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Noncash Compensation. For each of the following items,
indicate whether the individual taxpayer must include any amount in gross
income.
a. Employees of Easrside Bookstore are given their birthdays
off with pay.
b. Westside Hardware, Inc., gave each employee 10 shares of
Westside stock worth $100 per share in lieu of a cash bonus.
c. Employees of Northside Manufacturing were allowed to rake
home the company’s old computers when the company purchased new ones.

1. George, a wealthy investor, is uncertain whether he
should invest in taxable or tax-exempt bonds. What tax and nontax factors
should he consider?
2. Do you agree or disagree with the following state – ment:
A taxpayer should nor have ro report income when debt is forgiven because the
taxpayer receives nothing. Explain.

Cash and Accrual Metho ds. Carmen opens a retail store . Her
sales during the first year are $600,000, of which $30,000 has not been
collected at year-end. Her purchases are $400,000 . She still owes $20,000 to
her suppliers, and at year-end she has $50,000 of inventory on hand. She
incurred operating expenses of $160,000 . At year-end she has not paid $15,000
of the expenses.
a. Compute her net income from the business assuming she
elects the accrual method.
b. Compute her net income from the business assuming she
elects the cash method.
c. Would paying the $15,000 she owes for operating expenses
before year-end change her net income under accrual method of reporting? under
the cash method?

Al imony . As a result of their divorce, Fred agreed to pay
alimony to Tammy of $20,000 per year. The payments are to cease in the event of
Fred’s or Tammy’s death or in the event of Tammy’s remarr iage. In addition,
Tammy is co receive their residence, which cost chem $100,000 but is wort h
$140,000.
a. How will the $20,000 payments be treate d by Fred and
Tammy if covered by prior law?
b. How will the payments be treate d if the divorce is
covered by new law?
c. What is Tammy ‘s basis in the residence?
d. What role would a tax adviser play in a divorce?

Constructive Dividend. Brad owns a successful corporation
that has substantial earnings and profits. During the year, the following
payments were made by the corporation :
a. Salary of $250,000 to Brad. Officers in other
corporations performing similar services receive between $50,000 and $85,000.
b. Rent of $25,000 to Brad. The rent is paid in connection
with an office building owned by Brad and used by the corporation . Similar
buildings rent for about the same amount.
c. Salary of $5,000 to Brad’s daughter, who wor ked for the
compa ny full-time during the summer and part -time during the rest of the year
while she attended high school.
d. Alimony of $40,000 to Brad’s former wife. Although Brad
was personally obligated to make the payments, he used corporat ion funds to
make the payments . Discuss the likelihood of these payments being created as
construct ive dividends. If a payment is deemed to be a construct ive dividend,
indicate how such a payment will be treated.

Prepaid Rent. Stan rented an office building to Clay for
$3,000 per mont h. On December 29, 2018, Stan received a deposit of $4,000 in
addition to the first and last months’ rent. Occupa ncy began on January 2,
2019. On July 15, 2019, Clay closed his business and filed for bankruptcy .
Stan had collected rent for February, March, and April on the first of each
month. Stan had received May rent on May 10, but collected no payments
afterwards. Stan withheld $800 from the deposit because of damage to the
property and $1,500 for unpa id rent. He refunded the balance of the deposit to
Clay. What amount wou ld Stan report as gross income for 2018? for 2019?

Annuity Income . Tim retired during the current year at age
58. He purchased an annu – ity from American National Life Company for $40,000.
The annuity pays Tim $500 per month for life.
a. Compute Tim’s annual exclusion.
b. How much income will Tim report each year after reaching
age 84?

Social Security Benefits. Dan and Diana file a joint return.
Dan earned $31,000 during the year before losing his job. Diana received Social
Security benefits of $5,000.
a. Determine the taxable portion of the Social Security
benefits.
b. What is the taxable portion of the Social Security
benefits if Dan earned $46,000?

Social Security Benefits. Lucia is a 69-year-old single
individual who receives a taxable pension of $10,000 per year and Social
Security benefits of $7,000. Lucia is considering the possibility of selling
stock she has owned for years and using the funds to purchase a summer home. She
will realize a gain of $20,000 when she sells the stock, which has been paying
$1,000 of dividends each year. Lucia says her brother recommended that she sell
half of the stock chis year and half next year because selling all of the stock
at once would affect the tax treatment of her Social Security benefits.
a. Compute her AGI under the assumption she sells all of the
stock now after receiving $1,000 dividends from the stock.
b. Repeat the computation under the assumption she sells
only half of the stock this year and also receives $1,000 dividends from the
stock.