TAX 3300, Chapter 4: Gross income

The realization requirement gives an incentive to own assets that have increased in value and to sell assets whose value has decreased

True

Judy is a cash basis attorney. In 2015, she performed services in connection with the formation of a corporation and received stock with a value of $4,000 for her services. By the end of the year, the value of the stock had decreased to $2,000. She continued to hold the stock. Judy must recognize $4,000 of gross income from the stock for 2015

True

Barney painted his house which saved him $3,000. According to the realization requirement, Barney must recognize $3,000 of income

False

Nicolas owned stock that decreased value by $20,000 during the year, but he did not sell the stock. He earned $45,000 salary, but received only $34,000 because $11,000 in taxes were withheld. Nicholas saved $10,000 of his salary and used the remainder for personal living expenses. Nicholas' economic income for the year exceeded his gross income for tax purpose

False - Nicholas' economic income would be reduced by the unrealized losses on his stock. However, these unrealized losses are not recognized for tax purposes until securities are sold

The fact that the accounting method the taxpayer use to measure income is consistent with GAAP does not assure that the method will be acceptable for tax purposes

True - GAAP: to protect investors/ Tax: the equitable collection of revenues

The financial accounting principle of conservatism is not well suited to the task of measuring taxable income

True - As the supreme court reasoned in the power tool co., the conservatism principle wouldn't serve the governments goal of raising revenues

A cash basis taxpayer purchased a certificate of deposit for $1,000 on July 1, 2014 that will pay $1,100 upon its maturity on June 30, 2016. The taxpayer must recognize a portion of the income in 2015.

True - The difference between the issue price and the amount due at maturity is "original issue discount" must be amortized

Ralph purchased his first Series EE bond during the year. He paid $709 for a 10 year bond with a $1,000 maturity value. The YtM on the bonds was 3.5%. Ralph is not required to recognize the $291 ($1,000-709) original issue discount until the bond matures. However, Ralph can elect to amortize the discount over the ten year period

True - Series EE bonds are not subject to the original issue discount rules. Note, however, that an election can be made to amortize the discount

A sole proprietorship purchased an asset for $1,000 in 2015 and its value was $1,500 at the end of 2015. In 2016, the sole proprietorship sold the asset for $1,400. The sole proprietorship realized a taxable gain of $400 in 2016 but an economic loss of $100 in 2016

True - realization requirement was not satisfied until 2015, and thus $400 in gross income was recognized in the year

At the beginning of 2015, Mary purchased a 3-year CD for $8,760. The maturity value of the certificate was $10,000 and it was to yield 4.5%. She also purchased a Series EE bond for $6,400 with a maturity value in 10 years of $10,000. Mary must recognize $1,240 of income from the certificate of deposit in 2015, and $3,600 from the Series EE bonds in 2024

False - The income from the DC must be amortized over the three year period as original issue discount. The Series EE bonds are also original issue discount instruments, but the law permits the taxpayer to defer the income until maturity

In 2006, Terry purchased land for $150,000. In 2015, Terry received $10,000 from a local cable television company in exchange for Terry allowing the company to run an underground cable across Terry's property. Terry is not required to recognize income from receiving the $10,000 because it was a return of his capital invested in the land

True - Terry does not recognize income, but he must reduce his basis for the land by $10,000. The $10,000 received is a recovery of his capital

In December 2014, Mary collected the December 2014 and January 2015 rent from a tenant. Mary is a cash basis taxpayer. The amount collected in December 2014 for the 2015 rent should be included in her 2015 gross income

False - The cash basis taxpayer must report the rent income in gross income for the year it is received, 2014, rather than the year in which it is earned

On December 2015, Daniel an accrual basis taxpayer, collects $12,000 rent for December 2015 and $12,000 for January 2016. Daniel must include the $24,000 in 2015 gross income

True - Both payments must be included in Daniel's 2015 gross income. Prepaid rent income cannot be deferred until earned

On January 1, 2015, an accrual basis taxpayer entered into a contract to provide termite inspection service each month for 36 months. The amount received for the contract was $2,400. The taxpayer should report $1,600 of income in 2016

True - the prepaid income cannot be deferred beyond the tax year following the year of receipt. Therefore, the taxpayer should report $800 of income in 2015 and $1,600 in 2016

An advance payment received in June 2015 by an accrual basis and calendar year taxpayer for services to be provided over a 36-month period can be spread over four tax years

False - The income from advance payments for services received by an accrual basis taxpayer cannot be deferred beyond the tax year following the year of receipt. The scenario described in the question relates to advance payments for goods received by an accrual basis taxpayer

In 2015, Juan, a cash basis taxpayer, was offered $3 million for signing a professional baseball contract. He counter offered that he would receive $900,000 per year for 4 years beginning in 2016. The team accepted the counteroffer. Juan constructively received $3 million in 2015

False - The income was not constructively received in 2015 by Juan because he did not have the right to receive the income in that year. The $3 million offer was merely part of Juan's contract negotiation

The constructive receipt doctrine requires that income must be recognized when it is made available to the cash basis taxpayer, although it has not been actually received. The constructive receipt doctrine does not apply to accrual basis taxpayers

True - Cash basis taxpayers must recognize income when it is actually or constructively received. The income is constructively received when it is made available to the taxpayer. Accrual basis taxpayers generally report income when they have earned the right to receive it

Fred is a full-time teacher. He has written a book and receives royalties from it. Fred's mother, Mabel, is age 65 and lives on her Social Security benefits and gifts from her son, Fred. This year Fred directed the publisher to make the royalty check payable to Mabel because she needs the money for support. Fred must include the amount of the royalty check in his gross income

True - The royalties must be included in the gross income of Fred, the taxpayer who earned it

Jessica is a cash basis taxpayer. When Jessica failed to repay a loan, the bank garnished her salary. Each week $60 was withheld from her salary and paid to the bank. Jessica is required to include the $60 each week in her gross income even though it is the creditor that benefits from the income

True - Income is generally taxed to the person who earned the income, regardless of who actually receives the income. Moreover, Jessica received the benefit of the income in that her liability was paid

ABC corporation declared a dividend for taxpayers of record as of December 24, 2014. The dividend checks were mailed on December 31, 2014. Ed, a cash basis shareholder, received the dividend check on January 2, 2015. Ed cannot delay reporting the income from the dividend until 2015.

False - The income was not available to Ed until 2015

Tom, a cash basis taxpayer, purchased a bond on March 31 for $10,000, plus $100 accrued interest. In December, Tom collected $500 interest from the bond. Tom's interest income from the bond for the year is $500

False - The accrue interest of $100 is included in the gross income of the seller rather than in Tom's gross income. Tom's gross income was $400, and he recovered the $100 cost of the accrued interest purchased. The same result would be achieved if Tom were an accrual basis taxpayer

When stock is sold after the date of declaration but before the record date, the buyer must recognize as income the dividend declared

True - Dividends are included in the gross income of the person who receives them. Because the stock was sold before the record date, the buyer received the dividend. The price of the stock may in fact included the value of the dividend, but the tax law does not include this refinement

Linda delivers pizzas for a pizza shop. On Wednesday, December 31, 2015, Linda made several deliveries and collected $400 from customers. However, Linda forgot to turn in the proceeds for the day to her employer until the following Friday, January 2, 2016. The pizza shop owner recognizes the income of $400 when he receives it from Linda in 2016.

False - Linda is her employer's agent. Therefore, the employer must include the $400 in gross income in 2015, the tax year in which the income was received by the employer's agent

Jake is the sole shareholder of an S corporation that earned $60,000 in 2015. The corporation was short on cash and therefore distributed only $15,000 to Jake in 2015. Jake is required to recognize $60,000 of income from the S corporation in 2015.

True - Jake is taxed on his share of the income earned by the S corporation $60,000 ($60,000 * 100%) rather than the amount of his distributions

When a business is operated as an S corporation, a disadvantage is that the shareholder must pay the tax on his or her share of the S corporation's income even though the S corporation did not distribute the income the he shareholder

True- A shareholders required to recognize his or her share of S corporation income even if it is not distributed to the shareholder

The B&W partnership earned taxable income of $140,000 for the year. Bryan is entitled to 50% of the profits, but Bryan withdrew only $60,000 during the year. Bryan's gross income from the partnership for the year is $ 60,000

False - The income from the partnership flows to the partner whether or not the partner receives any assets from the partnership during the year. Bryan's share of the profits is $70,000 (50% *$140,000)

Mark is a cash basis taxpayer, He is a partner in the M&M partnership, and his share of the partnership's profits for 2015 is $90,000. Only $40,000 was distributed to him in January 2015, and this was his share of the 2014 partnership profits. None of the 2015 profits were distributed. Mark's gross income from the partnership for 2015 is $40,000

False - Each partner must report his or her distributive share of the partnership's income and deductions for the partnership's tax year ending within or with the partner's tax year even if such income is not actually distributed. So Mark should report $90,000 for 2015

Rhonda has a 30% interest in the capital and profits of the ABC Partnership. In the first year of the partnership, 2015,it earned $150,000. However, the partners agreed that nothing would be distributed until after the end of March 2016,
before Rhonda filed her 2015 tax return. The distributions were to be delayed because it was unclear as to whether
business conditions would remain good in 2016. Things were going well in 2016 and therefore the partnership distributed
$30,000 to Rhonda at the end of March, as a portion of her share of the partnership's 2015 earnings. The partnership's
income for 2016 was $60,000. As a result, Rhonda must recognize $30,000 of gross income in 2015 and $18,000 in 2016.

False - Rhonda must recognize in 2015 her 30% of the partnership's income ($45,000) regardless of
whether it is distributed to her.

April, a calendar year taxpayer, is a 40% partner in Pale Partnership, whose fiscal year ends on September 30th. For
the fiscal year ending September 30, 2015, the partnership had $400,000 net income and for fiscal year ending September
30, 2016, the partnership had $300,000 net income. April withdrew $100,000 in December of each year. April's gross
income from the partnership for 2015 is $160,000 ($400,000 × 40%).

True- April is taxed on her share of the profits ($160,000) for the partnership's tax year that ends within her calendar tax year. The withdrawals of $100,000 are a distribution of her capital investment, a non taxable recovery of her capital

Alvin is the sole shareholder of an S corporation that earned $200,000 in 2015 and distributed $75,000 to Alvin. Alvin must recognize $75,000 as income from the S corporation in 2015

False - Alvin must recognize $200,000 as income

Samantha and her son, Brent, are cash basis taxpayers. Samantha gave Brent a corporate bond with a face amount and fair market value of $10,000. On the date of the gift, March 31, 2015, the accrued interest on the bond was $100. On December 31, 2015, Brent collected $400 interest on the bond. Brent must include in gross income the $300 interest
earned after the date of the gift.

True - The interest accrued at the date of the gift becomes gross income to the cash basis donor when the interest is collected by the donee. Thus, Samantha is taxed on $100 and Brent is taxed on $300 of interest that was earned and collected after he owned the bond (between March 31 and December 31).

In all community property states, the income from property that was inherited by a spouse after the marriage is treated
as all earned by the spouse who inherited the property.

False - This result occurs only in certain community property states.

Ted earned $150,000 during the current year. He paid Alice, his former wife, $75,000 in alimony. Under these facts,
the tax is paid by the person who benefits from the income rather than the person who earned the income.

True - The alimony rules tax the person who benefits from the $75,000, which is Alice, and the person who makes the payment, Ted, is allowed a deduction.

George and Erin are divorced, and George is required to pay Erin $20,000 of alimony each year. George earns
$75,000 a year. Erin is required to include the alimony payments in gross income although George earned the income.

True - George is allowed to deduct the alimony of $20,000 from his gross income and Erin includes the alimony of $20,000 in her gross income. Thus, the alimony rules tax the person who benefits from the income rather than the person who earned the income.

After the divorce, Jeff was required to pay $18,000 per year to his former spouse, Darlene, who had custody of their
child. Jeff's payments will be reduced to $12,000 per year in the event the child dies or reaches age 21. During the year,
Jeff paid the $18,000 required under the divorce agreement. Darlene must include the $12,000 in gross income.

True - The alimony taxable to Darlene is only $12,000. Because of the contingency related to the child, the additional $6,000 is child support (nondeductible to Jeff and not included in Darlene's gross income).

