Question

Problem 4-28 (LO. 1)

Determine the taxpayer's current-year (1) economic income and (2) gross income for tax purposes from the following events:

If an amount is zero, enter "0".

Economic Income Gross Income for Tax Purposes a. Sam's employment contract as chief executive of a large corporation was terminated, and he was paid $500,000 not to work for a competitor of the corporation for five years. $ $ b. Elliot, a 6-year-old child, was paid $5,000 for appearing in a television commercial. His parents put the funds in a savings account for the child's education. $ $ c. Valery found a suitcase that contained $100,000. She could not determine who the owner was. $ $ d. Winn purchased a lottery ticket for $5 and won $750,000. $ $ e. Larry spent $1,000 to raise vegetables that he and his family consumed. The cost of the vegetables in a store would have been $2,400. $ $ f. Dawn purchased an automobile for $1,500 that was worth $3,500. The seller was in desperate need of cash. $ $

Answer 1

(a) In this case Sam's Economic Income is equal to $500000 and Gross Income for Tax purpose will remain $500000. Since Sam's employment contract was terminated and company paid him the amount to restrain him for working for competitor firm for 5 years. The entire amount paid to him will be considered while calculating economic income. His gross income will be $500000 as company paid him to not render his services to a competitor firm it will be treated same as payment given for performance

(b) In this case child's parents put the funds for child's education in a saving account. For this purpose, both Economic Income and Gross income for tax purpose will be $5000

(c) Since Valery could not determine the owner of the suitcase. There will be increase in Valery's wealth realized by $100000. Therefore both economic income and gross income of Valery will be $100000

(d) Economic Income will be determined by Lottery amount won subtracted by Lottery ticket cost. Hence economic income will be $749995 ($750000- $5). Gross Income for tax purpose will be entire amount won in lottery i.e. $750000. For tax purposes $5 may be deductible as itemized deduction.

(e) Larry's economic income will be $1400 ($2400-$1000). Since the vegetables raised was consumed by him & his family rather then selling them in the vegetable market, there is no gross income for tax purposes. The realization requirements for tax purpose is not satisfied, hence gross income will be $0

(f) Economic Income will be calculated by subtracting automobile purchase price from automobile worth. Hence Dawn's economic income = $2000 ($3500-$1500). There will be no gross income realized while purchasing the automobile. Gross income will be realized if dawn sells the automobile for more than $1500 price. Currently Dawn's gross income = $0