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Chapter 4 Gross Income: Concepts And Inclusions
Research Problems
Research Problem 1. Tranquility Funeral Home, Inc., your client, is an accrual basis taxpayer that sells preneed funeral contracts. Under these contracts, the customer pays in advance for goods and services to be provided at the contract beneficiary’s death. These payments are refundable at the contract purchaser’s request, pursuant to state law, anytime until the goods and services are furnished. Tranquility, consistent with its financial accounting reporting, includes the payments in income for the year the funeral service is provided. The IRS agent insists that the payments be prepaid income subject to tax in the year of receipt. Your client believes that the amounts involved are customer deposits. Write a letter to Tranquility that contains your advice about how the issue should be resolved. The client’s address is 400 Rock
Street, Memphis, TN 38152.
Research Problem 2. Your client was the beneficiary of an annuity contract purchased by her stepmother. When the stepmother died, the insurance company paid the client $400,000 and sent her a Form 1099 indicating that the taxable portion (i.e., the amount in excess of the investment in the contract) was $50,000. However, according to the client, her father fraudulently convinced her that he was the intended beneficiary.
She gave her father a check equal to the amount she had received from the insurance company. She did not report any of the annuity proceeds in her income tax return. She later discovered the fraud and filed a lawsuit to collect from her father.
The IRS has examined your client’s return and has taken the position that she must include the $50,000 in her gross income.
Evaluate the IRS’s position.
Research Problem 3. Your client owns a life insurance policy on his life. He has paid $6,800 in premiums, and the cash surrender value of the policy is $30,000. He borrowed $30,000 from the insurance company, using the cash surrender value as collateral.
He is considering canceling the policy in payment of the loan. He would like to know the tax consequences of canceling his policy.
Research Problem 4. Lottery winnings are taxable for Federal income tax purposes.
What many lottery hopefuls forget to factor into their tax considerations are that lottery winnings are also taxable in many states. Search the Internet to see whether you can determine if lottery winnings are taxable for California residents.
Research Problem 5. Go to the web page of a consulting firm that offers counseling services to individuals as they negotiate the terms of a divorce. What specific taxrelated services do these firms offer? Suggest a new tax-related service the consulting firm could offer.
Use the tax resources of the Internet to address the following questions. Do not restrict your search to the Web, but include a review of newsgroups and general reference materials, practitioner sites and resources, primary sources of the tax law, chat rooms and discussion groups, and other opportunities.
Internet
Activity
Roger CPA Review Questions
1. Smith, an individual, is required to pay Goode yearly alimony of $6,000 and yearly child support of $18,000. Smith paid Goode $20,000 in 2016. Smith’s 2016 W–2 income was $50,000. Considering only the foregoing facts, what should Smith’s adjusted gross income be for 2016?
a. $30,000
b. $45,000
c. $48,000
d. $50,000
2. Which of the following is excluded from gross income on an individual’s 2016 tax return?
a. January 2017 rent received in December 2016
b. Value arising from personal use of company vehicle in 2016
c. Dividends announced by a C corporation in December 2015 and received in
January 2016
d. Refundable security deposit received in January 2016 for a lease ending in July
2017
3. Walters, an individual, received the following in 2016:
W–2 income $10,000
Federal tax refund for 2015 1,250
Scholarship stipend, in return for teaching assistant duties performed 25,000
Cash inheritance from deceased great-uncle 5,000
Considering only the above, what is Walters’ 2016 gross income?
a. $35,000
b. $36,250
c. $15,000
d. $16,250
4. Doran, a single individual, received $20,000 in Social Security benefits in 2016.
Doran’s 2016 provisional income was $65,000. Considering only these facts, what should Doran report as gross income on Doran’s 2016 tax return?
a. $75,000
b. $72,000
c. $57,000
d. $65,000
5. On October 1, 2016, Cruz purchased an annuity for $90,000 in post-tax dollars, effective immediately, that pays Cruz $500 a month until death. At the date of purchase,
Cruz’s official life expectancy was 25 years. How much of Cruz’s 2016 annuity payments should be included in Cruz’s gross income for 2016?
a. $0
b. $900
c. $600
d. $1,500