Paula transfers stock to her former spouse, Fred. The transfer is pursuant to a divorce agreement. Paula's cost of the
stock was $75,000 and its fair market value on the date of the transfer is $95,000. Fred later sells the stock for $100,000.
Fred's recognized gain from the sale of the stock is $5,000.

False - Fred's basis is $75,000, the same as Paula's basis. So Fred's recognized gain is $25,000 ($100,000 - $75,000).

Jacob and Emily were co-owners of a personal residence. As part of their divorce agreement, Emily paid Jacob cash
for his interest in the personal residence. This cash payment results in a taxable gain to Jacob if he receives more cash than his share of the cost of the residence

False - Property transfers incident to a divorce are classified as a property settlement rather than as alimony. Moreover, the property settlement is nontaxable to Jacob, and Emily's basis in the interest purchased from Jacob is the same as Jacob's basis in the residence.

Alimony recapture may occur if there is a substantial decrease in the amount of the alimony payments in the second year.

True - Alimony recapture occurs if there is a substantial decrease in the amount of the alimony
payments during the first three years.

If the alimony recapture rules apply, the recipient of the alimony decreases his or her AGI by a portion of the amount
included in gross income as alimony in a prior year or years

True - The net effect is that the excessive payment is treated as a nondeductible and non- includible property settlement. So the payor's AGI increases and the payee's AGI decreases.

Father made an interest-free loan of $25,000 to Son who used the money to buy an SUV. Son had $1,600 interest
income from a certificate of deposit for the year. Father is not required to impute interest income.

False - The loan is classified as a gift loan. Since the amount of the loan is greater than $10,000, the imputed interest rules apply. However, since the loan is not greater than $100,000, the imputed interest is limited to Son's net investment income of $1,600.

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.

True - The imputed interest rules treat the lender as though he or she charged interest but then forgave the amount due (a gift).

In the case of a gift loan of less than $100,000, the imputed interest rules apply if the donee has net investment income
of over $1,000.

True - The imputed interest rules apply to gift loans. However, if the amount of the loan is for
$100,000 or less, the imputed interest cannot exceed the borrower's net investment income
for the tax year. If net investment is $1,000 or less, it is considered to be $0.

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.

True - At the end of the 13th year, Susan's basis for the annuity is $0

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).

False - Terri should report a loss of $60,000 [12 × ($100,000/20 years)], which is her cost of the
annuity that was not excluded during her life.

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.

False - The prize must be included in gross income. The gift to a government unit or charity may result in a charitable contribution deduction, but the winner must account for both the income and the deduction. The "not exceed 30% of the winner's AGI" does not affect the tax treatment of the prize.

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.

False - The premiums paid by the employer on the first $50,000 of coverage are excludible by the employee. However, premiums calculated using the IRS table on the additional $50,000 [($50,000 × 2) - $50,000] of coverage must be included in the employee's gross income.

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.

True - For higher income taxpayers, 85% of their Social Security benefits are included in gross income. The other 15% is excluded as a rough approximation of his or her contributions to the Social Security system—a recovery of capital.

Norma's income for 2015 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.

True - Norma's earned income of $27,000 plus 50% of her Social Security benefits of $4,500 ($9,000 × 50%) exceed the threshold amount of $25,000.

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.

True - The $1,000 loss will reduce her MAGI and thus reduce her taxable Social Security benefits

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:
a. Tom must earn more than $160 if he is in the 25% marginal tax bracket.
b. Tom must earn at least $160 if he is in the 33% marginal tax bracket.
c. Tom must earn at least $150 if he is in the 25% marginal tax bracket.
d. Tom must earn at least $135 if he is in the 15% marginal tax bracket.
e. None of these.

a - If Tom earns $160, he will have after-tax pay of $120 [(1 - .25)($160)], which is equal to what
he must pay the painter.

he tax concept and economic concept of income are in agreement on which of the following:
a. The fair rental value of an owner-occupied home should be included in income.
b. The increase in value of assets held for the entire year should be included in income for the year.
c. Rent income for 2016 collected in 2015 is income for 2015.
d. All of these.
e. None of these.

c - The realization requirement applies to taxable income, but does not apply to economic
income. The prepaid rent income received in 2015 is included in gross income in that year
and is an increase in assets in 2015.

The Blue Utilities Company paid Sue $2,000 for the right to lay an underground electric cable across her property
anytime in the future.
a. Sue must recognize $2,000 gross income in the current year if the company did not install the cable during the
year.
b. 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.
c. Sue must recognize $2,000 gross income in the current year regardless of whether the company installed the
cable during the year.
d. 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.
e. None of these.

b - The $2,000 payment results in a reduction of Sue's basis in the land but is not
income recognized.

For purposes of determining gross income, which of the following is true?
a. 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.
b. 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.
c. Embezzlement proceeds are not included in the embezzler's gross income because the embezzler has an
obligation to repay the owner.
d. All of these are false.
e. All of these are true.

b - Under the claim of right doctrine, the person who finds property, and has free and
unrestricted use of the property, has realized an increase in wealth and must include the
found property in his or her gross income.

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.
a. The $1,500,000 is not taxable because it represents a recovery of capital.
b. The $1,500,000 is taxable because Detroit has no basis in the goodwill.
c. The $1,500,000 is not taxable because Detroit did nothing to earn the money.
d. The $1,500,000 is not taxable because Detroit settled the case.
e. None of these.

b - Detroit had no basis in the goodwill; therefore, the entire amount received is included in gross
income.

The annual increase in the cash surrender value of a life insurance policy:
a. Is taxed when the individual dies and the heirs collect the insurance proceeds.
b. Must be included in gross income each year under the original issue discount rules.
c. Reduces the deduction for life insurance expense.
d. Is not included in gross income each year because of the substantial restrictions on gaining access to the
policy's value.
e. None of these.

d - The income has not been actually received and, because of the restrictions, is not
constructively received.

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.
a. If the employer accepts Turner's counteroffer, Turner will recognize $660,000 at the time the offer is accepted.
b. If the employer accepts Turner's counteroffer, Turner will recognize as gross income $55,000 per month [($480,000 + $180,000)/12].
c. If the employer accepts Turner's counteroffer, Turner will recognize $40,000 income each month for the year
and $180,000 in year 5.
d. If the employer accepts Turner's counteroffer, Turner must recognize imputed interest income on the $180,000
to be received in 5 years.
e. None of these.

c - The constructive receipt doctrine does not apply to the negotiations. Therefore, Turner will
include the salary and bonus in his gross income in the tax year received in accordance with
the negotiated contract.

