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Exam 5: Gross Income: Exclusions

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Question 21

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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) B) and C)
G) A) and B)

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Question 22

Multiple Choice

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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.

A) Ed must include $150 in his gross income.
B) Ed may exclude the cost of the copies as a no-additional cost fringe benefit.
C) Ed may exclude the cost of the copies only if the organization is a client of Mauve.
D) Ed may exclude the cost of the copies as a de minimis fringe benefit.
E) None of the above.

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

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Question 23

Multiple Choice

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Cash received by an employee from an employer:

George, an unmarried cash basis taxpayer, received the following amounts during 2014: $\begin{array}{llr} \text {Interest on savings accounts } &\$2,000\\ \text { Interest on a State tax refund} &600\\ \text { Interest on City of Salem school bonds} &350\\ \text { Interest portion of proceeds of a 5 \% bank certificate of deposit} &\\ \text { purchased on July 1, 2013, and matured on June 30, 2014 } &250\\ \text { Diridende on ISCG common stock } &300\\\end{array}$ What amount should George report as gross income from dividends and interest for 2014?

A cash basis taxpayer took an itemized deduction of $5,500 for state income tax paid in 2014. His total itemized deductions in 2014 were $18,000. In 2015, he received a $900 refund of his 2014 state income tax. The taxpayer must include the $900 refund in his 2015 Federal gross income in accordance with the tax benefit rule.

Gull Corporation was undergoing reorganization under the bankruptcy laws. The shareholders, who had made loans of $300,000 to the corporation, agreed to accept additional stock with a value of $200,000 instead of repayment on the debt. The Old Line Insurance Company, which had a $400,000 mortgage on the building, agreed to reduce the principal to $250,000. A trade creditor with a receivable of $150,000 from the company agreed to accept $70,000 in full payment for the debt incurred to purchase goods that were still on hand. Finally, the company transferred some equipment with an adjusted basis of $90,000 in satisfaction of a liability for $120,000. Compute the corporation's gross income and other adjustments necessary as a result of the above transactions.

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.

Albert had a terminal illness which required 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. Albert 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. Albert 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:

The earnings from a qualified state tuition program account are deferred from taxation until they are used for qualified higher education expenses. At that time, the amount taken from the fund must be included in the gross income of the person who contributed to the account.

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.

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 $8,000 from her employer. For the next 60 days, she received $12,000 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 $6,000 on an income replacement policy she had purchased. Of the $26,000 she received, Julie must include in gross income:

Ben was hospitalized for back problems. While he was away from the job, he collected his regular salary from an employer­sponsored income protection insurance policy. Ben's employer­sponsored 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.

Ron, age 19, is a full-time graduate student at City University. During 2014, he received the following payments: $\begin{array}{llr} \text { Cash award for being the outstanding resident adviser } &\$1,500\\ \text { Resident adviser housing } &2,500\\ \text { State scholarship for ten months (tuition and books) } &6,000\\ \text { State scholarship (meals allowance) } &2,400\\ \text {Loan from college financial aid office } &3,000\\ \text { Cash support from parents} &2,000\\&\$17,400\end{array}$ 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 2014?

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.

Mauve Company permits employees to occasionally use the copying machine for personal purposes. The copying machine is located in the office where the higher paid executives work, so they occasionally use the machine. However, the machine is not convenient for use by the lower paid warehouse employees and, thus, they never use the copier. The use of the copy machine may not be excluded from gross income because the benefit is discriminatory.

Gold Company was experiencing financial difficulties, but was not bankrupt or insolvent. The 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 8 years. As a result of the above, Gold must:

The exclusion of interest on educational savings bonds:

Iris collected $150,000 on her deceased husband's life insurance policy. The policy was purchased by the husband's employer under a group policy. Iris's husband had included $5,000 in gross income from the group term life insurance premiums during the years he worked for the employer. She elected to collect the policy in 10 equal annual payments of $18,000 each.

James, a cash basis taxpayer, received the following compensation and fringe benefits in the current year: Salary ^$66,000 Disability income protection premiums ^3,000 Long-term care insurance premiums ^4,000 His actual salary was $72,000. He received only $66,000 because his salary was garnished and the employer paid $6,000 on James's credit card debt he owed. 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 towards a nursing home or similar facility. What is James's gross income from the above?

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.