to
include the $500 in his gross income this year because he did not deduct state
income taxes last year.
True

False

17. Constructive receipt represents the principle that cash basis taxpayers should be
taxed on income when it is made available to them without substantial restrictions.
True

False

18. Claim of right states that income has been realized if a taxpayer receives income and
there are substantial restrictions on the taxpayer's use of the income.
True

False

19. Community property laws dictate that income earned by one spouse is treated as
though it was earned equally by both spouses.
True

False

20. Interest income is earned in the year in which it is received by the taxpayer or

credited to the bank account.
True

False

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21. The assignment of income doctrine requires that to shift income from property to
another person, the taxpayer must transfer only the income to the other person.
True

False

22. For tax purposes, unearned income means income that has not yet been realized.
True

False

23. A portion of each payment from a purchased annuity represents income.
True

False

24. The exclusion ratio for a purchased annuity is the cost of the annuity divided by the
interest rate.
True

False

25. Rental income generated by a partnership is reported by partners as dividend
income.
True

False

26. The tax law defines alimony to include transfers of property (but not cash) between
former spouses.
True

False

27. The tax law includes a complex set of restrictions called the anti-frontloading rules to
make it difficult for taxpayers to disguise property payments as alimony payments.
True

False

28. Prizes and awards are generally taxable.
True

False

29. Gambling winnings are included in gross income only to the extent that the winnings
exceed gambling losses incurred during the same period.
True

False

30. Generally, 85 percent of Social Security benefits are included in income of high
income taxpayers.
True

False

31. Unemployment benefits are excluded from gross income.
True

False

32. A taxpayer generally includes in gross income the amount of debt forgiven by a
lender.
True

False

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33. An employee may exclude up to a 40 percent employer-provided discount on
services.
True

False

34. A below-market loan (e.g., from an employer to an employee) is a common example

of a transaction that generates taxable imputed income.
True

False

35. Interest earned on a Federal Treasury bond is excluded from gross income (for federal
tax purposes).
True

False

36. Interest earned on a city of Denver bond is excluded from gross income (for federal
tax purposes).
True

False

37. Taxpayers meeting certain home ownership and use requirements can permanently
exclude up to $1,000,000 of realized gain on the sale of their principal residence.
True

False

38. Qualified fringe benefits received by an employee can be excluded from gross
income.
True

False

39. Scholarships are excluded from gross income for degree candidates even if the

scholarship pays for required fees and books in addition to tuition.
True

False

40. Earnings from 529 plans and Coverdell education savings accounts are excluded from
gross income as long as they use the earnings to pay for qualifying educational
expenditures.
True

False

41. Trevor received a gift of $25,000 in cash from his rich uncle. Trevor must include
$15,000 of this gift in his gross income this year.
True

False

42. Anna received $15,000 from life insurance paid upon the death of her grandmother.
Anna can exclude the entire amount of the life insurance from her gross income.
True

False

43. U.S. citizens generally are subject to tax on all income whether it is generated in the
United States or in foreign countries.
True

False

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44. To provide relief from double taxation, Congress allows a foreign-unearned income
exclusion for interest and dividends earned in foreign countries.
True

False

45. Worker's compensation benefits are excluded from gross income.
True

False

46. Fred must include in gross income a $7,500 payment received from his neighbor to
compensate Fred for the emotional distress he suffered when his neighbor
accidentally ran over his dog.
True

False

47. Loretta received $6,200 from disability insurance that she purchased directly this
year. Loretta must include all $6,200 in her gross income.
True

False

48. Brad was disabled for part of the year and he received $11,500 of benefits from a

disability plan purchased by Brad's employer. Brad must include all $11,500 of
benefits in his gross income because Brad was not taxed on the disability insurance
premiums paid by his employer.
True

False

Multiple Choice Questions
49. Gross income includes

A.
B.
C.
D.
E.

all income from whatever source derived unless excluded by law.

all realized inco

50. Which of the following is not a necessary condition for income to be included in gross
income?

A.
B.
C.
D.
E.

income must be realized

income must be paid in cash
income cannot be excluded by law
income must be made available to a taxpayer on the cash basis

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51. Sally is a cash basis taxpayer and a member of the Valley Barter club. This year Sally
provided 100 hours of sewing services to the barter club in exchange for two football
playoff tickets. Which of the following is a true statement?

