NAME ______________________________________ BUS 407/507 Individual Taxation Eaxam 2 CH 4 and 5 TAKE HOME Multiple Choice 50 Points 25 Questions 2 points

ints each 1. Zachary has a 20% interest in the XY partnership. In the current year, the partnership has sales of $3,400,000, cost of goods sold of $2,300,000, and $300,000 in operating expenses. Zachary withdrew $100,000 from the partnership during the year, but his partner did not withdraw anything. a. Zachary must report $160,000 gross income from the partnership for the year. b. The partnership is taxable on $800,000 for the year and Zachary must include $50,000 in gross income. c. Zachary must report $100,000 gross income from the partnership for the year. d. Zachary is not required to recognize any income from the partnership for the year. 2. Penny made a $60,000 interest-free loan to her son, Cole, who used the money to start a new business. Coles only sources of income were $50,000 from the business and $900 of interest on his checking account. The relevant Federal interest rate was 5%. Based on the above information: a. Penny must recognize $3,000 (.05 X $60,000) of imputed interest income on the below market loan. b. Coles gross income must be increased by the $3,000 (.05 X $60,000) imputed interest income on the below market loan. c. Coles interest income is increased by $900 and his interest expense is zero. d. Penny is not required to recognize imputed interest and Cole does not have to recognize any imputed interest expense. Pluto, Inc. provides group term life insurance to all employees of the corporation. Darien, a CEO, received $550,000 of coverage for the year at a cost to Pluto, Inc. of $1,800. The uniform premiums (based on Darien's age) are $3 a year for $1,000 of protection. How much must Darien include in gross income this year? a. $1,800. b. $1,650. c. $1,500. d. $-0-. Linda and Taylor were divorced. Their only marital property was a personal residence with a fair market value of $500,000 and a cost of $200,000. Under the terms of the divorce agreement, Taylor would receive the house and Taylor would pay Linda $50,000 each year for 6 years, or until Lindas death, whichever should occur first. Linda and Taylor lived apart when the payments were made by Taylor. The divorce agreement did not contain the word alimony. Taylor paid the $300,000 to Linda over the five-year period. Then, Taylor sold the residence for $750,000. Taylors recognized gain from the sale is: a. $0. b. $250,000 ($750,000 $200,000 $300,000). c. $350,000 ($750,000 $100,000 $300,000). d. $550,000 ($750,000 $200,000).

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On January 1, 2012, Faye gave Todd, her son, a 36-month certificate of deposit she purchased December 31, 2010, for $8,638. Faye gave Todd 1,000 shares of ABC, Inc., on December 2, 2012. The certificate had a maturity value of $10,000 and the yield to maturity was 5%. On November 30, 2012, ABC, Inc., had declared a dividend of $1.00 payable to stockholders of record on December 5th. How much interest and dividends should Todd include in his gross income for 2012? a. Todd must include $432 interest income and $1,000 dividend income b. Todd does not have to include any interest or dividend income c. Todd must include $500 interest income and $0 dividend income d. Todd must include $454 interest income and $0 dividend income

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Margaret made a $90,000 interest-free loan to her son, Adam, who used the money to retire a mortgage on his personal residence and to buy a certificate of deposit. Adams only income for the year is his salary of $35,000 and $1,400 interest income on the certificate of deposit. The relevant Federal interest rate is 8% compounded annually. The loan is outstanding for the entire year. What is the effect of the loan on Margarets gross income for the year? a. Margaret has interest income from the loan of $1,400 b. Margaret has interest income from the loan of $7,200 c. Margaret has no interest income from the loan. d. Margaret has interest income from the loan of $5,800

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Margaret made a $90,000 interest-free loan to her son, Adam, who used the money to retire a mortgage on his personal residence and to buy a certificate of deposit. Adams only income for the year is his salary of $35,000 and $1,400 interest income on the certificate of deposit. The relevant Federal interest rate is 8% compounded annually. The loan is outstanding for the entire year. You discovered that Margaret had made an additional loan of $15,000 to Adam in the previous year. Adam used the funds to pay his childs private school tuition. What are the effects of the loans on Margarets gross income? a. Margaret has interest income from the loan of $1,400 b. Margaret has interest income from the loan of $8,400 c. Margaret has interest income from the loan of $7,000 d. Margaret has interest income from the loan of $7,200

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Arnold was employed during the first six months of the year and earned a $86,000 salary. During the next 6 months, he collected $4,800 of unemployment compensation, borrowed $6,000 (using his personal residence as collateral), and withdrew $1,000 from his savings account (including $60, interest). His luck was not all bad, for in December he won $800 in the lottery on a $20 ticket. Because of his dire circumstances, Arnolds parents loaned him $10,000 (interest-free) on July 1 of the current year, when the Federal rate was 8%. Arnold did not repay the loan during the year and used the money for living expenses. Calculate Arnolds adjusted gross income for the year. a. $86,800 b. $91,600 c. $91,640 d. $91,660

