Concepts in federal taxation 2017 24th edition murphy test bank 1 by jeanne.frank869

Concepts in Federal Taxation 2017 24th Edition Murphy

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1. Gifts received are not subject to income taxation; however the donor is subject to the gift tax rules on the making of a gift.

a. True

b. False ANSWER: True

2. Any income earned subsequent to the death of the decedent from inherited property is excludable from the heir's taxable income.

a. True

b. False ANSWER: False

3. Connie received a $1,000 scholarship to attend State University from a local civic group based on her grades and community activities. The $1,000 is included in income.

a. True

b. False ANSWER: False

4. Matt, a U.S. citizen, can exclude all of his $110,000 salary he earned as a bullfighter in Spain where he lived all year, from his U.S. tax return.

a. True

b. False ANSWER: False

5. Myra's employer paid her health and accident insurance premium of $5,600. Since she had the option to take the cash and purchase her own insurance, the $5,600 must be included in income.

a. True

b. False

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ANSWER: False

6. Robert's employer provides all of its employees a $40,000 group term life insurance policy. The cost of this policy must be included in Robert's income.

a. True

b. False ANSWER: False

7. To keep the employees on the premises in case an emergency arises, the Riverview Hotel provides meals to its employees in a room adjacent to their restaurant. Since the meals are provided as a convenience to the employer and on their premises, the value of the meals is excluded in the income of the employees.

a. True

b. False ANSWER: True

8. No-additional-cost services and employee discounts must be made available to employees on a nondiscriminatory basis and must also be in the same line of business in which the employee works to be excluded from the employee's income.

a. True

b. False ANSWER: True

9. Health Savings Accounts are available only to self-employed individuals or small businesses.

a. True

b. False ANSWER: False

10. Melvin was in an accident which was the other driver's fault. Melvin received $15,000 for pain and suffering, emotional distress, and lost wages. Melvin may exclude the entire $15,000.

a. True

b. False ANSWER: True

11. The interest from Guam Water Authority bonds is excluded from income as "Municipal Bond Interest."

a. True

b. False ANSWER: True

12. Systech offered its stockholders a choice between stock and cash for their annual dividend. Since Carol has chosen stock, she does not have to include the dividend in income.

a. True

b. False ANSWER: False

13. When Rick found out that Ryan's liabilities exceeded his assets by $15,000, he forgave Ryan the $1,000 he owed Rick in hoping that Ryan might get back on his feet. Ryan is allowed to exclude the $1,000 from income.

a. True

b. False

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ANSWER: True

14. Patrick ran up a large credit card debt. Since the bank wanted to keep Patrick’s account they forgave $5,000 of his balance. Patrick was solvent before and after the forgiveness. He has to include the $5,000 in his income.

a. True

b. False

ANSWER: True

15. Clarance rented office space to an attorney who left town before the lease was completed. The attorney left several bookcases and other improvements to cover the remaining rent. Clarance must include in income the value of the leasehold improvements to the extent of the remaining rent that was due.

a. True

b. False

ANSWER: True

16. On April 1, Sally is given $20,000 worth of City of Boise bonds for her 18th birthday. On June 30, Sally receives the $800 annual interest payment on the bonds. How much income should Sally recognize due to these two events?

a. $- 0 -

b. $200

c. $800

d. $20,000

e. $20,800

ANSWER: a

17. On April 1, Sally is given $20,000 worth of General Motors bonds for her 18th birthday. On June 30, Sally receives the $800 annual interest payment on the bonds. How much income should Sally recognize due to these two events?

a. $- 0 -

b. $200

c. $800

d. $20,000

e. $20,800

ANSWER: b

18. On her 18th birthday, Anna's grandfather gave her stock worth $100,000. During the current year, Anna receives $5,000 of dividends on the stock, which she uses to pay college expenses. The cost of Anna's tuition, fees, and books is $4,000. Anna's income from this event is:

a. $- 0 -

b. $1,000

c. $4,000

d. $5,000

e. $75,000

ANSWER: d

19. On her 18th birthday, Patti's grandfather gave her $8,000 of dividends on stock he owned, which she uses to pay college expenses. The cost of Patti's tuition, fees, and books is $6,000. Patti's gross income from this event is:

a. $- 0 -

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b. $2,000

c. $6,000

d. $8,000

ANSWER: a

20. Cornell is a building contractor who builds 25-30 homes a year. Charlotte is a real estate broker who sells all of Cornell's homes. Charlotte has recently referred a couple to Cornell who wanted him to build a $400,000 home for them. Knowing that Charlotte and her husband enjoy skiing, he bought her a nice pair of skis and boots.

I. The "gift" appears to be a form of compensation.

II. The skis are considered a gift for income tax purposes.

III. Substance-over-form applies to this situation.

IV. Charlotte recognizes gross income from the receipt of the skis.

a. Only statement I is correct.

b. Only statement II is correct.

c. Statements I, III, and IV are correct.

d. Statements II and IV are correct.

e. Statements II, III, and IV are correct.

ANSWER: c

21. For the past seven years Karen, an attorney, has directed litigation clients to Rebecca, a CPA, for accounting investigatory work. Because of the amount of litigation work Karen directed to Rebecca, Rebecca's business is now comprised solely of litigation support work. Karen began taking tennis lessons this year. Rebecca gives Karen a new tennis racquet so they could share afternoons by playing tennis together.

I. The "gift" appears to be a form of compensation.

II. Substance-over-form applies to this situation.

III. The tennis racquet meets the income tax definition of a gift.

IV. Karen recognizes no gross income from the receipt of the tennis racquet.

a. Only statement I is correct.

b. Only statement IV is correct.

c. Statements I and II are correct.

d. Statements III and IV are correct.

e. Statements I, II, and IV are correct.

