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Exam 5: Gross Income: Exclusions

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Question 1

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Amber Machinery Company purchased a building from Ted for $250,000 cash and a mortgage of $750,000.One year after the transaction, the mortgage had been reduced to $725,000 by principal payments by Amber, but it was apparent that Amber would not be able to continue to make the monthly payments on the mortgage.Ted reduced the amount owed by Amber to $600,000.This reduced the monthly payments to a level that Amber could pay.Amber must recognize $125,000 income from the reduction in the debt by Ted.

A) True
B) False

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Question 2

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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 $12,000 in premiums and he collected $30,000 from the insurance company.Gary is not required to include the gain of $18,000 ($30,000 - $12,000) in gross income.

A) True
B) False

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Question 3

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Albert had a terminal illness that would require almost constant nursing care for the remaining two years of his estimated life, according to his doctor.Albert had a life insurance policy with a face amount of $100,000.He had paid $25,000 of premiums on the policy.The insurance company has offered to pay him $80,000 to cancel the policy, although its cash surrender value was only $55,000.He accepted the $80,000.Albert used $15,000 to pay his medical expenses.Albert made a miraculous recovery and lived another 20 years.As a result of cashing in the policy:

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.

The Royal Motor Company manufactures automobiles.Nonmanagement employees of the company can buy a new automobile for Royal's cost plus 2%.The automobiles are sold to dealers at cost plus 20%.Generally, management employees of Local Dealer, Inc., are allowed to buy a new automobile from the company at the dealer's cost.Which of the following statements is correct?

Heather's interest and gains on investments for the current year are as follows: $\begin{array} { l r } \text { Interest on Madison County school bonds } & \$ 600 \\\text { Interest on U.S. government bonds } & 700 \\\text { Interest on a Federal income tax refund } & 200 \\\text { Gain on the sale of Madison County school bonds } & 500\end{array}$ Heather must report gross income in the amount of:

Ed died while employed by Violet Company.His wife collected $40,000 on a group term life insurance policy that Violet provided its employees and $6,000 of accrued salary Ed had earned prior to his death.All of the premiums on the group term life insurance policy were excluded from the Ed's gross income.Ed's wife is required to recognize as gross income only the $6,000 she received for the accrued salary.

The employees of Mauve Accounting Services are permitted to use the copy machine for personal purposes, provided the privilege is not abused.Ed is the president of a civic organization and uses the copier to make several copies of the organization's agenda for its meetings.The copies made during the year would have cost $150 at a local office supply.

The taxpayer's marginal federal and state tax rate is 25%.Which would the taxpayer prefer?

Both Sally and Ed own property with a fair market value less than the amount of the outstanding mortgage on the property and also less than the original cost basis.Each of them was able to convince the mortgage holder to reduce the principal amount on the mortgage.Sally's mortgage is on her personal residence and Ed's mortgage is on rental property he owns.Both debts are recourse. a.Each taxpayer's liabilities were reduced.Therefore, the net worth of each has increased as measured using the cost basis in the assets.Each taxpayer also experienced a loss in the value of her or his assets.However, the losses were not realized (because each taxpayer still owns the property).Thus, each taxpayer had income from the reduction in debt but no recognized loss.Fortunately, the tax law in effect through 2017 allows the taxpayer whose property is a personal residence to exclude the income from debt discharge from gross income.The taxpayer who a.Explain whether each of these individuals has realized income from the reduction in the debt. b.Assume that under the current system of measuring income, each of these taxpayers realized income from the reductions in the mortgages.Should either of these taxpayers be permitted to exclude any of the debt discharge income?

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 had purchased.Which of these sources of income is/are taxable? Explain the basis for excluding any item or items.

James, a cash basis taxpayer, received the following compensation and fringe benefits in the current year: $\begin{array} { l r } \text { Salary } & \$ 66,000 \\\text { Disability income protection premiums } & 3,000 \\\text { Long-term care insurance premiums } & 4,000\end{array}$ His actual salary was $72,000.He received only $66,000 because his salary was garnished and the employer paid the $6,000 owed on James's credit card.The wage continuation insurance is available to all employees and pays the employee three-fourths of the regular salary if the employee is sick or disabled.The long-term care insurance is available to all employees and pays $150 per day toward a nursing home or similar facility.What is James's gross income from the above?

The exclusion of interest on educational savings bonds:

Gold Company was experiencing financial difficulties but was not bankrupt or insolvent.National Bank, which held a mortgage on other real estate owned by Gold, reduced the principal from $110,000 to $85,000.The bank had made the loan to Gold when it purchased the real estate from Silver, Inc.Pink, Inc., the holder of a mortgage on Gold's building, agreed to accept $40,000 in full payment of the $55,000 due.Pink had sold the building to Gold for $150,000 that was to be paid in installments over eight years.As a result of the above, Gold must:

Beverly died during the current year.At the time of her death, her accrued salary and commissions totaled $3,000 and were paid to her husband.The employer also paid the husband $35,000, which represented an amount equal to Beverly's salary for the year prior to her death.The employer had a policy of making the salary payments to "help out the family in the time of its greatest need." Beverly's spouse collected her interest in the employer's qualified profit sharing plan amounting to $30,000.As beneficiary of his wife's life insurance policy, Beverly's spouse elected to collect the proceeds in installments.In the year of her death, he collected $8,000, which included $1,500 interest income.Which of these items are subject to income tax for Beverly's spouse?

On January 1, 2009, Cardinal Corporation issued 5% 25-year bonds at par and used the $12,000,000 proceeds to finance the construction of a new plant.On January 1, 2019, the company acquired the bonds on the open market for $11,500,000.Assuming that Cardinal is neither bankrupt nor insolvent, the acquisition and retirement of the bonds results in which of the following?

When Betty was diagnosed as having a terminal illness, she sold her life insurance policy to Insurance Purchase, Inc., a company that is licensed to invest in these types of contracts.Betty sold the policy for $32,000, and Insurance Purchase, Inc.became the beneficiary.She had paid total premiums of $19,000.Betty died eight months after the sale.Insurance Purchase, Inc., collected $50,000 on the policy.The company had paid additional premiums of $4,000 on the policy.Betty's estate is not required to recognize a $13,000 gain from the sale of her life insurance policy; and Insurance Purchase, Inc.is required to recognize a $14,000 gain from the insurance policy.

The taxpayer was in the 35% marginal tax bracket in 2018 and deducted $15,000 in state income taxes as an itemized deduction that year.In 2019, he filed his 2018 state income tax return and received a $5,000 refund of state income taxes paid in 2018.His marginal tax rate in 2019 was 12%.What was the taxpayer's Federal tax benefit from the overpayment of his 2018 state income tax?

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:

Sam, a single individual, took an itemized deduction of $5,500 for state income tax paid in 2019.His total itemized deductions in 2019 were $18,000 and did not include any other state or local taxes.In 2020, he received a $900 refund of his 2019 state income tax.Sam must include the $900 refund in his 2020 Federal gross income in accordance with the tax benefit rule.