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Exam 5: Gross Income and Exclusions

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Question 71

Multiple Choice

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Nate is a partner in a partnership that received $5,000 of interest income this year. Nate's share of the interest is $1,000, and he should report this income on his individual return as:

A) business income
B) income from a partnership
C) interest income
D) dividend income because the partnership intends to organize next year as a limited liability company
E) All of these

F) B) and D)
G) A) and C)

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Question 72

Multiple Choice

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Rhett made his annual gambling trip to Uwin Casino. On this trip Rhett won $250 at the slots and $1,200 at poker. Also this year, Rhett made several trips to the race track, but he lost $700 on his various wagers. What amount must Rhett include in his gross income?

A) $1,450
B) $1,200
C) $750
D) $250
E) Zero - gambling winnings are not included in gross income

F) All of the above
G) C) and E)

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Question 73

True/False

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Interest earned on a city of Denver bond is excluded from gross income (for federal tax purposes).

This year Ed celebrated his 25th year as an employee of Designer Jeans Company. In recognition of his long and loyal service, the company awarded Ed a gold watch worth $250 and a $2,000 cash bonus. What amount must Ed include in his gross income?

Identify the rule that states that income has been realized when a taxpayer receives the income and there are no restrictions on the taxpayer's use of the income (e.g., no obligation to repay the amount) :

Irene's husband passed away this year. After his death, Irene received $250,000 of proceeds from life insurance on her husband, and she inherited her husband's stock portfolio worth $750,000. What amount must Irene include in her gross income?

Recognized income may be in the form of cash or property received (but not services received).

Juan works as a landscaper for local businesses on weekends, and he often provides services in exchange for property. This year Juan provided lawn-mowing services in exchange for $1,275 of car repair services, $3,570 of groceries, and a certificate of deposit (C.D.) for $4,050. The C.D. matures next year with interest. Finally, Juan received a gift card that can only be applied for $850 of clothing at a local mall. Juan has only applied the gift card to purchase $100 of clothing. Compute Juan's gross income assuming that he uses the cash basis of accounting. $1,275 + $3,570 + $4,050 + $850 = $9,745

The tax law defines alimony to include transfers of property (but not cash) between former spouses.

This fall Angelina, age 35, plans to attend college. To fund her tuition she cashed in Series EE savings bonds with a redemption value of $24,000 and an original cost of $16,800. Angelina plans on spending $7,200 of the proceeds to pay tuition. The redemption proceeds are Angelina's only source of income. What amount of interest must Angelina include in gross income this year?

Barter clubs are an effective means of avoiding realization for tax purposes.