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Exam 5: Gross Income: Exclusions

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Question 41

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The president of Silver Corporation is assigned a secretary.When the secretary has completed work on company matters,the secretary is available to do the president's personal matters (pick up laundry,buy groceries) so long as the privilege is not abused.No other employee has a personal secretary.

A) The value of the secretary's services provided to the president may be excluded as no-additional-cost services.
B) The value of the secretary's services provided to the president may be excluded because the president did not receive cash.
C) The value of the secretary's services provided to the president may be excluded as no-additional-cost services because the services are not available to all employees.
D) If the value of secretary's services are considered de minimis, the president may exclude the benefit from gross income even through other employees are not provided the same benefit.
E) None of the above.

F) B) and C)
G) None of the above

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Question 42

Multiple Choice

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The exclusion for health insurance premiums paid by the employer applies to:

A) Only current employees.
B) Only current employees and their spouses and children.
C) Only current and retired former employees.
D) Present employees, retired former employees, and their spouses and children.
E) None of the above.

F) A) and B)
G) B) and E)

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Question 43

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Melody works for a company with only 22 employees.Her employer contributed $2,000 to her health savings account (HSA),and the account earned $100 in interest during the year.Melody withdrew only $1,200 to pay medical expenses during the year.Melody is not required to recognize any gross income from the HSA for the year.

Harold bought land from Jewel for $150,000.Harold paid $50,000 cash and gave Jewel an 8% note for $100,000.The note was to be paid over a five-year period.When the balance on the note was $80,000,Jewel began having financial difficulties.To accelerate her cash inflows,Jewel agreed to accept $60,000 cash from Harold in final payment of the note principal.

Jack received a court award in a civil libel and slander suit against National Gossip.He received $120,000 for damages to his professional reputation,$100,000 for damages to his personal reputation,and $50,000 in punitive damages.Jack must include in his gross income as a damage award:

Bob had a terminal illness and realized that he "can't take it with him." Therefore,he cashed in his insurance policy and received $120,000.He had paid $50,000 in premiums on the policy.He used the money to fulfill his lifelong ambitions of going to the Super Bowl,driving an expensive sports car,and vacationing in Bermuda. Was Bob's behavior consistent with the Congressional intent in providing the tax exemption he was permitted to use?

Swan Finance Company,an accrual method taxpayer,requires all of its customers to carry credit life insurance.If a customer dies,the company receives from the insurance company the balance due on the customer's loan.Ali,a customer,died owing Swan $1,500.The balance due included $200 accrued interest that Swan has included in income.When Swan collects $1,500 from the insurance company,Swan:

Ron,age 19,is a full-time graduate student at City University.During 2011,he received the following payments: Ron served as a resident advisor in a dormitory and,therefore,the university waived the $2,500 charge for the room he occupied.What is Ron's adjusted gross income for 2011?

The CEO of Cirtronics Inc.,discovered that the company's competitor had adopted a cafeteria plan for its employees.The CEO is concerned about retaining his talented employees and would like you to provide a brief explanation as to why a cafeteria plan may be attractive to the company's employees.

Sonja is a United States citizen who has worked in Spain for the past 10 months.She received $5,000 a month as compensation.Her employer has offered to extend Sonja's contract to work in Spain for another 5 months at the same rate of pay.If she rejects the offer,she can return to the United States and receive the same salary.While working in Spain,she is subject to the Spain income tax,which is approximately 11% of her gross pay.The marginal tax rate on her income taxed in the United States is 25%.Compare Sonja's after-tax income assuming she remains in Spain with her after-tax income if she returns to the United States.

Ben was hospitalized for back problems.While he was away from the job,he collected his regular salary from an employer-sponsored income protection insurance policy.Ben's employer-sponsored hospitalization insurance policy also paid for 90% of his medical expenses.Ben also collected on an income protection policy that he purchased.Which of the above sources of income are taxable? Explain the basis for excluding any item or items.

In 2011,Bob's unincorporated business has a net loss of $24,000.Bob has investment income of $30,000.Itemized deductions and personal exemptions total $26,000.Thus,on his 2011 tax return,his taxable income was a negative $20,000.In 2011,Bob discovered that an employee has stolen $28,000 (pocketing the proceeds from unrecorded sales)from the business.This $28,000 theft loss is included in calculating the net loss of Bob's business of $24,000.In 2012,Bob recovers the $28,000 from the former employee.How can the tax benefit rule assist Bob in 2012?

Employees of the Valley Country Club are allowed to use the golf course without charge before and after working hours on Mondays,when the number of players on the course is at its lowest.Tom,an employee of the country club played 40 rounds of golf during the year at no charge when the non-employee charge was $20 per round.

In 2011,Khalid was in an automobile accident and suffered physical injuries.The accident was caused by Rashad's negligence.Khalid threatened to file a lawsuit against Amber Trucking Company,Rashad's employer,claiming $50,000 for pain and suffering,$25,000 for loss of income,and $100,000 in punitive damages.Amber's insurance company will not pay punitive damages; therefore,Amber has offered to settle the case for $120,000 for pain and suffering,$25,000 for loss of income,and nothing for punitive damages.Khalid is in the 35% marginal tax bracket.What is the after-tax difference to Khalid between Khalid's original claim and Amber's offer?

In the case of a fringe benefit plan that is discriminatory (e.g.,the plan favors officers over other employees) ,

Gary cashed in an insurance policy on his life.He needed the funds to pay for his terminally ill wife's medical expenses.He had paid $15,000 in premiums and he collected $30,000 from the insurance company.Gary is required to include the gain of $15,000 ($30,000 - $15,000)in gross income.

Flora Company owed $95,000 to the National Bank.Flora borrowed the funds to purchase land from another party.The land serves as security for the loan.

A debtor undergoing a Chapter 11 reorganization under the bankruptcy laws who receives a discharge of his or her liabilities has realized income but can exclude the debt reduction from gross income.

Kristen's employer owns its building and provides parking space for its employees.The value of the free parking is $150 per month.Karen's employer does not have parking facilities,but reimburses its employee for the cost of parking in a nearby garage,up to $150 per month.

The taxpayer incorrectly took a $5,000 deduction (e.g.,incorrectly calculated depreciation)in 2011 and as a result his taxable income was reduced by $5,000.The taxpayer discovered his error in 2012.The taxpayer must add $5,000 to his 2012 gross income in accordance with the tax benefit rule to correct for the 2011 error.