Maroon Corporation expects the employees' income tax rates to increase next year. The employees use the cash
method. The company presently pays on the last day of each month. The company is considering changing its policy so
that the December salaries will be paid on the first day of the following year. What would be the effect on an employee of
the proposed change in company policy for paying its salaries beginning December 2015?
a. The employee would be required to recognize the income in December 2015 because it is constructively
received at the end of the month.
b. The employee would be required to recognize the income in December 2015 because the employee has a claim
of right to the income when it is earned.
c. The employee will not be required to recognize the income until it is received, in 2016.
d. The employee can elect to either include the pay in 2015 or 2016.
e. None of these.

c - The cash basis employees do not recognize the income until it is actually or constructively
received. If the employer will not pay until January 2016, the employee has not
constructively received the income in 2015, nor has the employee received the income under
a claim of right in that year.

The annual increase in the cash surrender value of a life insurance policy:
a. Is taxed according to the original issue discount rules.
b. Is not included in gross income because the policy must be surrendered to receive the cash surrender value.
c. Reduces the deduction for life insurance expense.
d. Is exempt because it is life insurance proceeds.
e. None of these.

b - The substantial restrictions on gaining access to the policy, the fact the taxpayer must cancel
the policy means that the increase in value is not actually or constructively received.

Under the original issue discount (OID) rules as applied to a three-year certificate of deposit:
a. All of the income must be recognized in the year of maturity by a cash basis taxpayer.
b. The OID will be included in gross income for the year of purchase.
c. The interest income will be the same each year.
d. The interest income will be greater in the third year than in the first year.
e. None of these is correct.

d - The OID is amortized using the effective interest rate method. Because the principal amount
is increased each year by the amount of the OID which is amortized, the total interest income
increases each year. Thus, answers a., b., c., and e. are incorrect.

Freddy purchased a certificate of deposit for $20,000 on July 1, 2015. The certificate's maturity value in two years
(June 30, 2017) is $21,218, yielding 3% before-tax interest.
a. Freddy must recognize $1,218 gross income in 2015.
b. Freddy must recognize $1,218 gross income in 2017.
c. Freddy must recognize $600 (.03 × $20,000) gross income in 2017.
d. Freddy must recognize $300 (.03 × $20,000 × .5) gross income in 2015.
e. None of these.

d - The 3% interest rate is applied to the $20,000 original investment in the first year $600
($20,000 × 3%). The certificate was held for only 6 months in 2015; therefore, the interest income for 2015 is $300 ($600 × 6/12). Answers a., b., and c. are incorrect because these
answers assume a method of allocating the income that differs from the effective interest
method.

Jerry purchased a U.S. Series EE savings bond for $744. The bond has a maturity value in 10 years of $1,000 and
yields 3% interest. This is the first Series EE bond that Jerry has ever owned.
a. Jerry can defer the interest income until the bond matures in 10 years.
b. Jerry must report ($1,000 - $744)/10 = $25.60 interest income each year he owns the bond.
c. The interest on the bonds is exempt from Federal income tax.
d. Jerry can report all of the $256 as a capital gain in the year it matures.
e. None of these.

a - The original issue discount (OID) on the Series EE bonds is not subject to the OID rules.
However, the income is interest, rather than gain from the sale of a capital asset.

Office Palace, Inc., leased an all-in-one printer to a new customer, Ashley, on December 27, 2015. The printer was to
rent for $600 per month for a period of 36 months beginning January 1, 2016. Ashley was required to pay the first and last
month's rent at the time the lease was signed. Ashley was also required to pay a $1,500 damage deposit. Office Palace
must recognize as income for the lease:
a. $0 in 2015, if Office Palace is an accrual basis taxpayer.
b. $7,800 in 2016, if Office Palace is a cash basis taxpayer.
c. $2,700 in 2015, if Office Palace is a cash basis taxpayer.
d. $1,200 in 2015, if Office Palace is an accrual basis taxpayer.
e. None of these.

d - The company is required to recognize the $1,200 (January 2015 and December 2018 rent) in
2015 because prepaid income from rents is ineligible for deferral. The damage deposit of
$1,500 is not income.

The Maroon & Orange Gym, Inc., uses the accrual method of accounting. The corporation sells memberships that
entitle the member to use the facilities at any time. A one-year membership costs $480 ($480/12 = $40 per month); a twoyear
membership costs $720 ($720/24 = $30 per month). Cash payment is required at the beginning of the membership
period. On July 1, 2015, the company sold a one-year membership and a two-year membership. The company should
report as gross income from the two contracts:
a. $1,200 in 2015.
b. $960 in 2015.
c. $180 in 2017.
d. $780 in 2016.
e. None of these.

d - The accrual basis taxpayer can prorate the income from services in the first year, but must
include the balance of the income on the contract in the following year. Therefore, for the 24-
month contract, all of the income was reported by the end of the second tax year. This limited
deferral is provided under Revenue Procedure 2004-34. ($40 x 6 + ($720-$180) = $780.)

Orange Cable TV Company, an accrual basis taxpayer, allows its customers to pay by the year in advance ($500 per
year), or two years in advance ($950). In September 2015, the company collected the following amounts applicable to
future services:

October 2015-September 2017 services (two-year contracts) $144,000

October 2015-September 2016 services (one-year contracts) 128,000

Total $272,000

As a result of the above, Orange Cable should report as gross income:
a. $272,000 in 2015.
b. $128,000 in 2015.
c. $168,000 in 2016.
d. $222,000 in 2016.

d - One-eighth (3/24) of the payments on the two-year contracts were earned (1/8 × $144,000 =
$18,000) and one-fourth (1/4 × $128,000 = $32,000) of the payments on the one-year
contracts were earned in 2015 and is included in 2015 gross income. The balance of the
payments of $222,000 ($272,000 - $18,000 - $32,000) must be included in 2016 gross
income.

With respect to the prepaid income from services, which of the following is true?
a. The treatment of prepaid income is the same for tax and financial accounting.
b. A cash basis taxpayer can spread the income over the period services are to be provided if all of the services
will be completed by the end of the tax year following the year of receipt.
c. An accrual basis taxpayer can spread the income over the period services are to be provided if all of the
services will be completed by the end of the tax year following the year of receipt.
d. An accrual basis taxpayer can spread the income over the period services are to be provided on a contract for
three years or less.
e. None of these.

c - Answer a. is incorrect because the tax treatment is based on the income tax provisions,
whereas the financial accounting treatment is based on generally accepted accounting
principles. Answer b. is incorrect because the cash basis taxpayer recognizes the income in
the year of receipt. Answer c. is correct because under Revenue Procedure 2004-34 any
unearned income at the end of the first tax year must be included in the gross income of the
second tax year. Answer d. is incorrect because there is no three-year provision. The deferral
possibilities for services to be provided exist only in the case of accrual basis taxpayers who
satisfy the requirements of Revenue Procedure 2004-34.

With respect to income from services, which of the following is true?
a. The income is always amortized over the period the services will be rendered by an accrual basis taxpayer.
b. A cash basis taxpayer can spread the income from a 24-month service contract over the contract period.
c. If an accrual basis taxpayer sells a 36-month service contract on July 1, 2015 for $3,600, the taxpayer's 2015 gross income from the contract is $600.
d. If an accrual basis taxpayer sells a 24-month service contract on July 1, 2015, one-half (12/24) the income is
recognized in 2016.
e. None of these.

c - Answer b. is incorrect because Revenue Procedure 2004-34 does not apply to cash basis
taxpayers. Answers a. and d. are incorrect because they are not in accordance with Revenue
Procedure 2004-34.

The Green Company, an accrual basis taxpayer, provides business-consulting services. Clients generally pay a retainer
at the beginning of a 12-month period. This entitles the client to no more than 40 hours of services. Once the client has
received 40 hours of services, Green charges $500 per hour. Green Company allocates the retainer to income based on the
number of hours worked on the contract. At the end of the tax year, the company had $50,000 of unearned revenues from
these contracts. The company also had $10,000 in unearned rent income received from excess office space leased to other
companies. Based on the above, Green must include in gross income for the current year:
a. $60,000.
b. $50,000.
c. $10,000.
d. $0.
e. None of these.

c - The prepaid income from services that will be earned in the following year by Green can be
deferred under Revenue Procedure 2004-34. However, the prepaid income from rents is not
eligible for deferral.

Teal company is an accrual basis taxpayer. On December 1, 2015, a customer paid for an item that was on hand, but
the customer wanted the item delivered in early January 2016. Teal delivered the item on January 4, 2016. Teal included
the sale in its 2015 income for financial accounting purposes.
a. Teal must recognize the income in 2015.
b. Teal must recognize the income in the year title to the goods passed to the customer, as determined under the state laws in which the store is located.
c. Teal can elect to recognize the income in either 2015 or 2016.
d. Teal must recognize the income in 2016.
e. None of these.

a - Teal received the income before the goods were delivered to the customer. Therefore, when
Teal recognizes the income for tax purposes depends upon Teal's financial accounting
method.

On January 5, 2015, Tim purchased a bond paying interest at 6% for $30,000. On March 31, 2015, he gave the bond to
Jane. The bond pays $1,800 interest on December 31. Tim and Jane are cash basis taxpayers. When Jane collects the
interest in December 2015:
a. Tim must include all of the interest in his gross income.
b. Jane must report $1,800 gross income for 2015.
c. Jane reports $1,350 of interest income in 2015, and Tim reports $450 of interest income in 2015.
d. Jane reports $450 of interest income in 2015, and Tim reports $1,350 of interest income in 2015.
e. None of these is correct.

c - Tim held the bond for 3 months before he gave it to Jane, who held the bond for the other 9
months that the interest accrued. Therefore, Tim must recognize $450 (3/12 × $1,800), and
Jane must recognize $1,350 (9/12 × $1,800).

Mike contracted with Kram Company, Mike's controlled corporation. Mike was a medical doctor and the contract
provided that he would work exclusively for the corporation. No other doctor worked for the corporation. The corporation
contracted to perform an operation for Rosa for $8,000. The corporation paid Mike $6,500 to perform the operation under
the terms of his employment contract.
a. Mike's gross income is $6,500
b. Mike must recognize the $8,000 gross income because he provided the service.
c. Mike must recognize $8,000 gross income since the patient obviously wanted him to perform the operation.
d. The Kram Company corporation's gross income is $1,500.
e. None of these.

a - Mike is an employee of Kram Company. Thus, Kram Company is taxed on the $8,000
income from the services provided by Mike to the patient. Mike is taxed on the $6,500 of
compensation received from Kram.

As a general rule:
I. Income from property is taxed to the person who owns the property.
II. Income from services is taxed to the person who earns the income.
III. The assignee of income from property must pay tax on the income.
IV. The person who receives the benefit of the income must pay the tax on the income.
a. Only I and II are true.
b. Only III and IV are true.
c. I, II, and III are true, but IV is false.
d. I, II, III, and IV are true.
e. None of these is true.

a - III is false because a person who has the right to income (the assignor) but assigns the rights
to another must pay the tax on the income. IV is false because, for example, the assignee of
income receives the benefit, but the assignor has the right to the income and therefore must
pay the tax on that income.

On November 1, 2015, Bob, a cash basis taxpayer, gave Dave common stock. On October 30, 2015, the corporation
had declared the dividend payable to shareholders of record as of November 22, 2015. The dividend was paid on
December 15, 2015. The corporation has paid the $1,200 dividend once each year for the past ten years, during which Bob
owned the stock. When Dave collected the dividend on December 15, 2015:
a. Bob must include $1,000 (10/12 x $1,200) of the dividend in his gross income.
b. Bob must include all of the dividend in his gross income.
c. Dave must include all of the dividend in his gross income.
d. Dave should treat the $1,200 as a recovery of capital.
e. None of these is correct.

b - Dave received the stock as a gift. According to the Tax Court, when the donor makes the gift
after the declaration but prior to the record date, the dividend is included in the gross income
of the donor.

Daniel purchased a bond on July 1, 2015, at par of $10,000 plus accrued interest of $300. On December 31, 2015,
Daniel collected the $600 interest for the year. On January 1, 2016, Daniel sold the bond for $10,200.
a. Daniel must recognize $300 interest income for 2015 and a $200 gain on the sale of the bond in 2016.
b. Daniel must recognize $600 interest income for 2015 and a $200 gain on the sale of the bond in 2016.
c. Daniel must recognize $600 interest income for 2015 and a $100 loss on the sale of the bond in 2016.
d. Daniel must recognize $300 interest income for 2015 and a $100 loss on the sale of the bond in 2016.
e. None of these.

a - The $600 collected consists of $300 of gross income for the interest earned from July 1
through December 31 and $300 of accrued interest that was purchased. The cost of the bond
was $10,000; thus Daniel has a $200 gain ($10,200 - $10,000) on the sale.

Theresa, a cash basis taxpayer, purchased a bond on July 1, 2011, for $10,000, plus $400 of accrued interest. The bond
paid $800 of interest each December 31. On March 31, 2015, she sold the bond for $9,800, which included $200 of
accrued interest.
a. Theresa has $200 interest income and a $400 loss from the bond in 2015.
b. Theresa has $200 interest income and a $200 gain from the bond in 2015.
c. Theresa has a $100 loss from the sale of the bond and no interest income.
d. Theresa's loss on the sale of the bond is $600.
e. None of these.

a - The cost of the bond was $10,000 and the proceeds from the sale were $9,600 ($9,800 -
$200 accrued interest). Therefore, Theresa had a $400 ($9,600 - $10,000) loss from the
sale, and $200 of interest income.

Darryl, a cash basis taxpayer, gave 1,000 shares of Copper Company common stock to his daughter on September 29,
2015. Copper Company is a publicly held company that has declared a $2.00 per share dividend on September 30th every
year for the last 20 years. Just as Darryl had expected, Copper Company declared a $2.00 per share dividend on
September 30th, payable on October 15th, to stockholders of record as of October 10th. The daughter received the $2,000
dividend on October 18, 2015.
a. The daughter must recognize the income because she owned the stock when the dividend was declared and she
received the $2,000.
b. Darryl must recognize the income of $2,000 because the purpose of the gift was to avoid taxes.
c. Darryl must recognize $1,500 of the dividend because he owned the stock for three-fourths of the year.
d. Darryl must recognize the $2,000 dividend as his income because he constructively received the dividend.
e. None of these

a - The gift of the stock is made prior to the declaration date.

Harry and Wanda were married in Texas, a community property state, but moved to Virginia, a common law state.
The calculation of their income on a joint return:
a. Will increase as a result of changing their state of residence.
b. Will decrease as a result of changing their state of residence.
c. Will not change as a result of changing their state of residence.
d. Will not be permitted.
e. None of these.

c - All of their income, regardless of whether they live in a common law state or community
property state, must be included on their joint return.

Jim and Nora, residents of a community property state, were married in early 2014. Late in 2014 they separated, and
in 2015 they were divorced. Each earned a salary, and they received income from community owned investments in all
relevant years. They filed separate returns in 2014 and 2015.
a. In 2015, Nora must report only her salary and one-half of the income from community property on her
separate return.
b. In 2015, Nora must report on her separate return one-half of the Jim and Nora salary and one-half of the
community property income.
c. In 2015 Nora must report on her separate return one-half of the Jim and Nora salary for the period they were
married as well as one-half of the community property income and her income earned after the divorce.
d. In 2015, Nora must report only her salary on her separate return.
e. None of these.

a - Because Jim and Nora lived apart for the entire year, she does not have to report one-half of
Jim's salary on her separate return. She is required to report her share of the income from
the community owned investments.

Under the alimony rules:
a. To determine whether a cash payment is alimony, one must consult the state laws that define alimony.
b. A person who receives a property division has experienced an increase in wealth and thus should be subject to
tax.
c. The income is included in the gross income of the recipient of the payments.
d. A person who earns $90,000 and pays $20,000 in alimony is taxed on $90,000 because the $20,000 alimony is
income assigned to the former spouse.
e. None of these.

c

Wayne owns a 30% interest in the capital and profits of Emerald Company (a calendar year partnership). For tax year
2014, the partnership earned revenue of $900,000 and had operating expenses of $660,000. During the year, Wayne
withdrew from the partnership a total of $90,000. He also invested an additional $30,000 in the partnership. For 2014,
Wayne's gross income from the partnership is:
a. $72,000.
b. $90,000.
c. $132,000.
d. $162,000.
e. None of these.

a - Wayne must report as his gross income 30% of the partnership profits, 30% × ($900,000 -
$660,000) = $72,000. The $90,000 is a return of capital. The $30,000 is a contribution to
capital.

Travis and Andrea were divorced. Their only marital property consisted of a personal residence (fair market value of
$400,000, cost of $200,000), and publicly-traded stocks (fair market value of $800,000, cost basis of $500,000). Under the
terms of the divorce agreement, Andrea received the personal residence and Travis received the stocks. In addition,
Andrea was to receive $50,000 for eight years.
I.
If the $50,000 annual payments are to be made to Andrea or her estate (if she dies
before the end of the eight years), the payments will qualify as alimony.
II.
Andrea has a taxable gain from an exchange of her one-half interest in the stocks for
Travis' one-half interest in the house and cash.
III. If Travis sells the stocks for $900,000, he must recognize a $400,000 gain.
a. Only III is true.
b. Only I and III are true.
c. Only I and II are true.
d. I, II, and III are true.
e. None of these are true.

a - To qualify as alimony, the cash payments must cease upon the death of the payee; therefore,
option I is incorrect. The basis of the marital property received by a former spouse is the
same as the former married couple's basis. Therefore, Travis' basis in the stocks was
$500,000, and when they were sold, Travis recognized a $400,000 gain (option III).

