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Chapter 5 Solutions(1) - Chapter 5 Gross Income Solutions...

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Chapter 5 Gross Income Solutions to Problem Materials D ISCUSSION Q UESTIONS P ROBLEMS 5-27 a. No. The increase in value is not recognized as income until it is realized (e.g., when Q sells or otherwise disposes of the property). (See p. 5-5.) b. Yes. This is a bargain purchase. The $4,000 difference between the sales price of $3,000 and the property's value of $7,000 would constitute compensation unless R can establish that the bargain element of the sale was a gift. Note, however, that so-called qualified employee discounts are excludable, as discussed in Chapter 6. These discounts must be on property other than real property that is offered for sale to customers in the employer's ordinary line of business in which the employee is performing services and they must not exceed the employer's gross profit margin. (See p. 5-7 and § 132.) c. No. Although I has "cashed in" on the increase in value of the property, no income is realized because there has not been a disposition of the property, and I still remains obligated to repay the $10,000 loan. Moreover, I's net worth has not increased. Assets have increased, but so have liabilities. (See p. 5-8.) d. Yes. S would be treated as having received $60 (30% × $200) per month as income from using the car for personal purposes. Because S is controlling shareholder of the business, the income probably would be treated as a constructive dividend from the corporation. (See p. 5-10 and § 61.) 5-29 a. Yes. The $39,000 reimbursement for mental anguish might appear to be excluded from income because it represents a return of capital. However, §
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