ANSWER: c

22. Ally served as chairperson of the local school board. Upon completion of her term in office, the organization awards her a silver-serving tray in recognition of her outstanding service to the organization. The value of the tray is $200. What are the tax effects of the award?

I. The value of the tray is included in gross income because of services rendered.

II. The tray is a gift because it is from a detached and disinterested generosity.

a. Only statement I is correct.

b. Only statement II is correct.

c. Both statements are correct.

d. Neither statement is correct.

ANSWER: b

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23. Ally served as chairperson of the local school board. Upon completion of her term in office, the employees in the school district offices take up a collection and purchase her a silver sterling tray in recognition of her outstanding service to the organization. The value of the tray is $200. What are the tax effects of the award?

I. The value of the tray is included in gross income because of services rendered. II. The tray is a gift because it is from a detached and disinterested generosity.

a. Only statement I is correct.

b. Only statement II is correct.

c. Both are correct.

d. Neither is correct.

ANSWER: b

24. Drew graduated from business school in December 2015. To honor Drew, on January 3, 2016, his uncle gives him two tickets to the Super Bowl. The uncle paid $1,200 for each ticket. Because he had to report to work at a brokerage firm in Indianapolis on January 15, 2016, he could not use the tickets. Therefore, he sells them for $2,500 each. How much income must Drew recognize in 2016 because of these events?

a. $- 0 -

b. $2,000

c. $2,400

d. $2,600

e. $5,000

ANSWER: d

25. Ward and June are in the 28% tax bracket. Included in their assets is a Dell Corporation bond with a face value of $10,000. The bond pays $1,000 a year in interest. Ward and June make a gift to their son, Wally (age 19) of the $1,000 in interest income. Wally is in the 10% tax bracket. What is Ward and June's tax liability related to the bond and the bond interest for the current year?

a. $-0-

b. $100

c. $280

d. $1,000

e. $2,800

ANSWER: c

26. Ward and June are in the 28% tax bracket. Included in their assets is a Dell Corporation bond with a face value of $10,000. The bond pays $1,000 per year in interest. Ward and June gift the bond to their son, Wally (age 19), on January 1, 2016. Wally is in the 10% tax bracket. Wally's taxable income from the receipt of the bond and the bond interest in 2016 is

a. $-0-

b. $1,000

c. $1,500

d. $10,000

e. $11,000

ANSWER: b

27. Ward and June are in the 28% tax bracket. Included in their assets is a Dell Computer Corporation bond with a face value of $10,000. The bond pays $1,000 a year in interest. Ward and June gift the bond to their son, Wally (age 19), on

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January 1, 2016. Wally is in the 15% tax bracket. The 2016 net tax savings for the family unit of Ward, June and Wally related to the transfer of the bond is

a. $-0-

b. $130

c. $150

d. $280

ANSWER: b

28. Terri is driving down a road when she sees that Sonny is having trouble changing a tire. Terri stops and helps Sonny. As Sonny is leaving, he gives Terri $50 and thanks her. What are the effects of the $50 receipt?

I. The $50 is a gift because it is from detached and disinterested generosity.

II. The $50 is compensation received for services rendered.

a. Only statement I is correct.

b. Only statement II is correct.

c. Both statements are correct.

d. Neither statement is correct.

ANSWER: b

29. Gary receives $40,000 worth of Quantro, Inc., common stock from the estate of his late grandmother. He receives a $100 cash dividend six months later. Before the end of the year, Gary sells the stock for $42,000. Due to these events, how much must Gary include in his gross income for the year?

a. $-0-

b. $100

c. $2,000

d. $2,100

e. $42,100

ANSWER: d

30. During the current year, Eleanor receives land valued at $30,000 from the estate of her grandfather. Her grandfather's basis in the land was $8,000. Eleanor sells the land for $34,000 late in the year. Eleanor's gross income is:

a. $- 0 -

b. $4,000

c. $8,000

d. $16,000

e. $26,000

ANSWER: b

31. In May, Josefina receives stock worth $10,000 from the estate of her Uncle. The following November she receives a $500 cash dividend on the stock. Josefina must

I. include the $500 dividend in her gross income.

II. include the $10,000 value of the stock received in her gross income.

a. Only statement I is correct.

b. Only statement II is correct.

c. Both statements are correct.

d. Neither statement is correct.

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ANSWER: a

32. Fran dies on January 14, 2016. Her spouse, Carl, is the beneficiary of a $100,000 life insurance policy. Carl elects to receive the proceeds in 10 equal installments of $11,000. In 2016, Carl receives $11,000. The amount included in Carl’s 2016 gross income is

a. $- 0 -

b. $1,000

c. $10,000

d. $11,000

e. $111,000

ANSWER: b

33. Barbara was the legal owner of a $100,000 life insurance policy on herself. Glenna is the stated beneficiary. Shortly before her death, Barbara transfers ownership of the policy to Glenna for $15,000. Glenna makes one premium payment in the amount of $1,000 before Barbara dies. Glenna subsequently receives the $100,000 life insurance proceeds. How much of the $100,000 is taxable to Glenna?

a. $- 0 -

b. $15,000

c. $84,000

d. $85,000

e. $100,000

ANSWER: c

34. Jerry's wife dies in September. His wife had paid $20,000 of premiums on a $150,000 face value whole life insurance policy. Jerry elects to receive the life insurance policy proceeds in 20 annual installments of $10,000. Jerry receives his first $10,000 payment this year. How much of the payment should Jerry report as gross income?

a. $- 0 -

b. $2,500

c. $5,000

d. $7,500

e. $10,000

ANSWER: b

35. Bernice is the beneficiary of a $50,000 insurance policy on her father's life. If she receives the proceeds in installments from the insurance company that carries the policy, she will earn only five-percent interest per year, receiving $10,500 per year for five years. Bernice decides to take the $50,000 in a lump-sum payment and invest the funds herself. Of the $50,000 received:

a. All $50,000 is tax-free.

b. All $50,000 is taxable income.

c. $500 is interest income for each year.

d. The first $25,000 is taxable.

