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Exam 5: Gross Income: Exclusions

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Question 21

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George is employed by the Quality Appliance Company.All the full time employees are allowed to purchase appliances at the company's cost plus 10%.The employee also is given,at no cost,a 1-year service contract on all the goods purchased from the company.George purchased a refrigerator for $500.The company's normal selling price for the refrigerator is $800.George also received a service contract,at no charge,that had a value of $150.During the year,George was required to have his refrigerator serviced once.The cost of the call would have been $75 if he had not had the service contract.Is George required to recognize any income from the purchase of the refrigerator,the receipt of the service contract,and the service call?

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George will probably be required to reco...

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Question 22

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Roger is in the 35% marginal tax bracket.Roger's employer has created a flexible spending account for medical and dental expenses that are not covered by the company's health insurance plan.Roger had his salary reduced by $1,200 during the year for contributions to the flexible spending plan.However,Roger incurred only $1,100 in actual expenses for which he was reimbursed.Under the plan,he must forfeit the $100 unused amount.His after-tax cost of overfunding the plan is $65.

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B) False

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Question 23

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Heather's interest and gains on investments for 2011 were as follows: Heather's gross income from the above is:

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.

Mel was the beneficiary of a $45,000 group term life insurance policy on his wife.His wife's employer paid all of the premiums on the policy.Mel used the life insurance proceeds to purchase a United States Government bond,which paid him $2,500 interest during the current year.Mel's Federal gross income from the above is $2,500.

All employees of United Company are covered by a group hospitalization insurance plan,but the employees must pay the premiums ($8,000 for each employee) .None of the employees has sufficient medical expenses to deduct the premiums.Instead of giving raises next year,United is considering paying the employee's hospitalization insurance premiums.If the change is made,the employee's after-tax and insurance pay will:

Christie sued her former employer for a back injury she suffered on the job in 2010.As a result of the injury,she was partially disabled.In 2011,she received $240,000 for her loss of future income,$160,000 in punitive damages because of the employer's flagrant disregard for the employee's safety,and $15,000 for medical expenses she had deducted on her 2010 return.Christie's 2011 gross income from the above is:

Heather is a full-time employee of the Drake Company and participates in the company's flexible spending plan that is available to all employees.Which of the following is correct?

Nicole's employer pays her $150 per month towards the cost of parking near a railway station where Nicole catches the train to work.The employer also pays the cost of the rail pass,$75 per month.Nicole can exclude both of these payments from her gross income.

In December 2011,Todd,a cash basis taxpayer,paid $1,200 fire insurance for the calendar year 2012 on a building he held for rental income.Todd deducted the $1,200 insurance premiums on his 2011 tax return.He had $150,000 of taxable income that year.On June 30,2012,he sold the building and,as a result,received a $500 refund on his fire insurance premiums.As a result of the above:

Carmen had worked for Sparrow Corporation for thirty years when she died of a heart attack at age 60.She was practically penniless at the time of her death,owed a $12,000 hospital bill,and had a disabled spouse.The company was very concerned about its public image,and rather than run the risk of embarrassment from one of its long-term employees dying and leaving her spouse with insufficient means,the Board of Directors agreed to pay Carmen's hospital bill and to give her spouse $6,000 per year for the rest of his life.Discuss both sides of the question whether Carmen (or her estate)and her spouse realize any taxable income from the above.

Barney is a full-time graduate student at State University.He serves as a research assistant for which he is paid $700 per month for 9 months and his $5,000 tuition is waived.In addition,he receives a $1,500 research grant to pursue his own research and studies.Barney's gross income from the above is:

A scholarship recipient at State University may exclude from gross income the scholarship proceeds used to pay for:

Louise works in a foreign branch of her employer's business.She earned $5,000 per month throughout the relevant period.

Section 119 excludes the value of meals from the employee's gross income:

Julie was suffering from a viral infection that caused her to miss work for 90 days.During the first 30 days of her absence,she received her regular salary of $4,000 from her employer.For the next 60 days,she received $6,000 under an accident and health insurance policy purchased by her employer.The premiums on the health insurance policy were excluded from her gross income.During the last 30 days,Julie received $2,000 on an income replacement policy she had purchased.Of the $12,000 she received,Julie must include in gross income:

Adam repairs power lines for the Egret Utilities Company.He is generally working on a power line during the lunch hour.He must eat when and where he can and still get his work done.He usually purchases something at a convenience store and eats in his truck.Egret reimburses Adam for the cost of his meals.

The exclusion of interest on educational savings bonds:

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.

Employers can provide numerous benefits to their employees and the employees are permitted to exclude the value of these benefits from gross income.What are the effects of the exclusions on: