AC 371 - Chapter 4 Quiz (one of them is wrong)

Thelma and Mitch were divorced in 2021. 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 six years, or until Thelma's death, whichever should occur first. Thelma and Mitch lived apart when the payments were made by Mitch. He 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. $300,000 ($1,300,000 – $1,000,000).
d. $700,000 ($1,300,000 – $600,000).

d. $700,000 ($1,300,000 – $600,000).

Which of the following is not a requirement for a payment between former spouses to be considered alimony?
a. The payments must be in cash.
b. The payor and payee must not live in the same household at the time of the payments.
c. The payments must cease upon the death of the payee.
d. The payments must extend over at least three years.

a. The payments must be in cash.

Darryl, a cash basis taxpayer, gave 1,000 shares of Copper Company common stock to his daughter on September 29, 2022. 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, 2022 payable on October 15th, to stockholders of record as of October 10th. The daughter received the $2,000 dividend on October 18, 2022.
a. The daughter must recognize the income because she owned the stock on October 10th.
b. Darryl must recognize $1,500 of the dividend because he owned the stock for three-fourths of the year.
c. Darryl must recognize the income of $2,000 because the purpose of the gift was to avoid taxes.
d. Darryl must recognize the $2,000 dividend as his income because he constructively received the dividend.

a. The daughter must recognize the income because she owned the stock on October 10th.

In 2021 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 2023, Todd's estate should amend his tax returns for 2021 and 2022 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 $1,500 in gross income.
d. 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 $1,000 in gross income.

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. I, II, III, and IV are true.
b. I, II, and III are true, but IV is false.
c. Only I and II are true.
d. Only III and IV are true.

c. Only I and II are true.