Seth, a Calendar Year Taxpayer, Purchased an Annuity for $50,000

question 122

Multiple Choice

Seth, a calendar year taxpayer, purchased an annuity for $50,000 in 2010.The annuity was to pay him $3,000 on the first day of each year, beginning in 2010, for the remainder of his life.Seth's life expectancy at the time he purchased the annuity was 20 years.In 2012, Seth developed a deadly disease, and doctors estimated that he would live for no more than 24 months.

• A)If Seth dies in 2013, a loss can be claimed on his final return for his unrecovered cost of the annuity.
• B)If Seth dies in 2013, his returns for the two previous years can be amended to allocate the entire cost of the annuity to the years in which he received payments and reported gross income.
• C)If Seth is still alive at the end of 2012, he is not required to recognize any gross income because of his terminal illness.
• D)If Seth is still alive in 2032, his recovery of capital for that year is $500.
• E)None of the above.

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Definitions:

Fixed Expenses

Costs that do not vary with the level of production or sales over a short period, such as rent or salaries.

Cost Structure

The relative proportion of fixed, variable, and mixed costs in an organization.

Advertising Budget

The allocation of funds toward promotional activities intended to communicate the value of products or services to customers.

Variable Costs

Costs that change in proportion to the level of activity or production volume, such as materials and labor directly involved in production.