Fed Tax Unit 1- Gross Income

In Year 1 Suz finds in the back of her hotel room a watch that has a FMV of $4,000 and a wallet that has $600 cash. She keeps the watch and wallet and tells no one about her good luck. In Year 2, Suz sells the watch for $4,000 and spends the $600 on a round trip plane ticket to Cancun. Which best describes the likely tax consequences of Suz finding the watch and wallet and selling the watch and wallet.

• Suz has $4,600 of gross income in Year 1 and $4,000 of gross income in Year 2

• Suz has $4,600 of gross income in Year 1 and no gross income in Year 2

• Suz has $600 of gross income in Year 1 and $4,000 of gross income in Year 2 when she sells the watch

• Suz has no gross income in Year 1 and $4,600 of gross income in Year 2 when she sells the watch and spends the cash

Answer explanation

This is similar to Cesarini v Comm'r and 1.61-14, the treasure trove regulation. Here the found property is the cash and FMV of the watch. That is the amount that must be taken into gross income.

Keith purchases 1 share of Amazon stock on Feb 1 Year 1 for $1,000. By December 31 Year 1 the value of the share has increased to $1500. On December 31, Keith borrows $1200 from the bank and pledges the share as security or collateral for the loan. What are the likely tax consequences of Keith's purchase of the Amazon share and borrowing of the $1200?

• Keith will have $500 in gross income if the stock's fair market value of $1500 can be definitely ascertained

• Keith has realized $200 of the $500 gain and will have to include $200 in gross income

• Keith will not have gross income in Year 1 as there has been no realization event

• Keith has $500 of gross income as he has an accession to wealth under Glenshaw Glass and Roco

Answer explanation

Keith has no gross income as the borrowing of money is not a realization event.

Hank is an electrician who is good friends with Lester an accountant. Hank agrees to  b    install a generator for Lester if Lester prepares Hank’s income tax return and also gives Hank $200 in cash. The value of the generator installation is $1,000 and the value of the income tax return preparation is $800. What are Hank’s tax consequences?

• Hank will have $1,000 of gross income

• Hank will have no gross income because the value he exchanges is precisely equal to the sum of the fmv of the cash and return preparation services

• Hank will have $200 of gross income, the excess of the cash over the fmv of the value of the return prep services

• Hank will have $800 of gross income

Answer explanation

As 1.61-2(d)(1) of the regulations clarifies, if services are paid for other than in money, the fmv of the property or services taken in payment must be included in GI. 61(a)(1); also see Rev. Rul 79-24

Ty is a teaching golf pro at a local country club. In Summer Year 1 Ty hired seven summer college golf pros to help teach summer camp and offer clinics to newer golfers. At the end of the summer Ty offered Danny, his best summer teaching pro, the option of buying a golf club set for $100. The fair market value of the golf clubs is $2,000. In offering the clubs to Danny Ty wrote him a note saying that he valued his "excellent contributions to the club" and hoped that he would come back next summer. Ty did not make the same offer to the other college teaching pros as he did not think they did a good job and had no interest in hiring them next season. 

 

Danny agreed to purchase the clubs for $100. In January of Year 2 Danny sold the clubs for $2,000.  What best describes the tax consequences of the above?

• Danny has no gross income under Section 61(a)(1) in Year 1. He has $1900 61(a)(3) gross income in Year 2

• Danny has $2,000 gross income under Section 61(a)(1) in Year 1. He has no 61(a)(3) gross income in Year 2

• Danny has gross income under Section 61(a)(1) in Year 1 of $1900. He has no 61(a)(3) gross income in Year 2

• Danny has no gross income under Section 61(a)(1) in Year 1. He has $2,000 61(a)(3) gross income in Year 2

Answer explanation

This is similar to Bridge Problem 3 and implicated 1.61-2(d)(2) where the discount is likely compensation for services. The excess of the FMV over the purchase price, or $1900, is 61(a)(1) compensation income. Danny's basis in the clubs is $2000, so when he sells the clubs for $2,000 he has no GI.

Jenny performed research for Professor Dingle. The fair market value of the research was $750. Jenny told Professor Dingle that in exchange for her services she would appreciate if the professor paid her $500 bar tab and her mother’s $250 tab at the same bar. Dingle paid the bar tab for Jenny and her mother. What are the likely tax consequences to Jenny?

