Question

<pclass=”msobodytext” style=”box-sizing: border-box; margin: 0cm 40pt 0.0001pt 31.25pt; text-indent: -16.5pt;”>1. In the case of a below-market gift loan for which there is no exception to the imputed interest rules, the lender is deemed to have received interest income even though no interest is charged and collected.

1. True
2. False
3. In the case of a gift loan of less than $100,000, the imputed interest rulesapplyif the donee has net investment income of over $1,000.
4. True
5. False
6. Susan purchased an annuity for $200,000. She is to receive $18,000 each year and her life expectancy is 13 years. If Susan collects under the annuity for 14 years, the entire $18,000 received in the 14th year must be included in her gross income.
7. True
8. False

4. Terri purchased an annuity for $100,000. She was to receive $10,000 per year and her life expectancy was 20 years. She died after receiving 8 payments. Terri’s final return should reflect a loss of $20,000 ($100,000 – $80,000).
5. True
6. False
7. If a lottery prize winner transfers the prize to a qualified government unit or nonprofit organization, then the prize is excluded from the winner’s gross income if the amount of the prize does not exceed 30% of the winner’s AGI.
8. True
9. False
10. If the employer provides all employees with group term life insurance equal to twice the employee’s annual salary, an employee with a salary of $50,000 has no gross income from the life insurance protection provided by the employer.
11. True
12. False
13. In the case of a person with other income of $300,000, 15% of his or her Social Security benefits received are excluded from gross income.
14. True
15. False
16. Norma’s income for 2014 is $27,000 from part-time work and $9,000 of Social Security benefits. Norma is not married. A portion of her Social Security benefits must be included in her gross income.
17. True
18. False
19. Lois, who is single, received $9,000 of Social Security benefits. She also received $25,000 from dividends, interest, and her employer’s pension plan. If Lois sells a capital asset that produces a $1,000 recognized loss, Lois’s taxable income will decrease by more than $1,000.
20. True
21. False

10.On a particular Saturday, Tom had planned to paint a room in his house, but his employer gave him the opportunity to work that day. If Tom works, he must hire a painter for $120. For Tom to have a positive cash flow from working and hiring the painter:

1. Tom must earn more than $160 if he is in the 25% marginal tax bracket.
2. Tom must earn at least $160 if he is in the 33% marginal tax bracket.
3. Tom must earn at least $150 if he is in the 25% marginal tax bracket.
4. Tom must earn at least $135 if he is in the 15% marginal tax bracket.
5. None of the above.

11.The tax concept and economic concept of income are in agreement on which of the following:

1. The fair rental value of an owner-occupied home should be included in income.
2. The increase in value of assets held for the entire year should be included in income for the year.
3. Rent income for 2015 collected in 2014 is income for 2014.
4. All of the above.
5. None of the above.

12.The Blue Utilities Company paid Sue $2,000 for the right to lay an underground electric cable across her property anytime in the future.

1. Sue must recognize $2,000 gross income in the current year if the company did not install the cable during the year.
2. Sue is not required to recognize gross income from the receipt of the funds, but she must reduce her cost basis in the land by $2,000.
3. Sue must recognize $2,000 gross income in the current year regardless of whether the company installed the cable during the year.
4. Sue must recognize $2,000 gross income in the current year, and when the cable is installed, she must reduce her cost basis in the land by $2,000.
5. None of the above.

13.For purposes of determining gross income, which of the following is true?

1. A mechanic completed repairs on an automobile during the year and collects money from the customer. The customer was not satisfied with the repairs and sued the mechanic for a refund. The mechanic can defer recognition of the income until the suit has been settled.
2. A taxpayer who finds a wallet full of money is required to recognize income even though someone may eventually ask for the return of the money.
3. Embezzlement proceeds are not included in the embezzler’s gross income because the embezzler has an obligation to repay the owner.
4. All of the above are false.
5. All of the above are true.

14.Detroit Corporation sued Chicago Corporation for intentional damage to Detroit’s goodwill. Detroit had created its goodwill through providing high-quality services to its customers. Thus, no basis for the goodwill appeared on Detroit’s balance sheet. The suit was settled and Detroit received $1,500,000 for the damages to its goodwill.

1. The $1,500,000 is not taxable because it represents a recovery of capital.
2. The $1,500,000 is taxable because Detroit has no basis in the goodwill.
3. The $1,500,000 is not taxable because Detroit did nothing to earn the money.
4. The $1,500,000 is not taxable because Detroit settled the case.
5. None of the above.

15.The annual increase in the cash surrender value of a life insurance policy:

1. Is taxed when the individual dies and the heirs collect the insurance proceeds.
2. Must be included in gross income each year under the original issue discount rules.
3. Reduces the deduction for life insurance expense.
4. Is not included in gross income each year because of the substantial restrictions on gaining access to the policy’s value.
5. None of the above.

16.Turner, a successful executive, is negotiating a compensation plan with his potential employer. The employer has offered to pay Turner a $600,000 annual salary, payable at the rate of $50,000 per month. Turner counteroffers to receive a monthly salary of $40,000 ($480,000 annually) and a $180,000 bonus in 5 years when Turner will be age 65.

1. If the employer accepts Turner’s counteroffer, Turner will recognize $660,000 at the time the offer is accepted.
2. If the employer accepts Turner’s counteroffer, Turner will recognize as gross income $55,000 per month [($480,000 + $180,000)/12].
3. If the employer accepts Turner’s counteroffer, Turner will recognize $40,000 income each month for the year and $180,000 in year 5.
4. If the employer accepts Turner’s counteroffer, Turner must recognize imputed interest income on the $180,000 to be received in 5 years.
5. None of the above.

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