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Ted loaned money to a business acquaintance. The loan was for $100,000 and was to be repaid at the rate of $13,000 each year for ten years. The effective interest rate was 5%. He also purchased an annuity contract for $100,000 that would pay him $13,000 each year for ten years. Choose the correct answer below. a. The income to Ted from the loan would increase over time. b. In the first year of the loan, income to Ted would be $8,000 and the balance of $5,000 would be recovery of the original investment. c. The income to Ted from the annuity would be $3,000 per year. d. The income to Ted from the annuity would not be recognized until the principal of $100,000 has been collected. Sarah, a widow, is retired and receives $20,000 interest income and dividends and $10,000 in Social Security benefits. Sarah is considering selling a stock at an $8,000 gain. Which answer below is INcorrect? a. None of Sarahs social security benefits will be taxable if she does not sell the stock. b. An $8,000 gain will cause Sarahs gross income to increase by $12,000. c. An $8,000 gain will cause Sarahs taxable social security benefits to increase by the lesser of of her social security benefits or of MAGI less $25,000. d. An $8,000 gain will cause $5,000 of her social security benefits to be taxed. In some foreign countries, the tax law specifically designates the types of income items that are includible in gross income. What is a major advantage to the approach used in the U.S. tax law? a. Gross income is defined as all income. b. An all-inclusive list of types of income does not have to be developed in the U.S. system. c. The U.S. has developed an all-inclusive list of types of income. d. None of the above is accurate. Rachel owns rental properties. When Rachel rents to a new tenant, she usually requires the tenant to pay an amount in addition to the first months rent. The additional amount serves as security for damages to the property and the tenants failure to pay future rents. How should the payments be characterized (e.g., on lease documents) to minimize Rachels current tax liability? a. Prepaid rent b. Security or Damage deposit c. It does not matter how the payments are characterized, they are taxable when received. d. None of the above answers are correct. James, age 19, is a full-time student at Western College and a candidate for a bachelor's degree. During 2012, he received the following payments: Wages $7,000 Western scholarship for ten months - tuition and books 5,500 Western scholarship for ten months - room and board 4,000 Loan from college financial aid office 4,500 Cash support from parents 3,000 Cash dividends 3,000 Cash prize awarded in a contest 250 $27,250 What is James's adjusted gross income for 2012? a. $4,250. b. $10,250. c. $13,250. d. $14,250.

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During the current year, Larry sustained a serious injury in the course of his employment. As a result of the injury sustained, he received the following payments during the year: Compensation for loss of income $7,000 Worker's compensation $4,500 Reimbursement from his employer's accident and health plan for medical expenses paid by Larry $2,000 Damages for physical personal injuries $5,000 What is the amount to be included in Larry's gross income for the current year? a. $-0-. b. $6,500. c. $7,000. d. $9,000.

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The employees of the Catskill Airways are given free flights to the ski resorts if there are empty seats on flights. The cost of such flights would be about $300 per employee. a. The employees must include the value of the flights in their gross income. b. The employees can exclude the value of the flights from their gross income because the employees were not given an option of receiving cash. c. An employee is required to include the value of the flights in gross income only if the employee would otherwise have bought the flights. d. The employees are not required to include the value of the flights in their gross income because this is a no-additional cost fringe benefit. Gloria is the manager of a motel. The employer gives Gloria the option of living on site at the motel if she wants (value of $600 per month) or receiving an additional $500 per month. Gloria appreciates the rent-free housing and considers this a fringe benefit, since she would otherwise be required to pay $650 per month rent for an apartment. The room that Gloria occupies normally rents for $30 per night, or $900 per month. On the average, 90% of the motel rooms are occupied. As a result of this rent-free use of a room, Gloria is required to include in gross income: a. $500. b. $600 per month. c. $810 ($1,500 X .90 = $900) per month. d. $900 per month. Kyle, a cash basis taxpayer, received the following compensation and fringe benefits in 2012: Salary $40,000 Advance on 2013 salary $ 6,000 Disability income protection $ 1,000 Long-term care insurance premiums $ 4,000 The employer made the salary advance so that Kyle could pay his sons college tuition that was due in December 2012. The following fringe benefits were provided as part of the employers cafeteria plan. The wage continuation insurance is available to all employees and pays the employee three-fourths of the regular salary if the employee is sick or disabled. The long-term care insurance is available to all employees and pays $150 per day towards a nursing home or similar facility. What is Kyles gross income from the above? a. b. c. d. $40,000. $46,000. $50,000. $51,000.