A.
B.
C.
D.
E.

Sally need not recognize any gross income unless she sells the football tickets.
Sally's exchange does not result in taxable income.
Sally is taxed on the value of the football tickets even if she cannot attend the
Sally is taxed on the value of her sewing services only if she is a professional sea
All of these are true.

52. This year Barney purchased 500 shares of Bell common stock for $20 per share. At
year-end the Bell shares were only worth $2 per share. What amount can Barney
deduct as a loss this year?

A.

B.
C.
D.
E.

Barney can deduct $10,000 only if he includes $1,000 in his taxable income
None of these - Barney is not entitled to a loss deduction.

53. Hillary is a cash-basis calendar-year taxpayer. During the last week of December she
received a letter containing a $5,000 check for services. Which of the following is a
true statement?

A.
B.
C.
D.
E.

Hillary is taxed on the $5,000 of service income in the year she cashes the chec
Hillary is taxed on the $5,000 of service income in the year the check was maile
Hillary is taxed on the $5,000 of service income in the year she receives the ch
Hillary is taxed on the $5,000 of service income in the year she provides the se
None of these is true.

54. Identify the rule that determines whether a taxpayer must include in income a refund
of an amount deducted in a previous year:

A.
B.
C.

D.
E.

Constructive receipt
Return of capital principle

55. Identify the rule dictating that on a sale of an asset a taxpayer need only include the
incremental gain in gross income rather than the entire proceeds from the sale:

A.
B.
C.
D.
E.

Constructive receipt
Return of capital principle
Wherewithal to

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56. Identify the rule that states that income has been realized when a taxpayer receives
the income and there are no restrictions on the taxpayer's use of the income (e.g., no
obligation to repay the amount):

A.
B.

C.
D.
E.

Constructive receipt
Return of capital principle
Wherewithal to

57. Dave is a plumber who uses the cash method of accounting. This year Dave
requested that his clients make their checks payable to his son, Steve. This year
Steve received checks in the amount of $62,000 for Dave's plumbing services. Which
of the following is a true statement?

A.
B.
C.
D.
E.

Dave is taxed on $62,000 of plumbing income this year.
Steve is taxed on $62,000 of plumbing income this year.
Steve is taxed on $62,000 of income from gifts received this year.
Dave may deduct the $62,000 received by Steve.
All of these are true

58. Jack and Jill are married. This year Jack earned $72,000 and Jill earned $80,000 and
they received $4,000 of interest income from a joint savings account. How much
gross income would Jack report if he files married-separate from Jill?

A.

B.
C.
D.
E.

$72,000 if they reside in a common law state.
$76,000 if they reside in a community property law state.
$84,000 if they reside in a common law state.
$78,000 if they reside in a community property law state.

59. Identify which of the items below help determine which taxpayer must recognize
earned income:

A.
B.
C.
D.
E.

Residence in a community property law state
Assignment of income
Residence in a common law state
Both residence in a community property law state and assignment of income a

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60. Kevin provided services to several clients this year who paid with different types of

property. Which of the following payments is not included in Kevin's gross income?

A.
B.
C.
D.
E.

Shares of stock listed on the New York Stock Exchange

All of these are included in gross income

61. Emily is a cash basis taxpayer, and she was an especially productive salesperson last
year. In December of last year her supervisor told Emily she had earned a $5,000
bonus. However, Emily received the bonus check after year end. Identify the principle
that will determine when Emily is taxed on the bonus:

A.
B.
C.
D.
E.

Assignment of income
Constructive receipt
Return of capital principle
Wherewithal to

62. Ophra is a cash basis taxpayer who is employed in the publishing industry. This year
her employer informed her that because of her outstanding performance she is

entitled to a free world cruise. Ophra asked her employer to issue the cruise tickets to
her parents, and he complied with this request. Identify the principle that will
determine whether Ophra or her parents are taxed on the value of the cruise tickets:

A.
B.
C.
D.
E.

Assignment of income
Constructive receipt
Return of capital principle
Wherewithal to

63. This year Henry realized a gain on the sale of an antique car that he inherited from
his uncle. The buyer has promised to pay Henry in installment payments over the
next few years. Identify the principle that will determine when Henry should be taxed
on the gain from the sale:

A.
B.
C.
D.
E.

Assignment of income
Constructive receipt
Return of capital principle
Wherewithal to

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64. This year Mary received a $200 refund of state income taxes that she deducted on
her tax return last year. Mary included a total of $4,000 of state income taxes when
she itemized deductions last year. What amount of the refund, if any, should Mary
include in her gross income this year?

