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Exam 5: Gross Income: Exclusions

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Question 51

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On January 1, 2008, 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, 2018, the company acquired the bonds on the open market for $11,500,000. Assuming that Cardinal Corporation is neither bankrupt nor insolvent, the acquisition and retirement of the bonds results in which of the following:

A) The company must recognize a $500,000 gain.
B) The company can make an election to recognize a $500,000 gain or reduce the company's basis in the plant by $500,000.
C) The company must recognize a $500,000 gain and increase the company's basis in the plant by $500,000.
D) The company can amortize the $500,000 gain, recognizing income over the remaining life of the bonds.
E) None of these.

F) D) and E)
G) All of the above

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Question 52

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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.)

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An amount paid in respect of compensatio...

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Question 53

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If a scholarship does not satisfy the requirements for a gift, the scholarship must be included in gross income.

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.

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.

For a person who is in the 35% marginal tax bracket, $1,000 of tax-exempt income is equivalent to $1,350 of income that is subject to tax.

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.

Sally and Ed each 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. They each were 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, their net worth has increased as measured using the cost basis in the assets. Each taxpayer also experienced a loss in the value of their 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, recent legislation permits in effect through 2017, the taxpayer whose property is a personal residence to exclude the income from debt discharge from gross income. The taxpayer who owns the rental home is not eligible for this debt discharge exclusion. b. Allowing the exclusion from income for the homeowner but not for the investor can only be justified on the basis of a value system that says we should modify the otherwise equitable rules to favor home ownership.

A U.S. citizen is always 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.

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)?

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?

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

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.

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?

Tommy, a senior at State College, receives free room and board as full compensation for working as a resident advisor at the university dormitory. The regular housing contract is $2,000 a year in total, $1,200 for lodging and $800 for meals in the dormitory. Tommy had the option of receiving the meals or $800 in cash. Tommy accepted the meals. What must Tommy include in gross income from working as a resident advisor?

Randy is the manager of a motel. As a condition of his employment, Randy is required to live in a room on the premises so that he would be there in case of emergencies. Randy considered this a fringe benefit, since he would otherwise be required to pay $800 per month rent. The room that Randy 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, Randy is required to include in gross income.

Meg's employer carries insurance on its employees that will pay an employee his or her regular salary while the employee is away from work due to illness. The premiums for Meg's coverage were $1,800. Meg was absent from work for two months as a result of a kidney infection. Meg's employer's insurance company paid Meg's regular salary of $8,000 while she was away from work. Meg also collected $2,000 on a wage continuation policy she had purchased. Meg must include $11,800 in her gross income.

The de minimis fringe benefit:

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.

Agnes receives a $5,000 scholarship which covers her tuition at Parochial High School. She may not exclude the $5,000 because the exclusion applies only to scholarships to attend college.