ANSWER: a

36. Bart's spouse, Carla, dies during the current year. Carla's life insurance policy names Bart the sole beneficiary of the $2 million proceeds. Bart invests the $2 million in a bank certificate of deposit (CD). For the current year, Bart earns $98,000 interest from the CD. What are the tax effects of these events for Bart?

I. The $98,000 is included in gross income.

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II. The $2 million is included in gross income.

a. Only statement I is correct.

b. Only statement II is correct.

c. Both statements are correct.

d. Neither statement is correct.

ANSWER: a

37. Bart's spouse, Carla, dies during the current year. Carla's life insurance policy names Bart the sole beneficiary of the $2 million proceeds. Bart invests the $2 million in a bank certificate of deposit (CD). For the current year, Bart earns $98,000 interest from the CD. What are the tax effects of these events for Bart?

I. The $2 million is excluded from gross income. II. Bart has no taxable income from these transactions.

a. Only statement I is correct.

b. Only statement II is correct.

c. Both statements are correct.

d. Neither statement is correct.

ANSWER: a

38. A college student who is a candidate for a degree may exclude the value of a scholarship received for I. Meals. II. Books. III. Computer. IV. Tuition. V. Housing.

a. Statements I and V are correct.

b. Statements II, III, and IV are correct.

c. Only statement IV is correct.

d. Statements II and IV is correct.

e. Statements I, II, III, IV, and V are correct.

ANSWER: b

39. Maria is on a "full ride" tennis scholarship at Western University. Her $12,500 scholarship covers tuition and books ($7,000) and room and board ($5,500). Maria's gross income is

a. $- 0 -

b. $2,000

c. $5,500

d. $7,000

e. $12,500

ANSWER: c

40. Mei-Ling is a candidate for a master's degree in taxation from Western State University. During the current year she receives the following cash payments: State allocated tuition waiver scholarship

$2,200 A Microsoft scholarship (for fees and books)

800 Check from her grandmother 1,700 Loan proceeds from the college financial aid office 2,500

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Prize won from a "rub and scratch" lottery ticket 300 Loan from her roommate 100

Interest received from National Bank CD 400 How much must be included in Mei-Ling's gross income?

a. $- 0-

b. $700

c. $1,500

d. $3,700

e. $8,000

ANSWER: b

41. Denise receives an academic scholarship to Pollytech College. Under the scholarship agreement, she receives tuition ($1,500), books ($400), and room and board ($5,000). How much of the scholarship is included in Denise's gross income?

a. $- 0 -

b. $400

c. $1,500

d. $5,000

e. $6,900

ANSWER: d

42. Donna is a student at Eastern State University. She receives a $4,000 academic scholarship from the Silverman Foundation. She also has a $2,000 assistantship to grade and tutor for the Department of Economics. Tuition, books, fees, and supplies are $5,000. How much gross income must Donna recognize from the scholarship and assistantship?

a. $- 0 -

b. $1,000

c. $2,000

d. $5,000

e. $6,000

ANSWER: c

43. Victor receives a $4,000 per year scholarship from Southern College. The college specifies that $2,500 is for tuition, books, supplies, and equipment for classes. The other $1,500 is for room and board. As part of the conditions of the scholarship, Victor must also work ten hours per week as a grader, for which he is paid $1,700 for the year. Of the total amount received, Victor will include in income:

a. $1,500

b. $1,700

c. $2,500

d. $3,200

e. $5,700

ANSWER: d

44. Sylvia is a United States citizen who has established legal residency in Japan. She has been teaching school there for several years. Her annual salary is $60,000. Anne's tax situation is

a. She is not subject to U.S. tax law.

b. She can elect to exclude her foreign income from U.S. taxation and take a tax credit for foreign taxes paid.

c. She can elect to exclude her foreign income from U.S. taxation, or take a tax credit for foreign taxes paid.

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d. She is not eligible to take a tax credit for foreign taxes paid or exclude her foreign income from her U.S. gross income.

e. Only one jurisdiction, either the U.S. or Japan, not both, can tax Sylvia on her income while in Japan.

ANSWER: c

45. David, an employee of Lima Corporation, is a U.S. citizen and the regional sales manager for South America. His office is in Miami and he spends nine months each year on business in South America. Which of the following statements about the treatment of his income from Lima Corporation is correct?

a. He must include his Lima income in his gross income and is not allowed a tax credit for any South American taxes paid.

b. He has the option of either excluding $101,300 of his Lima income or taking a tax credit for the South American taxes paid.

c. Because he is in South America only nine months of the year, he is only allowed to exclude $75,975 of Lima income.

d Because he is in South America only nine months of the year, he is not allowed to exclude any of his Lima income, but he can take a tax credit for any South American taxes paid.

ANSWER: d

46. Nancy teaches school in a Chinese university. She is a U.S. citizen and has been teaching in China for 5 years. In the current year she will earn $100,000. What are some of Nancy's options for reporting U.S. gross income?

I. She may include the foreign earned income in her gross income, calculate her U.S. income tax, and take a tax credit for foreign taxes paid.