A.
B.
C.
D.
E.

$200 is included because Mary itemized her deductions last year.
$200 is included if itemized deductions exceeded the standard deduction by $2
$200 is included because itemized deductions exceeded the standard deductio
$200 is included even if Mary claimed the standard deduction.
None of these - refunds of state income taxes are not included in gross income

65. Opal deducted $2,400 of state income taxes on her tax return last year. This year she
received a state income tax refund of $170. What amount of the refund, if any,
should Opal include in her gross income if last year her total itemized deductions
exceeded the standard deduction by $350?

A.
B.

C.
D.
E.

None of these - refunds of state income taxes are not included in gross income

66. Wilma has a $25,000 certificate of deposit (CD) at the local bank. The interest on this
certificate, $1,000, was credited to her account this year but she must pay an early
withdrawal penalty if she cashes in the CD before next year. Which of the following is
a true statement?

A.
B.
C.
D.
E.

Wilma must include the $1,000 of interest in her income this year.
Wilma must include the $1,000 of interest in her income when she cashes the C
Wilma must include the $1,000 of interest in her income this year only if the bank
Wilma must include the $1,000 of interest in her income next year if she does not

67. Which of the following is a true statement about the first payment received from a
purchased annuity?

A.
B.
C.
D.
E.

The payment is included in gross income.
A portion of the payment is a return of capital.
The payment can only be taxed in the year after the annuity was purchased.
The payment is not taxed until the annuity payments cease altogether.

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68. Which of the following is a description of how the annuity exclusion ratio is calculated
for an annuity paid over a fixed period?

A.
B.
C.
D.
E.

The expected return is divided by the number of payments.
The original investment is divided by the prevailing interest rate.
The original investment is divided by the number of payments.
The expected return is divided by the prevailing interest rate.

69. George purchased a life annuity for $3,200 that will provide him $80 monthly
payments for as long as he lives. Based on IRS tables, George's life expectancy is 100
months. How much of the first $80 payment will George include in his gross income?

A.

B.
C.
D.
E.
70. Fran purchased an annuity that provides $12,000 quarterly payments for the next 10
years. The annuity was purchased at a cost of $300,000. How much of the first
quarterly payment will Fran include in her gross income?

A.
B.
C.
D.
E.
71. Harold receives a life annuity from his qualified pension that pays him $5,000 per
year for as long as he lives. Later this year Harold will recover the remainder of his
cost of the annuity. Which of the following correctly describes how the annuity
payments are taxed after Harold has recovered the cost of the annuity?

A.
B.
C.
D.
E.

Harold will continue to apply the annuity exclusion ratio to determine the amount
Harold will include the entire amount of each annuity payment in gross income aft
The entire amount of each annuity payment is excluded from gross income after H
Harold must request that the IRS calculate his exclusion ratio based upon a revise

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72. To calculate a gain or loss on the sale of an asset, the proceeds from the sale are
reduced by which of the following?

A.
B.
C.
D.
E.

Tax basis of the property

Tax basis of the property and Selling expenses

73. Nate is a partner in a partnership that received $5,000 of interest income this year.
Nate's share of the interest is $1,000, and he should report this income on his
individual return as:

A.
B.
C.
D.
E.

income from a partnership

dividend income because the partnership intends to organize next year as a limit

74. Which of the following statements about alimony payments is true?

A.
B.
C.
D.
E.

To qualify as alimony, payments must be made in cash.
Alimony payments are includible in the gross income of the recipient.
To qualify as alimony, payments cannot continue after the death of the recipie
To qualify as alimony, payments must be made under a written agreement or divo

75. Barney and Betty got divorced this year. In the divorce decree Betty agreed to
transfer 100 shares of common stock worth $50,000 and pay Barney $24,000 per
year for five years (or until Barney's death or remarriage). What amount (if any) is
included in Barney's gross income this year?

