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Exam 5: Gross Income: Exclusions

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Question 51

True/False

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Benny loaned $100,000 to his controlled corporation.When it became apparent the corporation would not be able to repay the loan in the near future,Benny canceled the debt.The corporation should treat the cancellation as a nontaxable contribution to capital.

A) True
B) False

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Question 52

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Olaf was injured in an automobile accident and received $25,000 for his physical injury,$50,000 for his loss of income,and $10,000 punitive damages.As a result of the award,the amount Olaf must include in gross income is:

A) $10,000.
B) $50,000.
C) $60,000.
D) $85,000.
E) None of these.

F) B) and C)
G) D) and E)

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Question 53

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Juan,was considering purchasing an interest in a tax-exempt bond fund for $100,000,when he discovered that the interest must be included on his state income tax return.The interest rate is 5%.His marginal Federal tax rate is 35%,and his marginal state income tax rate is 10%.Juan itemizes his deductions on his Federal income tax return.As an alternative,Juan can purchase a state bond (a "double-exempt bond") yielding 4.9% interest that is exempt from both Federal and state income tax.Which investment would yield the greater after-tax return?

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.

Carla is a deputy sheriff.Her employer requires that she live in the county where she is employed.Housing is very expensive;so the county agreed to pay her $4,800 per year to cover the higher cost of housing.Carla must include the housing supplement in her gross income.

The First Chance Casino has gambling facilities,a bar,a restaurant,and a hotel.All employees are allowed to obtain food from the restaurant at no charge during working hours.In the case of the employees who operate the gambling facilities,bar,and restaurant,60% of all of Casino's employees,the meals are provided for the convenience of the Casino.However,the hotel workers,demanded equal treatment and therefore were also allowed to eat in the restaurant at no charge while they are at work.Which of the following is correct?

During the current year,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,$90,000 for loss of income,and $70,000 in punitive damages.Amber's insurance company will not pay punitive damages;therefore,Amber has offered to settle the case for $100,000 for pain and suffering,$90,000 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?

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.

A company has a medical reimbursement plan for officers that covers all costs that the insurer will not pay.However,for all employees who are not officers,the medical reimbursement plan applies only after the employee has paid $1,000 from his or her own funds.An officer incurred $1,500 in medical expenses and was reimbursed for that amount.An hourly worker also incurred $1,500 in medical expense and was reimbursed $500.

In 2015,Theresa was in an automobile accident and suffered physical injuries.The accident was caused by Ramon's negligence.In 2016,Theresa collected from his insurance company.She received $15,000 for loss of income,$10,000 for pain and suffering,$50,000 for punitive damages,and $6,000 for medical expenses which she had deducted on her 2015 tax return (the amount in excess of 10% of adjusted gross income).As a result of the above,Theresa's 2016 gross income is increased by $56,000.

John told his nephew,Steve,"if you maintain my house when I cannot,I will leave the house to you when I die." Steve maintained the house and when John died Steve inherited the house.The value of the residence can be excluded from Steve's gross income as an inheritance.

Barbara was injured in an automobile accident.She has threatened to file a suit against the other party involved in the accident and has proposed the following settlement: Damages for 25% loss of the use of her right arm $200,000 Medical expenses 30,000 Loss of wages 10,000 Punitive damages 100,000 $340,000 ​ The defendant's insurance company is reluctant to pay punitive damages.Also,the company disputes the amount of her loss of wages amount.Instead,the company offers to pay her $300,000 for damages to her arm and $30,000 medical expenses.Assuming Barbara is in the 35% marginal tax bracket,will her after-tax proceeds from accepting the offer be equal to what she considers to be her actual damages (listed above)?

Ben was diagnosed with a terminal illness.His physician estimated that Ben would live no more than 18 months.After he received the doctor's diagnosis,Ben cashed in his life insurance policy and used the proceeds to take a trip to see relatives and friends before he died.Ben had paid $12,000 in premiums on the policy,and he collected $50,000,the cash surrender value of the policy.Henry enjoys excellent health,but he cashed in his life insurance policy to purchase a new home.He had paid premiums of $12,000 and collected $50,000 from the insurance company.

Ridge is the manager of a motel.As a condition of his employment,Ridge is required to live in a room on the premises so that he would be there in case of emergencies.Ridge considered this a fringe benefit,since he would otherwise be required to pay $800 per month rent.The room that Ridge occupied normally rented for $70 per night,or $2,100 per month.On the average,90% of the motel rooms were occupied.As a result of this rent-free use of a room,Ridge is required to include in gross income.

An employee can exclude from gross income the value of meals provided by his or her employer whenever:

Evaluate the following statements: I. ​ De minimis fringe benefits are those that are so immaterial that accounting for them is impractical. II. De minimis fringe benefits are subject to strict anti-discrimination requirements. III. ​ Generally,a fringe benefit of less than $50 is considered de minimis and can be excluded from gross income. ​

In December 2015,Emily,a cash basis taxpayer,received a $2,500 cash scholarship for the Spring semester of 2016.However,she did not use the funds to pay the tuition until January 2016.Emily can exclude the $2,500 from her gross income in 2015.

Early in the year,Marion was in an automobile accident during the course of his employment.As a result of the physical injuries he sustained,he received the following payments during the year: Reimbursement of medical expenses Marion paid by a medical insurance policy he purchased $10,000 Damage settlement to replace his lost salary 15,000 ​ What is the amount that Marion must include in gross income for the current year?

Jena is a full-time undergraduate student at State University and is claimed by her parents as a dependent.Her only source of income is a $10,000 athletic scholarship ($1,000 for books,$5,500 tuition,$500 student activity fee,and $3,000 room and board) .Jena's gross income for the year is:

A U.S.citizen worked in a foreign country for the period July 1,2014 through August 1,2015.Her salary was $10,000 per month.Also,in 2014 she received $5,000 in dividends from foreign corporations (not qualified dividends) .No dividends were received in 2015.Which of the following is correct?