II. She may exclude up to $100,300 in foreign earned income for the current year.

III. She may exclude all of her income because it is earned outside of the U.S.

a. Only I is correct.

b. Only II is correct.

c. Only III is correct.

d. I and II are correct.

e. II and III are correct.

ANSWER: d

47. Sanford's employer has a qualified pension plan that allows employees to contribute up to 10% of their gross salaries to the plan. The employer matches the contribution at the rate of 50% of the employee's contribution. Sanford's current annual salary is $80,000. This is his only source of income. If he contributes the maximum amount to the pension plan, what is Sanford's gross income for the current year?

a. $72,000

b. $76,000

c. $80,000

d. $84,000

e. $88,000

ANSWER: a

48. Hector's employer has a qualified pension plan to which it contributes 6% of his gross salary. Hector's current annual salary is $50,000. The pension plan also earns $2,500 during the current year on contributions made to the plan on behalf of Hector. What is Hector's gross income from these transactions for the current year?

a. $50,000

b. $52,500

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c. $53,000

d. $55,500

ANSWER: a

49. Angie's employer has a qualified pension plan. The employer makes all payments into the plan; employees do not contribute to the plan. During the current year, the employer pays $5,000 into the plan on Angie's behalf. Which of the following statements is true?

I. Angie is not taxed on the $5,000 in the current year.

II. The $5,000 payment is excluded from her income in the current year, but she will pay tax on the $5,000 as she receives it.

a. Only statement I is correct.

b. Only statement II is correct.

c. Both statements are correct.

d. Neither statement is correct.

ANSWER: c

50. Fanny's employer has a qualified pension plan. The employer makes all payments into the plan; employees do not contribute to the plan. During the current year, the employer pays $4,000 into the plan on Fanny's behalf. The plan also earns $3,000 during the year on the balance in Fanny’s retirement account. Which of the following statements is true?

I. Fanny is not taxed on the $4,000 in the current year.

II. Fanny is not taxed on the $3,000 in the current year.

a. Only statement I is correct.

b. Only statement II is correct.

c. Both statements are correct.

d. Neither statement is correct.

ANSWER: c

51. Sundown, Inc., purchases a term life insurance plan only for its corporate officers. Harold receives $250,000 of insurance at a cost to the company of $3,500. The IRS Table of Premium value indicates that premiums are $1.08 annually per $1,000 of protection. How much gross income does Harold have from the purchase of the life insurance by Sundown, Inc.?

a. $216

b. $270

c. $2,800

d. $3,500

e. $5,000

ANSWER: d

52. Moonglow, Inc., purchases a group-term life insurance plan for all its employees. Harold receives $250,000 of insurance for the current year at a cost to the company of $2,500. The IRS Table of Premium values indicates that premiums are $1.08 annually per $1,000 of protection. How much gross income does Harold have from the purchase of the life insurance by Moonglow, Inc.?

a. $216

b. $270

c. $2,000

d. $2,270

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e. $2,500

ANSWER: a

53. Ramona's employer pays 100% of the cost of all employees' group-term life insurance. The life insurance plan is not discriminatory. Ramona’s annual salary is $100,000. What is the maximum amount of coverage that can be provided taxfree?

a. $- 0 -

b. $5,000

c. $10,000

d. $50,000

e. $100,000

ANSWER: d

54. Sigma Company provides its employees with $25,000 of group-term life insurance. How much is included in gross income because of the life insurance?

a. $- 0 -

b. $25,000

c. $50,000

d. The cost of the premium to purchase $25,000 of group term life insurance.

e. The value of the premium to acquire $25,000 of group term life insurance from IRS tables.

ANSWER: a

55. Rex is a programmer with Monon Electronics Corporation. His annual salary is $50,000. As part of his compensation package, he receives a term-life insurance policy equal to his annual salary. All members of the programming staff receive this benefit. Members of the sales staff have a cafeteria plan from which to select various benefits including life and health insurance coverage.

I. Rex has an excludable amount of income because of the nature of his employment benefit.

II. Rex must include $50,000 in his gross income because that is the value of the insurance benefit.

III. Rex must include the cost of the insurance policy in his gross income.

IV. If the benefit is only available to "key" employees and Rex is a "key" employee, he may exclude the cost of the premiums paid from his gross income.

a. Only statement I is correct.

b. Only statement II is correct.

c. Only statement III is correct.

d. Statements I and IV are correct.

e. Statements II and IV are correct.

ANSWER: a

56. Kristine is the controller of Evans Company. Evans provides all management level employees with medical insurance through a self-insured plan. During the current year, Kristine has $2,650 in medical expenses reimbursed by the plan. The income tax effect of the reimbursements Kristine receives is:

I. Kristine excludes the value of the reimbursement.

II. Kristine includes $2,650 in her gross income.

a. Only statement I is correct.

b. Only statement II is correct.

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c. Both statements are correct.

d. Neither statement is correct.

ANSWER: b

57. Julia spends her summers away from college as a forest ranger in a remote area near Mt. McKinley, Alaska. She lives in a remote dormitory where she also receives free meals. The dormitory's location permits rangers to be on call in case of an emergency.

I. The value of the lodging is excluded from Julia's gross income.

II. The value of the meals is excluded from Julia's gross income.

a. Only statement I is correct.

b. Only statement II is correct.

c. Both statements are correct.

d. Neither statement is correct.

ANSWER: c

58. Ramon is a waiter at Trucker's Delight Restaurant. He eats two meals each day at the restaurant at no charge. One is eaten just before he begins work; the other is eaten during working hours. The value of meals consumed by Ramon during the current year is $2,500, evenly distributed between the two meals. What are the tax effects of this situation?