• Jenny will have $500 of gross income

• Jenny will have no gross income

• Jenny will have $500 of gross income if her mother properly reports the $250

• Jenny will have $750 of gross income

Answer explanation

As in Old Colony and in 1.61-14, the payment of another's obligation (here a bar tab) will constitute gross income to the party performing the services. That Dingle also paid the mom's bar tab should not result in GI to the mom because in effect the payment of the mom's bill is 61(a)(1) compensation income as per 1.61-1 and as suggested by Pellar v Comm'r. It is as if Dingle gave Jenny $750 in cash and Jenny chose to pay her and her mom's bill. Her mom likely has a gift that would be excluded as per Section 102.

Landlord Louie received $24,000 in rent payments last year. Louie spent $5,000 to a management company, as he was an absentee landlord. Assume Louie incurred no other expenses on his rental property. What is an accurate statement?

• IRC § 61(a)(5) requires that Louie treat the $19,000 net profits as gross income

• There is unlikely to be gross income, if Louie is receiving a fair market value rental payment.

• Louie will likely have $24,000 gross income as per the Pellar case

• IRC § 61(a)(5) requires that Louie treat the $24,000 as gross income

Answer explanation

Income as per Code Section 61(a)(5); any expenses do not reduce GI and may be dedutible under Section 212 or 162, issues we will cover later in semester

In Year 1, after working for a summer for Professor Book, and in exchange for the excellent work that the RA has done, Book gives his research assistant a painting he made of the Internal Revenue Code. Book's tax paintings are well known, and he typically sells similar paintings on Etsy for $500. RA, who did not expect to receive the painting, immediately sends the painting to their parents, who place the painting in a prominent place at the family shore house. In Year 2, after law school graduation, RA decides that they want to take the painting and hang in their office. What are the income tax consequences of the above?

• RA will have gross income in Year 2 when she has dominion and control of the painting. The amount of the gross income will depend on the painting's FMV in Year 2

• RA will have no gross income because this was not a bargained for consideration and RA had no knowledge that they were getting the paintin

• RA will have $500 gross income in Year 1

• There is no gross income to RA; if RA sold the painting there would be a realization event and gross income but in the absence of a sale there is no gross incom

Answer explanation

GI under IRC 61 and 1.61-1(a) and 1.61-2(a) equal to FMV of painting. That RA allows parents to have painting and receives back has no impact on inclusion in Year 1.

Johanna has expertise in antique furniture. In Year 1 Johanna purchases a desk at a flea market for $300; at the time of the purchase Johanna knew that the desk was worth $10,000. Johanna sells the desk in Year 2 for its then FMV of $12,000. What accurately describes the income tax consequences?

• Johanna will have no gross income in Year 1 and $12,000 gross income in Year 2

• Johanna will have no gross income in Year 1 and $9,700 gross income in Year 2

• If under local law Johanna is entitled to keep the desk even if the seller finds out that she sold the desk for under FMV, Johanna will have $9,700 gross income in Year 1 and $2,000 gross income in Year 2

• Johanna will have no gross income in Year 1 and $11,700 gross income in Year 2

Answer explanation

Under Pellar the purachser in a bargain purcahse transaction has no GI in year of purchase; no suspect relationship and arm's length transaction. When sold the excess of amount realized of $12,000 over the basis of $300 is GI under 61(a)(3), so 11,700 GI

Dana is an unmarried taxpayer with taxable  income in 2021 of $170,000. Assume (not realistic) that on these facts Dana’s total federal income tax liability is $40,000. Assume (also not realistic) that if Dana had an additional $40,000 of taxable income, her total 2021 federal income tax liability would be $60,000. What is Dana’s marginal tax rate on this additional $40,000 of taxable income?

• 80%

• 50%

• 24%

• 33%

Answer explanation

Marginal tax rate equals the extra tax paid as a result of additional income/change in income. In this problem the extra tax paid is $20,000 and the additional income is 40,000, so marginal tax rate is $20,000/40,000, or .5 which amounts to 50%

In Year 1, Raphael purchases one share of Apple stock for $1,000. In Year 2, Raphael trades the one share of Apple stock for one share of Tesla stock. At the time of the Year 2 trade, the Tesla stock is worth $1,800 and the Apple stock is also worth $1,800.  What accurately describes the consequences to Raphael?

• Raphael will have $800 gross income in Year 2

• Raphael will have $800 gross income in Year 1

• No gross income in either Year 1 or Year 2

• Raphael will have $1,800 gross income in Year 2

Answer explanation

Realization event in Year 2 under Section 1001 and 1.1001-1(a) and Cottage Savings; GI= excess of amount realized of 1800 over the 1000 basis in the Apple stock.