Chapter 4 Gross Income: Concepts And Inclusions

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Discussion Questions
1. LO.1 According to the Supreme Court, would it be good tax policy to use income as computed by financial accounting principles as the correct measure of income for Federal income tax purposes? Explain.
2. LO.1 Compare and contrast the economist’s concept used to recognize income with the concept employed in measuring taxable income.
3. LO.1 Allen visits Reno, Nevada, once a year to gamble. This year his gambling loss was $25,000. He commented to you, “At least I didn’t have to pay for my airfare and hotel room. The casino paid that because I am such a good customer. That was worth at least $3,000.” What are the relevant tax issues for Allen?
4. LO.1 Ben lost his job when his employer moved its plant. During the year, he collected unemployment benefits for three months, a total of $1,800. While he was waiting to hear from prospective employers, he painted his house. If Ben had paid someone else to paint his house, the cost would have been $3,000. The cost of the paint Ben used was $800. What is Ben’s gross income for tax purposes from the above events?
5. LO.1 Howard buys wrecked cars and stores them on his property. Recently, he purchased a 1990 Ford Taurus for $400. If he can sell all of the usable parts, his total proceeds from the Taurus will be over $2,500. As of the end of the year, he has sold only the radio for $75 and he does not know how many, if any, of the remaining parts will ever be sold. What are Howard’s income recognition issues?
6. LO.2, 3 On December 29, 2016, an employee received a $5,000 check from her employer’s client. The check was payable to the employer. The employee did not remit the funds to the employer until December 30, 2016. The employer deposited the check on December 31, 2016, but the bank did not credit the employer’s bank account until January 2, 2017. When is the cash basis employer required to include the $5,000 in gross income?
7. LO.2 What is the purpose of the constructive receipt doctrine?
8. LO.2 A Series EE U.S. government savings bond accrues 3.5% interest each year.
The bond matures in three years, at which time the principal and interest will be paid. The bank will pay the taxpayer at a 3.5% interest rate each year if he agrees to leave money on deposit for three years. What tax advantage does the Series EE bond offer that is not available with the bank deposit?
9. LO.2 The taxpayer performs services with payment due from the customer within 30 days. All customers pay within the time limit. What would be the benefit to the taxpayer using the cash method of accounting rather than the accrual method?
10. LO.3, 5 Wade paid $7,000 for an automobile that needed substantial repairs. He worked nights and weekends to restore the car and spent $2,400 on parts for it. He knows that he can sell the car for $13,000, but he is very wealthy and does not need the money. On the other hand, his daughter, who has very little income, needs money to make the down payment on a house.
a. Would it matter, after taxes, whether Wade sells the car and gives the money to his daughter or whether he gives the car to his daughter and she sells it for $13,000? Explain.
b. Assume that Wade gave the car to his daughter after he had arranged for another person to buy it from his daughter. The daughter then transferred the car to the buyer and received $13,000. Who is taxed on the gain?
11. LO.3 Anita, a cash basis taxpayer, sued her former employer for wage discrimination.
Her attorney agreed to pursue the case on a contingent fee basis—the attorney would receive one-third of any settlement or court award. The parties reached a settlement, and the attorney for Anita’s former employer wrote a check payable to Anita for $320,000 and a check payable to her attorney for $160,000.
Anita reasons that she and the attorney were partners in the lawsuit who shared profits two-thirds and one-third, respectively. Therefore, she includes $320,000 in her gross income. Is Anita’s analysis correct? Explain.
12. LO.3 Rex became a partner with a 30% interest in the partnership profits when he invested $200,000. In 2016, the partnership generated $400,000 of taxable income, and Rex withdrew $100,000. In 2017, the partnership had $600,000 of taxable income, and Rex withdrew $200,000. What is Rex’s gross income from the partnership in 2016 and 2017?
13. LO.4 The divorce agreement requires Alice to pay her former spouse $50,000 a year for the next ten years. Will the payments qualify as alimony? Why or why not?
14. LO.4, 5 William and Abigail, who live in San Francisco, have been experiencing problems with their marriage. They have a 3-year-old daughter, April, who stays with William’s parents during the day because both William and Abigail are employed. Abigail worked to support William while he attended medical school, and now she has been accepted by a medical school in Mexico. Abigail has decided to divorce William and attend medical school. April will stay in San Francisco because of her strong attachment to her grandparents and because they can provide her with excellent day care. Abigail knows that William will expect her to contribute to the cost of raising April. Abigail also believes that to finance her education, she must receive cash for her share of the property they accumulated during their marriage. In addition, she believes that she should receive some reimbursement for her contribution to William’s support while he was in medical school. She expects the divorce proceedings to take several months. Identify the relevant tax issues for Abigail.
15. LO.4, 5 Patrick and Eva are planning to divorce. Patrick has offered to pay Eva $12,000 each year until their 11-year-old daughter reaches age 21. Alternatively,
Patrick will transfer to Eva common stock that he owns with a fair market value of $100,000. What factors should Eva and Patrick consider in deciding between these two options?
16. LO.4 In the current year, the Rose Corporation made a $400,000 interest-free loan to John Rose, the corporation’s controlling shareholder. Mr. Rose is also the corporation’s chief executive officer and receives a salary of $300,000 a year. What are the tax consequences of classifying the loan as a compensation-related loan rather than as a corporation-shareholder loan?
17. LO.4 Connor purchased an annuity that was to pay him a fixed amount each month for the remainder of his life. He began receiving payments in 2000, when he was 65 years old. In 2016, Connor was killed in an automobile accident.
What are the effects of the annuity on Connor’s final tax return?
18. LO.4 An employer provides all of his employees with life insurance protection equal to twice the employee’s annual salary. Melba, age 42, has an annual salary of $70,000. Is Melba required to recognize income even though she is still alive at the end of the year and thus nothing has been collected on the life insurance policy?
Explain.
19. LO.4 For a person who receives Social Security benefits, what effect, if any, can an increase in other income have on that person’s taxable income?