I. Ramon will have to recognize $1,250 of income.

II. None are taxable because the meals are for the convenience of the employer.

III. If Ramon has the option of receiving his choice of either a cash payment or the two meals, the $2,500 is taxable.

a. Only statement I is correct.

b. Only statement II is correct.

c. Only statement III is correct.

d. Statements I and II are correct.

e. Statements I and III are correct.

ANSWER: e

59. Steve is an employee of Giant Valley Auto City. The company allows all employees to receive a 35% discount on service to their personal vehicles. Steve paid $975 for work done on his truck that normally costs $1,500. How much gross income must Steve recognize because of the discount?

a. $- 0 -

b. $225

c. $300

d. $525

e. $975

ANSWER: b

60. Harry is a CPA employed as a manager by a regional accounting firm. The firm pays Harry's dues to professional organizations and $175 monthly for her personal parking place at the office. Only managers and partners receive these benefits.

I. Both payments are working condition fringe benefits.

II. These benefits are excludable for Harry even though they discriminate in favor of higherpaid employees.

a. Only statement I is correct.

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b. Only statement II is correct.

c. Both statements are correct.

d. Neither statement is correct.

ANSWER: c

61. The tax law allows the exclusion of general types of employment-related fringe benefits provided they are made available to employees on a nondiscriminatory basis. Which of the following must be provided on a nondiscriminatory basis to be excluded from income?

I. De minimis fringe benefits.

II. Employee discounts.

III. No additional cost services.

IV. Working-condition fringes.

a. Only statement I is correct.

b. Only statement II is correct.

c. Statements II and III are correct.

d. Statements III and IV are correct.

e. Statements I, II, III, and IV are correct.

ANSWER: c

62. Dawn's employer, Rourke Enterprises, pays $260 monthly for her covered parking space while at work. Rourke pays $160 monthly for uncovered parking space for Art, and does not pay anything toward Dan's parking.

a. Dawn is allowed to exclude the cost of the parking from her income because if Rourke did not pay for the space, Dawn could deduct her cost.

b. Dawn is allowed to exclude all of the cost of the parking from her income even though not all employees receive free parking.

c. Dawn must include the $260 cost of the parking in her gross income.

d. Dawn must include the $100 difference between the cost for Art's space and her space.

e. Dawn must include $5 monthly in her gross income.

ANSWER: e

63. Chad is a senior manager with Gusto, Inc. Chad's secretary, Loretta, takes care of several of Chad's personal tasks when time permits. Loretta arranges for the weekly pickup and delivery of Chad's laundry and dry cleaning. Loretta also books reservations to the theater and arranges for tickets to basketball games for Chad. Chad hopes that Loretta's services are classified as

a. No additional cost services.

b. An employee discount.

c. A de minimis fringe benefit.

d. Dependent care services.

e. Bonus pay.

ANSWER: c

64. During the Chili Company Christmas party, Alex is given a goose after her name was drawn from Santa's hat. The goose only cost Chili Company $40 because it was purchased from a wholesale grocer client. The price of a goose at a local supermarket is $55. Alex's gross income is

a. $- 0 -

b. $15

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c. $40

d. $55

e. $95

ANSWER: a

65. Which of the following non-cash employee benefits would be excluded from the taxable income of the employee? Unless indicated otherwise all benefits are provided on a non-discriminatory basis.

a. Executives of Handyware receive a free automobile every 2 years.

b. The top salesman for Genesis in each sales district receives a free two-week vacation in Hawaii.

c. Carter, a flight attendant for Western Airlines, flew roundtrip from Houston to Dallas 45 times during the tax year to visit her boyfriend at no cost. Airline employees fly free on a space available basis.

d. Mike receives a free apartment from his employer who owns hundreds of apartment complexes all over the country. Mike is the internal auditor for the apartment company. He has the option to live in a free apartment or receive additional compensation.

e. All of the above non-cash benefits can be provided to employees on a tax-free basis.

ANSWER: c

66. Lorraine is an employee of National Corporation. National pays the medical insurance premiums of all of its employees. Because of large deductible levels and limitations on the payment of certain medical expenses, the basic health insurance policy does not cover all medical costs. During the current year, National adopted a Flexible Benefits Plan into which employees can contribute to pay for any medical expenses not covered by insurance. Lorraine pays $2,500 into the plan during the current year. Premiums paid by National for Lorraine's medical insurance were $2,400.

I. There is no tax effect from the $2,500 payment into the Flexible Benefits Plan.

II. Lorraine's gross income from her National salary is reduced by the $2,500 payment into the Flexible Benefits Plan.

III. If Lorraine does not use the entire $2,500 paid into the Flexible Benefits Plan during the current year, she may obtain a refund of any amounts not spent from National.

IV. Amounts paid for medical costs by the medical insurance policy are excluded from Lorraine's gross income.

a. Statements II and IV are correct.

b. Statements I and IV are correct.

c. Statements III and IV are correct.

d. Only statement II is correct.

e. Only statement IV is correct.

ANSWER: a

67. Hannah is an employee of Bolero Corporation. Bolero pays the medical insurance premiums of all of its employees. Because of large deductible levels and limitations on the payment of certain medical expenses, the basic health insurance policy does not cover all medical costs. During the current year, Bolero adopted a Flexible Benefits Plan that employees can contribute into to pay for any medical expenses not covered by insurance. Hannah pays $2,500 into the plan during the current year. Premiums paid by Bolero for Hannah's medical insurance were $5,000.

I. Hannah's gross income from her Bolero salary is reduced by the $2,500 payment into the Flexible Benefits Plan.

II. Amounts paid for medical costs by the medical insurance policy are excluded from Hannah's gross income.

a. Only statement I is correct.

b. Only statement II is correct.

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c. Both statements are correct.

d. Neither statement is correct.

