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Exam 5: Gross Income: Exclusions

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Question 1

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Sharon had some insider information about a corporate takeover.She unintentionally informed a friend,who immediately bought the stock in the target corporation.The takeover occurred and the friend made a substantial profit from buying and selling the stock.The friend told Sharon about his stock dealings,and gave her a pearl necklace because she "made it all possible." The necklace was worth $10,000,but she already owned more jewelry than she desired.

A) The necklace is a nontaxable gift received by Sharon because the friend was not legally required to make the gift.
B) The value of the necklace is not included in Sharon's gross income unless she sells it.
C) The value of the necklace is not included in Sharon's gross income because passing the information was an illegal act and the SEC can confiscate the necklace.
D) The value of the necklace must be included in Sharon's gross income for the tax year it was received by her.
E) None of the above.

F) A) and C)
G) All of the above

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Question 2

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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:

A) $0.
B) $100,000.
C) $120,000.
D) $270,000.
E) None of the above.

F) C) and D)
G) A) and B)

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Question 3

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The Royal Motor Company manufactures automobiles.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,employees of Local Dealer,Inc.,are allowed to buy a new automobile from the company at the dealer's cost.Officers of Local Dealer are allowed to use a company vehicle (for personal use) at no cost.

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.

Denny was neither bankrupt nor insolvent but was short of cash and could not make the mortgage payments on his personal residence in 2012.The bank that held the mortgage agreed to reduce the principal on the debt from $100,000 to $80,000 so that Denny's monthly mortgage payments could be reduced to a manageable amount.Denny also had a vacation home with a mortgage whose payments were beyond his means.The mortgage holder on the vacation home agreed to reduce the mortgage from $60,000 to $50,000.The value of the personal residence was $80,000 and the value of the vacation home was $45,000 at the dates of the debt reduction.

Hazel,a solvent individual but a recovering alcoholic,embezzled $6,000 from her employer.In the same year that she embezzled the funds,her employer discovered the theft.Her employer did not fire her and told her she did not have to repay the $6,000 if she would attend Alcoholics Anonymous.Hazel met the conditions and her employer canceled the debt.

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?

What are the tax problems associated with payments received by a wife from her deceased husband's employer? (Assume the wife renders no services to the employer.)

Fresh Bakery often has unsold donuts at the end of the day.The bakery allows employees to take the leftovers home.The employees are not required to recognize gross income because the bakery does not incur any additional cost.

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.

If an employer pays for the employee's long-term care insurance premiums,the employee can exclude from gross income the premiums but all of the benefits collected must be included in gross income.

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: 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)?

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: What is the amount that Marion must include in gross income for the current year?

The exclusion of interest on educational savings bonds:

In 2012,Theresa was in an automobile accident and suffered physical injuries.The accident was caused by Ramon's negligence.In 2013,Theresa collected from his insurance company.She received $15,000 for loss of income,$25,000 punitive damages,and $8,000 for medical expenses which she had deducted on her 2012 tax return (the amount in excess of 7.5% of adjusted gross income).As a result of the above,Theresa's 2013 gross income is increased by $33,000.

Carin,a widow,elected to receive the proceeds of a $150,000 life insurance policy on the life of her deceased husband in 10 installments of $17,500 each.Her husband had paid premiums of $60,000 on the policy.In the first year,Carin collected $17,500 from the insurance company.She must include in gross income:

In December 2012,Todd,a cash basis taxpayer,paid $1,200 of fire insurance premiums for the calendar year 2013 on a building he held for rental income.Todd deducted the $1,200 of insurance premiums on his 2012 tax return.He had $150,000 of taxable income that year.On June 30,2013,he sold the building and,as a result,received a $500 refund on his fire insurance premiums.As a result of the above:

Peggy is an executive for the Tan Furniture Manufacturing Company.Peggy purchased furniture from the company for $9,500,the price Tan ordinarily would charge a wholesaler for the same items.The retail price of the furniture was $12,500,and Tan's cost was $9,000.The company also paid for Peggy's parking space in a garage near the office.The parking fee was $600 for the year.All employees are allowed to buy furniture at a discounted price comparable to that charged to Peggy.However,the company does not pay other employees' parking fees.Peggy's gross income from the above is:

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.

Generally,a U.S.citizen is required to include in gross income the salary and wages earned while working in a foreign country even if the foreign country taxes the income.