On February 1, 1993, Hall learned that he was bequeathed 500 shares of common stock under his father's will. Hall's father had paid $2,500 for the stock in 1990. Fair market value of the stock onFebruary 1, 1993, the date of his father's death, was $4,000 and had increased to $5,500 six months later. The executor of the estate elected the alternate valuation date for estate tax purposes. Hall sold the stock for $4,500 on June 1, 1993, the date that the executor distributed the stock to him. How much income should Hall include in his 1993 individual income tax return for the inheritance of the 500 shares of stock, which he received from his father's estate?
Answer(s): D
Choice "d" is correct. There is no income tax on the value of inherited property. The gain on the sale is the difference between the sales price of $4,500 and Hall's basis. Hall's basis is the alternate valuation elected by the executor. This is the value 6 months after date of death or date distributed if before 6 months. The property was distributed 4 months after death and the value that day ($4,500) is used for the basis. $4,500 − $4,500 = 0. Choice "a" is incorrect. There is no income tax on the value of inherited property.Choice "b" is incorrect. This is the basis of the stock if the alternate date had not been used. Heirs are not taxed on inheritances. The income or loss results when inherited property is sold.Choice "c" is incorrect. There is no income tax on the value of inherited property. The gain on the sale is the difference between the sales price of $4,500 and Hall's basis. Hall's basis is the alternate valuation elected by the executor.
John and Mary were divorced in 1991. The divorce decree provides that John pay alimony of $10,000 per year, to be reduced by 20% on their child's 18th birthday. During 1992, John paid $7,000 directly to Mary and $3,000 to Spring College for Mary's tuition. What amount of these payments should be reported as income in Mary's 1992 income tax return?
Answer(s): B
Choice "b" is correct. Alimony would be income to Mary while child support would not. Funds qualify as child support only if 1) a specific amount is fixed or is contingent on the child's status (e.g., reaching a certain age), 2) it is paid solely for the support of minor children, and 3) it is payable by decree, instrument or agreement. The actual use of the funds is irrelevant to the issue. In this case, $2,000 (20% × $10,000) qualifies as child support. The other $8,000 is alimony, which would be income to Mary.Choice "a" is incorrect. Take 80% of the $10,000 paid, not 80% of the $7,000 received by Mary. Choice "c" is incorrect. Only $8,000 would be alimony per the divorce decree (80% × $10,000).Choice "d" is incorrect. The 20% reduction when the child turns 18 makes 20% of the $10,000 payment, or $2,000, child support, which is nontaxable to Mary.
Freeman, a single individual, reported the following income in the current year:Guaranteed payment from services rendered to a partnership $50,000 Ordinary income from a S corporation $20,000What amount of Freeman's income is subject to self-employment tax?
Answer(s): C
Choice "c" is correct. Guaranteed payments are reasonable compensation paid to a partner for services rendered (or use of capital) without regard to his ratio of income. Earned compensation is subject to self- employment tax. Payments not guaranteed are merely another way to distribute partnership profits. The ordinary income reported from an S corporation are taxable income to the individual or their own individual tax return but is not subject to self-employment tax. The ordinary income reported from a partnership may be subject to self-employment tax (if to a general partner).
During 2001, Adler had the following cash receipts:What is the total amount that must be included in gross income on Adler's 2001 income tax return?
Choice "c" is correct. The wages of $18,000 and unemployment compensation are both includable in gross income on Adler's 2001 income tax return.Choice "a" is incorrect. The unemployment compensation must be included in gross income.Choice "b" is incorrect. Municipal bond interest income is excluded from gross income and the unemployment compensation must be included in gross income.Choice "d" is incorrect. Municipal bond interest income is excluded from gross income.
DAC Foundation awarded Kent $75,000 in recognition of lifelong literary achievement. Kent was not required to render future services as a condition to receive the $75,000. What condition(s) must have been met for the award to be excluded from Kent's gross income?I). Kent was selected for the award by DAC without any action on Kent's part.II). Pursuant to Kent's designation, DAC paid the amount of the award either to a governmental unit or to a charitable organization.
Choice "c" is correct. Generally, the fair market value of prizes and awards is taxable income. However, an exclusion from income for certain prizes and awards applies where the winner is selected for the award without entering into a contest (i.e., without any action on their part) and then assigns the award directly to a governmental unit or charitable organization. Therefore, conditions "I" and "II" must be met in order for Ken to exclude the award from his gross income.Choice "a" is incorrect. "II" is a necessary condition as well. See explanation above. Choice "b" is incorrect. "I" is a necessary condition as well. See explanation above. Choice "d" is incorrect. "I" and "II" are both necessary conditions. See explanation above.
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