ANSWER: c

68. Cindy is an employee of Silvertone Corporation. Silvertone pays the medical insurance premiums of all of its employees. Because of large deductible levels and limitations on the payment of certain medical expenses, the basic health insurance policy does not cover all medical costs. During the current year, Silvertone adopted a Cafeteria Plan funded entirely by Silvertone. The plan provides for $3,000 per employee, and Cindy elects $2,500 for her medical costs not covered by the basic policy. She takes the remaining $500 in cash. Actual payments for Cindy’s medical care of $1,500 are made from the Cafeteria Plan.

I. Cindy's gross income is increased by the $1,000 of the $2,500 allocation not used for additional medical expenses.

II. Cindy’s gross income is increased by the $1,500 paid out of the Cafeteria Plan.

a. Only statement I is correct.

b. Only statement II is correct.

c. Both statements are correct.

d. Neither statement is correct.

ANSWER: d

69. Linc's annual salary is $80,000. His employer, Riddle Corporation, has a qualified pension plan that allows employees to contribute up to 10% of their salaries, which is matched by the employer. Linc and Riddle Corporation each pay $7,500 into the plan. Riddle provides all employees with health and accident insurance by paying 75% of the cost of the policy. Linc's policy cost $3,200. Riddle also offers a flexible benefits plan that employees can use to pay their share of the cost of the medical insurance, other medical costs, and child-care costs. Linc elects to have $2,500 paid into the plan. He uses $800 to pay his share of the medical insurance costs and was reimbursed for $1,700 of medical and childcare costs from the plan. As an officer, Riddle Corporation pays Linc's $3,240 parking cost. Riddle Corporation has a workout room in its office building that is used exclusively by employees and their families. Dues to a comparable facility would be $100 per month. What is Linc's 2016 taxable income from Riddle Corporation?

a. $70,000

b. $70,180

c. $71,500

d. $71,620

e. $73,240

ANSWER: b

70. Gordon's family health insurance costs $6,000 annually. Gordon and his wife are in the 28% marginal tax rate bracket. His employer offers a cafeteria plan that would allow him to cover the insurance premium. How much would the insurance coverage effectively cost if he took advantage of his employer’s cafeteria plan?

a. $1,680

b. $3,000

c. $4,320

d. $5,000

ANSWER: c

71. Bonita's employer has a nondiscriminatory childcare reimbursement plan (a type of flexible benefits plan). Bonita expects that her childcare expenses will total $2,000 for the current year. If she does not participate in the reimbursement plan, she will be allowed a $400 tax credit for childcare. Bonita's marginal tax rate is 25%. What are the tax effects of Bonita's alternatives?

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I. Bonita will save $2,000 by using the reimbursement plan. II. The reimbursement plan is $100 more favorable than the tax credit for Bonita.

a. Only statement I is correct.

b. Only statement II is correct.

c. Both statements are correct.

d. Neither statement is correct.

ANSWER: b

72. Marge, age 35, is an employee of Troy, Inc. Her annual salary is $50,000. After considering the following list of benefits provided Marge, determine her gross income for the year.

• Marge has $2,000 of her salary withheld and paid into the company's qualified pension plan. The company matches the contribution at the rate of $.50 for each $1.00 paid in.

• Group-term life insurance policy at twice her annual salary paid by the company. Premium cost is $1.08 per $1,000 of coverage.

• Health and accident insurance policy costing $1,500 paid by the company.

• Marge elects to have $1,800 of her salary paid into a flexible benefits plan to cover childcare costs. She incurs $2,100 of childcare costs during the year.

a. $44,700

b. $44,754

c. $46,254

d. $48,054

e. $50,000

ANSWER: c

73. Francisco's employer establishes Health Savings Accounts (HSA’s) for its employees. The plan provides for his employer to pay $1,000 into Francisco's HSA, and Francisco to also contribute $1,000 to his HSA. During the year, the plan pays for $1,500 of Francisco’s medical expenses not covered by the employer’s regular medical insurance plan.

I. Francisco must include the $1,000 contribution by his employer in his adjusted gross income.

II. The $500 still in the account at the end of the year carries forward to the following year.

a. Only statement I is correct.

b. Only statement II is correct.

c. Both statements are correct.

d. Neither statement is correct.

ANSWER: b

74. Arthur's employer establishes Health Savings Accounts (HSAs) for its employees. Arthur pays $2,100 into his HSA. During the year, the HSA earns $90 interest and Arthur receives $1,850 from the HSA for reimbursement of medical expenses.

I. Arthur must include $90 in gross income from the HSA arrangement.

II. Arthur loses the $250 in contributions that are not spent on medical expenses in the current year.

a. Only statement I is correct.

b. Only statement II is correct.

c. Both statements are correct.

d. Neither statement is correct.

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ANSWER: d

75. Conzo is injured in an accident while working at his job. He received $1,500 in worker's compensation benefits for 5 weeks of lost work. How much should Conzo report as gross income from the receipt of these benefits?

a. $- 0 -

b. $300

c. $750

d. $900

e. $1,500

ANSWER: a

76. While staying at Vail Heights Resort, Jared falls over a pool cleaning vacuum hose left near the edge of the swimming pool, and suffers severe internal injuries. As part of the settlement, Jared receives the following amounts:

Pain and Suffering $105,000

Loss of Wages 16,200

How much of the settlement must be included in Jared's Gross Income?

a. $- 0 -

b. $16,200

c. $60,600

d. $105,000

e. $121,200

ANSWER: a

77. Punitive damage awards received because of a personal injury

a. Are the same as loss-of-income damages.

b. Are included in gross income regardless of the cause.

c. Will be excluded from gross income if the award resulted from a physical personal injury.

d. Will be excluded from gross income because punitive awards are meant to punish the offender for gross negligence.

e. Are never taxable.

