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Exam 5: Gross Income and Exclusions

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Question 51

Multiple Choice

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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) Assignment of income
B) Constructive receipt
C) Return of capital principle
D) Wherewithal to pay
E) All of these

F) D) and E)
G) All of the above

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Question 52

True/False

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

A) True
B) False

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Question 53

Multiple Choice

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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?

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?

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.

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) :

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?

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?

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?

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

Scholarships are excluded from gross income for degree candidates even if the scholarship pays for required fees and books in addition to tuition.

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

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?

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

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.

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

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:

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

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.

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