Ch. 5 Problem Solutions

Ch. 5 Problem Solutions - Chapter 5 SOLUTIONS MANUAL 38[LO...

Info icon This preview shows pages 1–3. Sign up to view the full content.

View Full Document Right Arrow Icon
Chapter 5 SOLUTIONS MANUAL 38. [LO 1] For the following independent cases, determine whether economic income is present and, if so, whether it must be included in gross income (that is, is it realized and recognized for tax purposes?). a. Asia owns stock that is listed on the New York Exchange, and this year the stock increased in value by $20,000. b. Ben sold stock for $10,000 and paid sales commission of $250. Ben purchased the stock several years ago for $4,000. c. Bessie is a partner in SULU Enterprises LLC. This year SULU reported that Bessie’s share of rental income was $2,700 and her share of municipal interest was $750. a. Economic income of $20,000 is present, but there is no realization for tax purposes. Without realization, there can be no recognition. Hence this will not be included in the gross income. b. Economic income is present and has been realized through the sale. Return of capital limits the addition to gross income to the net gain on the sale, $5,750. The presumption in the law is that realized income is included in gross income. Thus, absent some additional facts which allow the deferral or exclusion of the income, recognition would follow realization, and the income would be taxed. c. c. Bessie’s share of rental income is included in gross income, and her share of municipal interest is excluded from her gross income. 39. [LO 1] [Research} Devon owns 1,000 shares of stock worth $10,000. This year he received 200 additional shares of this stock from a stock dividend. His 1,200 shares are now worth $12,500. Must Devon include the dividend paid in stock in income? No, § 305(a) states that dividends paid in stock are generally not included in gross income. If, however, the taxpayer has the option to receive the dividend in cash (instead of stock), the dividend is included in gross income. 40. [LO 1] {Research} XYZ declared a $1 per share dividend on August 15. The date of record for the dividend was September 1 (the stock began selling ex-dividend on September 2). The dividend was paid on September 10. Ellis is a cash-method taxpayer. Determine if he must include the dividends in gross income under the following independent circumstances. a. Ellis bought 100 shares of XYZ stock on August 1 for $21 per share. Ellis received $100 on September 10. Ellis still owns the shares at year-end. b. Ellis bought 100 shares of XYZ stock on August 1 for $21 per share. Ellis sold his XYZ shares on September 5 for $23 per share. Ellis received the $100 dividend on September 10 (note that even though Ellis didn’t own the stock on September 10, he still received the dividend because he was the shareholder on the record date). c. Ellis bought 100 shares of XYZ stock for $22 per share on August 20. Ellis received the $100 dividend on September 10. Ellis still owns the shares at year-end. a. Ellis has $100 of economic income and includes the $100 dividend in gross income.
Image of page 1

Info icon This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
b. Ellis has $200 of income from the sale of the stock ($2,300-$2,100) that is included in gross income. Ellis also has $100 of income from the dividend, which he also includes in gross income [See Reg. §1.61-9(c).].
Image of page 2
Image of page 3
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern