Income Concepts (LO. 4) Determine the realized income of the taxpayer in each of
ID: 2417337 • Letter: I
Question
Income Concepts (LO. 4)
Determine the realized income of the taxpayer in each of the following situations. If an amount is zero, enter "0".
a. Alfredo owns a one-third interest in Bayou Partnership. During the current year, Bayou's taxable income is $45,000. $ b. Janet owns a pest-control service. She charges customers $50 per month for basic pest control. Alternatively, customers can pay a lump sum of $500 for one year of basic monthly pest control. During the current year, Janet receives $13,000 in monthly payments and $26,000 in 1-year prepayments. $ c. Monte owns 1,000 shares of Ali, Inc., common stock. During the current year, Ali declares and distributes a 20% stock dividend. As a result, Monte receives an additional 200 shares of stock. $ d. Rogers Trucking Company owes Big Truck Sales, Inc., $200,000 for the purchase of 3 trucks. Rogers is having a bad year and is unable to make full payment on the debt to Big Truck. Rather than foreclose on Rogers, Big Truck reduces the debt to $170,000 so that Rogers can stay in business. $Explanation / Answer
Answer a. Alfredo realizes $15,000 ($45,000 x 1/3) of income from the partnership. Owners of conduit entities are taxed on their share of the entity’s income. Because the partnership has realized income, the partners’ have also realized income Answer b. Janet has realized income of $13,000 from the monthly receipts regardless of her method of accounting because she has a claim of right to the income. Applying the wherewithal-to-pay concept, Janet would also include the $26,000 of prepayments in income even if she is an accrual basis taxpayer. Note: If Janet is an accrual basis taxpayer, she could use the accrual method to account for the prepayments under the one-year rule for advance payments for services. Answer c. Monte has not realized any income from the stock dividend because his wealth has not increased. That is, his percentage ownership in the firm remains the same, as does the value of the firm. Therefore, his total wealth remains unchanged and his property interest in the corporation has not changed. Answer d. Rogers wealth has increased by $30,000 ($200,000 - $170,000) as a result of a transaction with a second party. Therefore, it has realized income of $30,000 from the discharge of debt. Rogers has obtained a claim of right to the $30,000 because it is no longer under an obligation to repay the $30,000. If Rogers is insolvent before the discharge or if the debt is related to real property, part or all of the forgiveness could be excluded from income