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Timothy is an executive for the Appalachian Manufacturing Company. Timothy purchased furniture from the company for $4,000, the price the company ordinarily charges a wholesaler. The retail price of the furniture was $7,000. The company also paid for Timothy's parking space in a garage near the office. The parking fee was $2,600 for the year. Only highly compensated employees are allowed to buy furniture at the wholesalers price. In addition, the company does not pay other emp loyees' parking fees. Timothy's gross income from the above is: a. $0. b. $2,600. c. $3,000. d. $5,600. Julia's income from her investments for the current year was as follows: Interest on California tax return Gain on the sale of Orange County school bonds Interest on Orange County school bonds Interest received during the year on U. S. Government bonds Julia's gross income from the above is: a. $5,000. b. $11,500. c. $14,000. d. $17,000.

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$ 2,000 3,000 5,500 6,500

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Tyler owns 1,000 shares of stock in Sierra Corporation, worth $50 per share. The 2,000 shares were purchased in 2003 for $10 per share. In 2012, the corporation issues a 10% stock dividend to all common shareholders with an option of receiving either the stock worth $10,000 or $12,000 cash. Tyler selects the stock. Tylers gross income from the above is: a. $0. b. $10,000. c. $12,000. d. Tyler can elect to recognize income of $12,000 or reduce his basis in the stock by $10,000.

21. Beverly died during the current year. At the time of her death, her accrued salary and commissions totaled $3,000 and were paid to her husband. The employer also paid the husband $35,000 which represented an amount equal to Beverlys salary for the year prior to her death. The employer had a policy of making the salary payments to help out the family in the time of its greatest need. Beverlys spouse collected her interest in the employers qualified profit sharing plan amounting to $30,000. As beneficiary of his wifes life insurance policy, Beverlys spouse elected to collect the proceeds in installments. In the year of death, he collected $8,000 which included $1,500 interest income. What is the total that is subject to income tax for Beverlys spouse? a. $34.500 b. $39,500 c. $69,500 d. $76,000

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Barbara was injured in an automobile accident. She has threatened to file a suit against the other party involved in the accident and has proposed the following settlement: Damages for 25% loss of the use of her right arm $200,000 Medical expenses 30,000 Loss of wages 10,000 Punitive damages 100,000 $340,000 The defendants insurance company is reluctant to pay punitive damages. Also, the company disputes the amount of her loss of wages amount. Instead, the company offers to pay her $300,000 for damages to her arm and $30,000 medical expenses. Assuming Barbara is in the 35% marginal tax bracket, which answer below is correct? a. Barbaras claim for loss of wages and punitive damages are taxable amounts. b. The after-tax proceeds from Barbaras settlement are more than the after-tax proceeds from the company offer. c. The after-tax proceeds from the company offer totals $330,000. d. The after-tax proceeds from receiving Barbaras proposed settlement is $221,000.

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George is employed by the Quality Appliance Company. All the full time employees are allowed to purchase appliances at the companys cost plus 10%. The employee also is given, at no cost, a 1-year service contract on all the goods purchased from the company. George purchased a refrigerator for $500. The companys normal selling price for the refrigerator is $800. George also received a service contract, at no charge, that had a value of $150. During the year, George was required to have his refrigerator serviced once. The cost of the call would have been $75 if he had not had the service contract. Which of the following is correct? a. George is required to include in income $120 income from the service contract b. George is required to include in income $150 income from the service contract c. George is required to include in income $300 for the purchase of the refrigerator d. George is required to include in income $50 for the purchase of the refrigerator plus $120 income from the service contract.

24. Sonja is a United States citizen who has worked in Spain for the past 10 months. She received $5,000 a month as compensation. Her employer has offered to extend Sonjas contract to work in Spain for another 5 months at the same rate of pay. If she rejects the offer, she can return to the United States and receive the same salary. While working in Spain, she is subject to the Spain income tax, which is approximately 11% of her gross pay. The marginal tax rate on her income taxed in the United States is 25%. When comparing Sonjas after-tax income assuming she remains in Spain with her after-tax income if she returns to the United States which of the following is correct. a. If Sonja returns to the United States all her income will be eligible for the foreign earned income exclusion. b. If Sonja returns to the United States all her income will subject to the 25% rate in the U.S. c. Sonja will not be given credit for the taxes paid in Spain. d. If Sonja stays the additional 5 months this would cost her $10,500 in additional taxes.

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Bob had a terminal illness and realized that he cant take it with him. Therefore, he cashed in his insurance policy and received $120,000. He had paid $50,000 in premiums on the policy. He used the money to fulfill his lifelong ambitions of going to the Super Bowl, driving an expensive sports car, and vacationing in Bermuda. Which of the following is accurate? a. Bob is clearly not using the funds for the purpose in which the law intended which was that a person will have needs for funds to be used for his or her medical care. b. Bob cannot exclude from his gross income the $70,000 gain he realized from cashing in the policy. c. Bob can exclude from his gross income the $70,000 gain he realized from cashing in the policy only if he uses the money for medical care. d. In this case, the law does prevent Bob from obtaining the exclusion.

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