ANSWER: b

78. Maureen is injured on the job and has to retire. Before her retirement, Maureen earned $20,000 in wages. After her retirement, her employer pays her $5,000 for vacation time that accrued before she was injured. In addition, she receives $10,000 to compensate her for sick pay from an accident and health insurance plan that was paid for by her employer. How much of the above payments should Maureen include in her gross income?

a. $10,000

b. $20,000

c. $25,000

d. $30,000

e. $35,000

ANSWER: e

79. The income tax treatment of damages received from personal physical injuries is an application of the:

a. Ability-to-Pay Concept.

b. Administrative Convenience Concept.

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c. All-inclusive Income Concept.

d. Capital Recovery Concept.

e. Wherewithal-to-Pay Concept.

ANSWER: d

80. Returns of human capital

I. are excluded from gross income.

II. include unemployment compensation benefits.

III. include workers' compensation payments received for personal injury.

IV. are treated the same for tax purposes as all other forms of capital recovery.

a. Statements I and III are correct.

b. Statements II, III, and IV are correct.

c. Statements I, III, and IV are correct.

d. Only statement II is correct.

e. Statements I, II, III, and IV are correct.

ANSWER: c

81. Mavis is injured in an automobile accident and sues the driver of the truck that struck her car. The court finds the driver liable and awards Mavis $10,000 to pay her medical expenses, $20,000 for her pain and suffering, and $5,000 for loss of income while she was unable to work. The court also finds the truck driver negligent and awards Mavis $50,000 in punitive damages. Which of the following statements concerning the receipt of these payments is/are correct?

I. Mavis is not taxed on any of the payments because they relate to a personal physical injury.

II. Mavis must include the loss of income payment in her gross income.

III. The punitive damage payment is taxable.

a. Only statement I is correct.

b. Only statement III is correct.

c. Statements II and III are correct.

d. Only statement II is correct.

ANSWER: b

82. Samuel slips on an icy spot in front of an apartment and is hospitalized for three weeks. The owner of the apartment pays Samuel's $14,000 medical expenses and gives him $4,000 for his pain and suffering. Samuel receives his regular $1,800 salary from his employer while he couldn't work and also receives $7,000 in disability pay from a plan that he had purchased. Samuel's gross income from these payments is:

a. $-0-

b. $1,800

c. $2,500

d. $5,800

e. $8,800

ANSWER: b

83. Dean is a singer. After a singing engagement in a night club in Dallas, an article in Dallas City magazine identified him as a local celebrity who had a drug dependency. Dean sues the magazine for slander. The court determines that the article is false and awards Dean $20,000 for humiliation, $50,000 for loss of singing engagements, and $175,000 in punitive damages. Which of the following statements about the receipt of these payments is/are correct?

I. The $50,000 for loss of singing engagements is taxable.

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II. All of the payments are nontaxable because they are made on account of injury to Dean’s reputation

a. Only statement I is correct.

b. Only statement II is correct.

c. Both statements are correct.

d. Neither statement is correct.

ANSWER: a

84. During the current year, Vera receives the following interest payments: Third National Bank Savings Account $1,000 Toaster oven received for opening the savings account 100 Treasury Bond interest 2,000 City of Nassau, Bahamas, bonds 500 Interest from Federal income tax refund 75 How much of the $3,675 Vera receives is taxable?

a. $2,100

b. $2,175

c. $3,100

d. $3,175

e. $3,675

ANSWER: e

85. Morris is considering investing in some bonds. Morris is in the 33% tax bracket. His broker tells him about City of Fargo, North Dakota, bonds with a yield of 6%.

a. A U.S. Treasury bond paying 6% interest will have a greater after-tax yield than the City of Fargo bonds.

b. A U.S. Treasury bond paying 6% interest will have the same after-tax yield as the City of Fargo bonds.

c. The after-tax yield on City of Fargo bonds is 4% [(1.0 - .33) × 6%].

d. A taxable bond will have to pay 9% (6% ÷ .67) interest to provide an after-tax yield equal to the yield on the City of Fargo bonds.

ANSWER: d

86. Travis inherits $50,000 from his grandfather. He receives the $50,000 on January 2 and immediately invests $25,000 in General Motors bonds that pay 8% annual interest and $25,000 in West Lafayette City municipal bonds with a 6% annual interest rate. How much gross income does Travis report from these transactions?

a. $1,500

b. $2,000

c. $50,000

d. $52,000

e. $53,500

ANSWER: b

87. Ferris inherited State of Florida general-purpose bonds worth $2,400 from his grandfather in 2014. He received $120 interest on the bonds in 2014, 2015, and 2016. In 2016, he sells the bonds for a gain of $300. Ferris excludes the value of the bonds received and the bond interest, but must include a $300 capital gain in his 2016 gross income. Which of the following Concepts, Constructs, and/or Doctrines form the basis for this treatment?

I. Capital Recovery Concept

II. Legislative Grace Concept

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III. Constructive Receipt Doctrine IV. Realization Concept

a. Statements I and II are correct.

b. Statements I and IV are correct.

c. Statements II, III, and IV are correct.

d. Statements I, II, and III are correct.

e. Statements I, II, and IV are correct.

ANSWER: e

88. During the current year, Eve receives the following interest payments: City

Toronto, Ontario Bonds

How much gross income does Eve have from the interest payments?

a. $1,050

b. $1,480

c. $1,600

d. $1,800

e. $1,900

ANSWER: c

89. Items that are excluded from gross income include all of the following with the exception of:

a. gifts.

b. inheritances.

c. life insurance proceeds.

d. municipal bond interest.

e. U.S. Treasury Bills interest.