A.
B.
C.
D.
E.

None of the payments are included in gross income

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76. Charles and Camilla are getting divorced. Under the terms of the decree Charles will
pay Camilla $50,000 in cash in each of the next five years (or until Camilla's death or
remarriage). In addition, Charles will transfer a castle worth $2,000,000 to Camilla
and pay $12,000 per year to support their son, Clyde, until he turns 19 years old.
What amount (if any) is included in Camilla's gross income this year?

A.
B.
C.
D.
E.

None of the payments are included in gross income

77. Hal Gore won a $1 million prize for special contributions to environmental research.
This prize is awarded for public achievement, and Hal directed the awarding
organization to transfer $400,000 of the award to the Environmental Protection
Agency. How much of the prize should Hal include in his gross income?

A.
B.
C.
D.
E.

None of these because all prizes are excludible
None of these because prizes from charities are excludible

78. Ethan competed in the annual Austin Marathon this year and won a $25,000 prize for
fastest wheelchair entrant. Ethan indicated that he would transfer the prize to the
local hospital. How much of the prize should Hal include in his gross income?

A.
B.
C.
D.
E.

$25,000 because all prizes are taxable
Zero because prizes transferred to charities are excludible
Zero because all prizes are excludible
Zero because prizes from charities are excludible

79. This year Ed celebrated his 25th year as an employee of Designer Jeans Company. In
recognition of his long and loyal service, the company awarded Ed a gold watch
worth $250 and a $2,000 cash bonus. What amount must Ed include in his gross
income?

A.
B.
C.
D.
E.

Zero if Ed offers to contribute his watch and bonus to a qualified charity
Zero - all employee awards are excluded from gross income

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80. Rhett made his annual gambling trip to Uwin Casino. On this trip Rhett won $250 at
the slots and $1,200 at poker. Also this year, Rhett made several trips to the race
track, but he lost $700 on his various wagers. What amount must Rhett include in his
gross income?

A.
B.
C.
D.
E.

Zero - gambling winnings are not included in gross income

81. Bernie is a former executive who is retired. This year Bernie received $250,000 in
pension payments and $10,000 of social security payments. What amount must
Bernie include in his gross income?

A.
B.
C.
D.
E.
82. Bart, a single taxpayer, has recently retired. This year, he received $24,000 in
pension payments and $5,000 of social security payments. What amount must Bart
include in his gross income for the social security payments?

A.
B.
C.
D.
E.
83. Karl works at Moe's grocery. This year Karl was paid $43,000 in salary but he was
allowed to purchase his groceries at 10% below Moe's cost. This year Karl spent
$3,600 to purchase groceries costing Moe $4,000 and worth $6,000. What amount
must Karl include in his gross income?

A.
B.
C.
D.
E.

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84. Joyce's employer loaned her $50,000 this year (interest-free) to buy a new car. If the
federal interest rate was 3%, which of the following is correct?

A.
B.
C.
D.
E.

Joyce recognizes $1,500 of taxable interest income.
Joyce's employer recognizes $1,500 of deductible interest expense.
Joyce recognizes $1,500 of imputed compensation income.
Joyce recognizes $1,500 of imputed dividend income.

85. Janine's employer loaned her $5,000 this year (interest-free) to buy a used car. If the
federal interest rate was 4%, which of the following is correct?

A.
B.
C.
D.
E.

Janine recognizes $200 of taxable interest income.
Janine's employer recognizes $200 of deductible interest expense.
Janine recognizes $200 of imputed compensation income.
Janine recognizes $200 of imputed dividend income.

86. Deb has found it very difficult to repay her loans. Because of these difficulties, the
bank decided to forgive one of her most recent loans, an amount of $45,000. After
the loan was discharged, Deb had total assets of $232,000 and her remaining loans
total $217,000. What amount must Deb include in her gross income?

A.
B.
C.
D.
E.

Zero - Deb was not solvent when the loan was discharged

87. Mike received the following interest payments this year. What amount must Mike
include in his gross income (for federal tax purposes)?

A.
B.
C.
D.
E.

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88. This year, Fred and Wilma sold their home (sales price $750,000; cost $200,000). All
closing costs were paid by the buyer. Fred and Wilma owned and lived in their home
for 20 years. How much of the gain is included in gross income?

A.
B.
C.
D.
E.
89. This year, Barney and Betty sold their home (sales price $750,000; cost $200,000).
All closing costs were paid by the buyer. Barney and Betty owned and lived in their
home for 18 months. How much of the gain is included in gross income?

A.

B.
C.
D.
E.
90. Frank received the following benefits from his employer this year. What amount must
Frank include in his gross income?

A.
B.
C.
D.
E.

Zero - these benefits are excluded in gross income

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91. Ben's employer offers employees the following benefits. What amount must Ben
include in his gross income?

A.
B.
C.
D.
E.

Zero - None of these benefits is included in gross income

92. Shaun is a student who has received an academic scholarship to State University. The
scholarship paid $14,000 for tuition, $2,500 for fees, and $1,000 for books. In
addition, Shaun's dormitory fees of $8,500 were paid by the University when he
agreed to counsel freshman on campus living. What amount must Shaun include in
his gross income?

A.
B.
C.
D.
E.

Zero - None of these benefits is included in gross income

93. Graham has accepted an offer to do graduate work in the chemistry department at
State University. The chemistry department offered Graham a $5,000 tuition
reduction and $3,500 toward the cost of room and meals. Under the terms of the
scholarship Graham must work in the chemistry labs during the summer as a
research assistant. What amount must Graham include in his gross income?

A.
B.
C.
D.
E.

Zero - None of these benefits is included in gross income

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94. Sam, age 45, saved diligently for his college education by putting part of his pay into
U.S. Series EE saving bonds. Sam purchased the bonds for $6,500, and this year he
redeemed the bonds for $7,200. He has no other income this year. What amount
must Sam include in his gross income?

A.
B.
C.
D.
E.

a maximum of $350 if Sam uses the proceeds to pay for his college tuition and
$700 unless Sam uses the proceeds to pay for his college tuition and fees.
Zero - proceeds from cashing bonds sold at a discount is not realized income.

95. Brenda has $15,000 in U.S. Series EE saving bonds and she is considering whether to
cash the bonds. Under what conditions can Brenda exclude the interest on the
savings bonds from her gross income?

A.
B.
C.
D.
E.

Brenda can exclude the interest if she uses the proceeds to pay for college tuiti

Brenda's modified AGI must be below a phase-out range for the exclusion.
The proceeds must be used for higher education expenses of Brenda, her spouse
All of these are necessary conditions for Brenda to exclude the interest.
None of these - the interest is always included in gross income

96. Dora made a gift of stock to her granddaughter. At the time of the gift, the stock was
worth $15,000. Several months after the gift, a $500 dividend was declared on the
stock and paid to Dora's granddaughter. What amount must Dora's granddaughter
include in her gross income?

A.
B.
C.
D.
E.
97. Irene's husband passed away this year. After his death, Irene received $250,000 of
proceeds from life insurance on her husband, and she inherited her husband's stock
portfolio worth $750,000. What amount must Irene include in her gross income?

A.
B.
C.
D.
E.

Zero but only if Irene does not opt to receive the life insurance proceeds in a lum
Zero - None of these benefits is included in gross income

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98. Helen is a U.S. citizen and CPA, who moved to London, England three years ago to
work for a British company. This year, she spent the entire year in London and earned
a salary of $110,000. How much of her salary will she be allowed to exclude from
gross income in the U.S.?

A.
B.
C.
D.
E.

All of her salary is included in gross income

99. Hank is a U.S. citizen and is doing a three to six year assignment as a sales executive
in Paris for a French company, which began this year. Hank earned $109,500 working
for the French company this year but only lived in France for 340 days (out of 365
days). What amount of Hank's $109,500 salary this year will he be allowed to exclude
from gross income in the U.S. (rounded to the nearest one-hundred dollars)?

A.
B.
C.
D.
E.

Hank can exclude his entire salary because he worked more than 330 days over

None of his salary can be excluded from gross income because Hank must reside o

100 NeNe is an accountant and U.S. citizen, who has accepted a permanent position in
.
Madrid, Spain for a Spanish financial services company. This year, NeNe spent the
entire year working in Madrid. NeNe's employer paid $40,000 of her Madrid housing
expenses this year. What amount of the $40,000 housing payments may NeNe
exclude?