Which of the following is not a requirement for an alimony deduction?
a. The payments must be in cash.
b. The payments must cease upon the death of the payee.
c. The payments must extend over at least three years.
d. The payor and payee must not live in the same household at the time of the payments.
e. All of these are requirements for an alimony deduction.

c

Tim and Janet were divorced. Their only marital property was a personal residence with a value of $120,000 and cost
of $50,000. Under the terms of the divorce agreement, Janet would receive the house and Janet would pay Tim $15,000
each year for 5 years, or until Tim's death, whichever should occur first. Tim and Janet lived apart when the payments
were made to Tim. The divorce agreement did not contain the word "alimony."
a. Tim must recognize a $35,000 [$60,000 - 1/2($50,000)] gain on the sale of his interest in the house.
b. Tim does not recognize any income from the above transactions.
c. Janet is not allowed any alimony deductions.
d. Janet is allowed to deduct $15,000 each year for alimony paid.
e. None of these.

d - The $15,000 cash payments meet all of the requirements for alimony treatment. Although the
circumstances suggest that Janet is paying Tim for his share of the marital property, the
agreement must specify that the payments are not alimony to avoid alimony treatment.

Thelma and Mitch were divorced. The couple had a joint brokerage account that included stocks with a basis of
$600,000 and a fair market value of $1,000,000. Under the terms of the divorce agreement, Mitch would receive the
stocks and Mitch would pay Thelma $100,000 each year for 6 years, or until Thelma's death, whichever should occur
first. Thelma and Mitch lived apart when the payments were made by Mitch. Mitch paid the $600,000 to Thelma over the
six-year period. The divorce agreement did not contain the word "alimony." Then, Mitch sold the stocks for $1,300,000.
Mitch's recognized gain from the sale is:
a. $0.
b. $1,000,000 ($1,300,000 - $300,000).
c. $700,000 ($1,300,000 - $600,000).
d. $300,000 ($1,300,000 - $1,000,000).
e. None of these.

c - The stocks were marital property. When the marital property was distributed to Mitch, his
basis in the stocks became the same as the couple's basis of $600,000. Therefore, his gain
on the sale was $700,000 ($1,300,000 - $600,000).

The alimony recapture rules are intended to:
a. Assist former spouses in collecting alimony when the other spouse moves to another state.
b. Prevent tax deductions for property divisions.
c. Reduce the net cash outflow for the payor.
d. Distinguish child support payments from alimony.
e. None of these.

b

The alimony rules:
a. Are based on the principle that the person who earns the income should pay the tax.
b. Permit tax deductions for property divisions.
c. Look to state law to determine the definition of alimony.
d. Distinguish child support payments from alimony.
e. None of these.

d

Under the terms of a divorce agreement, Kim was to pay her husband Tom $7,000 per month in alimony. Kim's
payments will be reduced to $3,000 per month when their 9 year-old son becomes 21. The husband has custody of their
son. For a twelve-month period, Kim can deduct from gross income (and Tom must include in gross income):
a. $60,000.
b. $48,000.
c. $36,000.
d. $0.
e. None of these.

c - The $4,000 per month ($48,000) for child support is not deductible by Kim. The alimony of
$3,000 per month ($36,000) is deductible by Kim.

Under the terms of a divorce agreement, Lanny was to pay his wife Joyce $2,000 per month in alimony and $500 per
month in child support. For a twelve-month period, Lanny can deduct from gross income (and Joyce must include in gross
income):
a. $0.
b. $6,000.
c. $24,000.
d. $30,000.
e. None of these.

c - The $500 per month for child support is not deductible by Lanny.

Under the terms of a divorce agreement, Ron is to pay his former wife Jill $10,000 per month. The payments are to be
reduced to $7,000 per month when their 15 year-old child reaches age 18. During the current year, Ron paid $120,000
under the agreement. Assuming all of the other conditions for alimony are satisfied, Ron can deduct from gross income
(and Jill must include in gross income) as alimony:
a. $120,000.
b. $84,000.
c. $36,000.
d. $0.
e. None of these is correct.

b - The amount paid is in part dependent upon the child's age, and therefore is considered child
support. The balance of the payments, $7,000 per month, is alimony.

The purpose of the tax rules that apply to below-market loans between family members is to:
a. Discourage loans between related parties.
b. Prevent shifting of income among family members.
c. Prevent gifts from being disguised as bad debt expenses.
d. Prevent gift tax avoidance.
e. None of these is true.

b

On January 1, Father (Dave) loaned Daughter (Debra) $100,000 to purchase a new car and to pay off college loans.
There were no other loans outstanding between Dave and Debra. The relevant Federal rate on interest was 6 percent. The
loan was outstanding for the entire year.
a. If Debra has $15,000 of investment income, Dave must recognize $6,090 of imputed interest income.
b. Dave must recognize $6,090 of imputed interest income regardless of the amount of Debra's investment
income.
c. Debra must recognize $6,090 of imputed interest income.
d. Debra must recognize $6,090 of imputed interest income if Dave has at least $6,090 of investment income.
e. None of these.

a - The calculated imputed interest is $6,090 [($100,000 × 6% × .5) + ($103,000 × 6% × .5)].
Under the $100,000 exemption for below-market loans, Dave must recognize $6,090 of
imputed interest income because Debra has investment income in excess of the calculated
imputed interest income.

Sarah, a majority shareholder in Teal, Inc., made a $200,000 interest-free loan to the corporation. Sarah is not an
employee of the corporation.
a. Sarah must recognize imputed interest expense and the corporation must recognize imputed interest income.
b. Sarah must recognize imputed interest income and the corporation must recognize imputed interest expense.
c. Sarah must recognize imputed dividend income and the corporation may recognize imputed interest expense.
d. Neither Sarah's nor the corporation's gross income is affected by the loans because no interest was charged.
e. None of these.

b - Sarah, as the lender, has imputed interest income. The corporation, as the borrower, has
imputed interest expense.

The effects of a below-market loan for $100,000 made by a corporation to its chief executive officer as an enticement
to get him to remain with the company are:
a. The corporation has imputed interest income and the employee is deemed to have received a gift.
b. The corporation has imputed interest income and dividends paid.
c. The employee has no income unless the funds are invested and produce investment income for the year.
d. The employee has imputed compensation income and the corporation has imputed interest income.
e. None of these.

d - The corporation made a compensation related loan. It has imputed interest income and
compensation expense. The employee has imputed interest expense and compensation
income. Since the loan is for $100,000, the $10,000 exception does not apply.