A.
B.
C.
D.
E.

NeNe can exclude all of the housing payment because she worked more than 330

None of her salary can be excluded from gross income.

101 Pam recently was sickened by eating spoiled peanut butter. She successfully sued
.
the manufacturer for her medical bills ($3,700), her emotional distress ($6,000 - she
now fears peanut butter), and punitive damages ($44,000). What amount must Pam
include in her gross income?

A.
B.
C.
D.
E.

Zero - None of these benefits is included in gross income

5-18
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102 This year Zach was injured in an auto accident. As a result he received the following
.
payments.
Zach received $18,000 of disability pay. Zach has disability insurance provided by his
employer as a nontaxable fringe benefit. Zach's employer paid $4,300 in disability
premiums for Zach this year.
Zach's hospital bills totaled $4,500 and were paid by his health insurance. Zach has
health insurance provided by his employer as a nontaxable fringe benefit. Zach's
employer paid $6,250 in health insurance premiums for Zach this year.
What amount must Zach include in his gross income?

A.
B.
C.
D.
E.

Zero - None of these benefits is included in gross income

103 Samantha was ill for four months this year. Samantha missed work during this
.
period, but disability insurance paid $18,000 of disability pay to replace her missed

salary. Samantha shares the cost of the insurance with her employer. This year
Samantha's employer paid $2,200 in disability premiums for Samantha as a
nontaxable fringe benefit and Samantha paid the remaining $1,100 of premiums
from her salary. What amount of the disability pay must Samantha include in her
gross income (rounded to the nearest whole dollar)?

A.
B.
C.
D.
E.

Zero - None of these disability pay is included in gross income

104 Acme published a story about Paul and as a result Paul sued Acme for damage to his
.
reputation, emotional distress, and punitive damages. Paul won an award of $20,000
for damages, $5,500 for emotional distress, and $50,000 for punitive damages. What
amount must Paul include in his gross income?

A.
B.
C.
D.
E.

All of these benefits are included in gross income

Essay Questions

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105 This year Ann has the following stock transactions. What amount is included in her
.
gross income if Ann paid a $200 selling commission for each sale?

106 Blake is a limited partner in Kling-On Partners. This year Kling-On reported that
.
Blake's share of dividend income was $3,700 and his share of municipal interest was
$2,750. Early this year Blake found a bundle of $100 bills in the alley outside his
apartment. When no one claimed the money, the cash (a total of $2,400) was
returned to Blake. Finally, Blake earned salary of $42,000 but almost $6,500 was
withheld for income taxes and FICA tax. Compute Blake's realized income and gross
income.

5-20
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107 Henry works part-time on auto repairs and restoration projects. This year Henry was
.
paid $5,400 for repairs he made to his neighbor's auto. Henry's neighbor promised to
pay Henry another $2,200 in cash next year. Henry's brother borrowed $4,100 in
cash in December of this year and gave him a negotiable promissory note for $4,300
due in three months with interest. Henry sold the note in January for $3,500. Finally,
Henry restored a car for the football coach. The coach paid him with a pass to next

year's football games. The pass is worth $750. Compute Henry's gross income
assuming that he uses the cash basis of accounting.

108 Juan works as a landscaper for local businesses on weekends, and he often provides
.
services in exchange for property. This year Juan provided lawn-mowing services in
exchange for $1,275 of car repair services, $3,570 of groceries, and a certificate of
deposit (C.D.) for $4,050. The C.D. matures next year with interest. Finally, Juan
received a gift card that can only be applied for $850 of clothing at a local mall. Juan
has only applied the gift card to purchase $100 of clothing. Compute Juan's gross
income assuming that he uses the cash basis of accounting.

109 This year Kelsi received a $1,900 refund of state income taxes that she paid last
.
year. Last year Kelsi claimed itemized deductions of $7,200 including $2,800 of state
income taxes. How much of the refund, if any, must Kelsi include in gross income if
the standard deduction last year was $6,100?

5-21
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110 In April of this year Victoria received a $1,400 refund of state income taxes that she
.
paid last year. Last year Victoria claimed itemized deductions of $8,690. Victoria's
itemized deductions included state income taxes paid of $3,750. How much of the
refund, if any, must Victoria include in gross income if the standard deduction last
year was $6,100?