Sharon made a $60,000 interest-free loan to her son, Todd, who used the money to start a new business. Todd's only
sources of income were $25,000 from the business and $490 of interest on his checking account. The relevant Federal
interest rate was 5%. Based on the above information:
a. Todd's business net profit will be reduced by $3,000 (.05 × $60,000) of interest expense.
b. Sharon must recognize $3,000 (.05 × $60,000) of imputed interest income on the below- market loan.
c. Todd's gross income must be increased by the $3,000 (.05 × $60,000) imputed interest income on the below
market loan.
d. Sharon does not recognize any imputed interest income and Todd does not recognize any imputed interest
expense.
e. None of these is correct.

d - The $100,000 exception would apply. Sharon is not required to recognize imputed interest
income because Todd's investment income is less than $1,000. Todd does not recognize any
imputed interest expense.

Jay, a single taxpayer, retired from his job as a public school teacher in 2015. He is to receive a retirement annuity of
$1,200 each month and his life expectancy is 180 months. He contributed $36,000 to the pension plan during his 35-year
career; so his adjusted basis is $36,000. Jay collected 192 payments before he died. What is the correct method for
reporting the pension income?
a. Since Jay is no longer working, none of the pension payments must be included in his gross income.
b. The first $36,000 received is a nontaxable recovery of capital, and all subsequent annuity payments are
taxable.
c. The first $180,000 he receives is taxable and the last $36,000 is a nontaxable recovery of capital.
d. All of the last 12 payments he received ($14,400) are taxable.
e. None of these.

d - Jay is collecting under an annuity contract and the cost must be allocated among the
payments received on the basis of the cost/expected return, until the total cost has been
recovered. Thus, for each annuity payment received for the 180-month period, $200
[$36,000/($1,200 × 180) × $1,200] is excluded from gross income and $1,000 is included in
gross income. Any payments received after the 180-month period are included in his gross
income.

In 2015 Todd purchased an annuity for $150,000. The annuity is to pay him $2,500 per month for the rest of his life.
His life expectancy is 100 months. Which of the following is correct?
a. Todd is not required to recognize any income until he has collected 60 payments (60 × $2,500 = $150,000).
b. If Todd collects 20 payments and then dies in 2016, Todd's estate should amend his tax returns for 2015 and
2016 and eliminate all of the reported income from the annuity for those years.
c. For each $2,500 payment received in the first year, Todd must include $1,000 in gross income.
d. For each $2,500 payment received in the first year, Todd must include $1,500 in gross income.
e. None of these.

c - Each payment is in part a recovery of capital and in part income. The recovery of capital
portion is $1,500 [($150,000 cost/$250,000 expected return) × $2,500 payment]. The balance
of the amount received of $1,000 ($2,500 - $1,500) is income.

Mark a calendar year taxpayer, purchased an annuity for $50,000 in 2013. The annuity was to pay him $3,000 on the
first day of each year, beginning in 2013, for the remainder of his life. Mark's life expectancy at the time he purchased the
annuity was 20 years. In 2015 Mark developed a deadly disease, and doctors estimated that he would live for no more
than 24 months.
a. If Seth dies in 2016, a loss can be claimed on his final return for his unrecovered cost of the annuity.
b. If Seth dies in 2016, his returns for the two previous years can be amended to allocate the entire cost of the
annuity to the years in which he received payments and reported gross income.
c. If Seth is still alive at the end of 2015, he is not required to recognize any gross income because of his terminal
illness.
d. If Seth is still alive in 2035, his recovery of capital for that year is $500.
e. None of these.

a - Seth's final return can report a loss in 2015 because he did not recover all of his cost of the
annuity prior to his death. Answer d. is incorrect because Seth would have recovered his
entire cost of the contract in the first 20 years under the contract, 2013-2032. Answers b. and
c. are also incorrect.

Betty purchased an annuity for $24,000 in 2015. Under the contract, Betty will receive $300 each month for the rest of
her life. According to the actuarial estimates, Betty will live to receive 96 payments and will receive a 3% return on her
original investment.
a. If Betty collects $3,000 in 2015, her gross income is $630 (.03 × $21,000).
b. Betty has no gross income until she has collected $24,000.
c. If Betty lives to collect more than 96 payments, all of the amounts collected after the 96th payment must be
included in taxable income.
d. If Betty lives to collect only 60 payments before her death, she will report a $6,000 loss from the annuity
[$24,000 - (60 × $300) = $6,000] on her final return.
e. None of these.

c - The options other than C are simply contrary to the scheme provided in the Code for the
taxation of annuities. If Betty dies after collecting only 60 payments (before she has
recovered all of her investment), a loss can be claimed on her final return, but the loss is the
difference between her original cost and the capital she recovered prior to her death.
Therefore, d. is incorrect.

Gordon, an employee, is provided group term life insurance coverage equal to twice his annual salary of $125,000 per
year. According to the IRS Uniform Premium Table (based on Gordon's age), the amount is $12 per year for $1,000 of
protection. The cost of an individual policy would be $15 per year for $1,000 of protection. Since Gordon paid nothing
towards the cost of the $250,000 protection, Gordon must include in his 2015 gross income which of the following
amounts?
a. $1,350.
b. $2,400.
c. $3,000.
d. $3,750.
e. None of these.

b - Gordon must include in gross income the Uniform Premium Table amount for $200,000
($250,000 coverage less the $50,000 exclusion): 200 × $12 = $2,400.

Green, Inc., provides group term life insurance for all of its employees. The coverage equals twice the employee's
annual salary. Sam, a vice-president, worked all year for Green, Inc., and received $200,000 of coverage for the year at a
cost to Green of $1,500. The Uniform Premiums (based on Sam's age) are $.25 per month for $1,000 of protection. How
much must Sam include in gross income this year?
a. $0.
b. $375.
c. $450.
d. $600.
e. None of these

c - Sam must include in gross income the uniform premium amount for his coverage in excess of
$50,000, or $450 [(.25)(12) × ($200,000 - $50,000)/$1,000].

Turner, Inc., provides group term life insurance to the officers of the corporation only. Janet, a vice-president,
received $450,000 of coverage for the year at a cost to Turner, Inc. of $5,600. The Uniform Premiums (based on Janet's
age) are $15 a year for $1,000 protection. How much of this must Janet include in gross income this year?
a. $0.
b. $2,700.
c. $5,600.
d. $6,000.
e. None of these.

d - The plan is discriminatory. Therefore, the employee's income is the greater of the amount
from the IRS table (($15) × (450-50) = $6,000) or the employer's cost ($5,600).