111 Aubrey and Justin divorced on June 30 of this year. Through June 30 Aubrey earned
.
$62,000 of salary, and Justin earned $45,000. For the year Aubrey reported a total
salary of $130,000, and Justin earned a total salary of $88,000. Aubrey and Justin live
in a community property state. How much income earned will Justin report on his tax
return for this year?

112 Aubrey and Justin divorced on June 30 of this year. Through June 30 Aubrey earned
.
$62,000 of salary and Justin earned $45,000. For the year Aubrey reported a total
salary of $130,000 and Justin earned a total salary of $88,000. Aubrey and Justin live
in a community property state. How much of the income will Aubrey report on her
tax return for this year?

5-22
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113 Cyrus is a cash method taxpayer who reports on a calendar-year. Last year Cyrus
.
received salary of $88,000 and at year-end his employer announced that Cyrus
would receive an additional year-end bonus of $10,000 in cash and a new TV worth
$2,000. Cyrus didn't receive his bonus check until January of this year and the TV
didn't arrive until March of this year. Determine the amount Cyrus should include in
his gross income for last year.

114 Kathryn is employed by Acme and they have been very pleased with her
.
performance this year. In December Kathryn was granted an extra week off with pay

(pay for the week totaled $2,000). In addition, Kathryn was given tickets to a football
bowl game worth $800 (Kathryn didn't use the tickets - she hates football). At yearend Kathryn was allowed to order new office furniture and Acme told her to take the
old office furniture home. The office furniture was originally purchased for $7,000,
but it was fully depreciated and only worth about $1,000. Determine the amount
Kathryn should include in her gross income.

115 Charles purchased an annuity from an insurance company that promised to pay him
.
$20,000 per year for the next 12 years. Charles paid $180,000 for the annuity. How
much of the first $20,000 payment should Charles include in gross income?

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116 This year Larry received the first payment from an annuity that promises to pay him
.
$3,000 per month for the rest of his life. The IRS tables indicate that given Larry's
age, he should expect to receive 310 monthly payments. The cost of the annuity to
Larry was $620,000. How much of the first $3,000 payment should Larry include in
gross income?

117 Desai and Lucy divorced this year. Lucy has custody of their child, Andrea, and under
.
the divorce decree Desai pays Lucy $120,000 per year. The payments must be made
in cash and will cease if Lucy dies or remarries. The payments drop to $100,000 per
year once Andrea reaches the age of 18. How much of the payments should Lucy
include in gross income this year?

118 Terri and Mike are seeking a divorce. Terri and Mike own an art collection worth
.
$357,000 that would belong to Terri. Mike offered to make annual payments of cash
to Terri each year for five years if Terry allows Mike to take possession of the art
collection. Mike insists however, that the annual payments must cease in the event
of Terri's death. What amount of annual payment must Terri demand to make her
indifferent after taxes between taking possession of the ($357,000) art versus
collecting the cash payments? Assume that Terri has a marginal tax rate of 15
percent and Mike's tax rate is 35 percent and ignore the time value of money.

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119 J.Z. (single taxpayer) is retired and received $10,000 of Social Security benefits this
.
year. How much of the $10,000 Social Security benefits is taxable if his only other
income was $28,000 of pension income?

120 Wendell is an executive with CFO Tires. At the beginning of this year the corporation
.
loaned Wendell $50,000 at an interest rate of one percent. Wendell would have paid
interest of $2,500 this year if the interest rate on the loan had been set at the
prevailing Federal interest rate. Wendell used the funds as a down payment on a
vacation home and during the year he paid $500 of interest to CFO. On December
31, CFO forgave the loan and remaining interest. What amount of gross income does
Wendell recognize from the loan this year?

121 Bobby and Sissy got married 2.5 years ago. Since that time, they have lived in

.
Bobby's home. Sissy sold her previous home three years ago and excluded her entire
gain ($80,000) at that time. Bobby and Sissy decided to move to a bigger home this
year. As a result, they sold Bobby's home for $500,000 (original cost $150,000). How
much of the gain from the sale is taxable?

5-25
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