ANSWER: e

90. Norma is in the 33% marginal tax bracket. Because of her high tax rate, Norma would like to reinvest a $10,000, 6%, certificate of deposit in a tax-exempt bond. What is the minimum rate of interest Norma would have to receive to make the tax exempt-bond a more profitable investment?

a. 4.1%

b. 6.0%

c. 8.4%

d. 9.0%

ANSWER: a

91. Clark, a single taxpayer with expected taxable income of $190,000, needs your advice on an investment decision. Clark wants to invest $10,000 in long-term bonds. Clark can obtain a 6% return by investing in 10-year Ford Motors' bonds. What is the minimum interest rate that Clark should demand from an investment in State of Tennessee bonds of identical risk and duration?

a. 4.0%.

b. 4.5%.

c. 9.0%.

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$750 Florida Turnpike Authority Bonds 420 Virgin Islands Transportation Authority Bonds 630 General Electric Corporate Bonds 850

d. 10.0%.

ANSWER: a

92. The information that follows applies to the current year for Aaron and Janelle, a married couple.

• Aaron is employed as a shoe salesman; his compensation is $75,000.

• Janelle is employed by the state of Indiana; her compensation is $35,000.

• Aaron and Janelle have total allowable itemized deductions of $12,000.

• Aaron and Janelle have two dependent children.

• Aaron and Janelle have other economic income as follows:

- Interest on U.S. Treasury notes $1,000.

- Interest on Compost Computer bonds $1,500.

- Interest on German government bonds $750.

- Interest on City of Nashville. bonds $1,200.

- Aaron's wealthy uncle gives him $1,000.

- Janelle sold Aaron's football card collection for $3,000. It cost $800.

- Janelle sells Aaron's fishing boat for $2,000. Aaron had purchased the boat 3 years ago for $2,800.

Based on the above information, what is Aaron and Janelle 's adjusted gross income?

a. $114,450

b. $114,700

c. $115,450

d. $116,450

e. $116,650

ANSWER: c

93. The information that follows applies to the current year for Revis and Patrica, a married couple.

• Revis is employed as a shoe salesman; his compensation is $65,000.

• Patrica is employed as an interior designer; her compensation is $90,000.

• Revis and Patrica have total allowable itemized deductions of $15,000.

• Revis and Patrica have two dependent children.

• Revis and Patrica have other economic income as follows:

- Interest on U.S. Treasury bonds $1,000.

- Interest on French government bonds $750.

- Interest on City of Miami, Fla. bonds $1,200.

- Patrica won $500 from the state lottery

- Revis's wealthy uncle dies and leaves him $10,000.

- Patrica sold Revis's baseball card collection for $3,000. Revis bought it for $800.

- Patrica sells Revis's fishing boat for $2,000. Revis had purchased the boat for $2,500.

Based on the above information, what is Revis and Patrica 's taxable income?

a. $126,150

b. $129,950

c. $128,250

d. $144,450

e. $159,450

ANSWER: c

94. Melissa owns 40,000 shares of Wilkerson Corporation common stock that cost $99,000 four years ago. During the current year, Wilkerson distributes a 10% stock dividend to shareholders. Melissa receives 4,000 new shares when the

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market value of the stock is $9 per share. Later in the year, the corporation distributes a cash dividend of $0.50 per share. What are the tax effects of these distributions to Melissa?

I. The $22,000 cash dividend is included in gross income.

II. The $36,000 stock dividend is included in gross income.

III. Only $20,000 of the cash dividend is included in gross income.

IV. At the end of the year, the per share basis in the stock is $2.25.

a. Statements I and II are correct.

b. Statements III and IV are correct.

c. Statements I and IV are correct.

d. Only statement IV is correct.

e. Only statement I is correct.

ANSWER: c

95. Jacob is experiencing cash flow problems during the current year. Rather than put the $80,000 business loan in default, his bank agrees to reduce the debt to $50,000. Prior to the debt reduction, Jacob's total assets were $500,000 and his total liabilities were $490,000. How much income must Jacob recognize from the reduction of his bank loan?

a. - 0 -

b. $10,000

c. $20,000

d. $30,000

ANSWER: d

96. Milton is experiencing cash flow problems during the current year. Rather than foreclose on the $120,000 mortgage loan on his principal residence, his bank agrees to reduce the debt to $90,000. Prior to the debt reduction, Milton's total assets were $400,000 and his total liabilities were $390,000. How much income must Milton recognize from the reduction of his bank loan?

a. - 0 -

b. $10,000

c. $20,000

d. $30,000

ANSWER: a

97. Cary is experiencing cash flow problems during the current year. Rather than foreclose on an $80,000 business loan, his bank agrees to reduce the debt to $50,000. Prior to the debt reduction, Cary's total assets were $500,000 and his total liabilities were $510,000. How much income must Cary recognize from the reduction of his bank loan?

a. - 0 -

b. $10,000

c. $20,000

d. $30,000

ANSWER: c

98. Discharges of debt are generally taxable. However, in certain circumstances, part or all of the income from a discharge of indebtedness may be excluded. Which of the following concepts form(s) the basis for the income tax treatment of a discharged debt?

I. Wherewithal-to-Pay Concept.

II. Legislative Grace Concept.

III. Realization Concept.

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IV. Substance Over Form Doctrine.

a. Statements I and III are correct.

b. Statements II and III are correct.

c. Statements I and IV are correct.

d. Statements I, II, and III are correct.

e. Statements II, III, and IV are correct.

ANSWER: d

99. Harry owed $10,000 to his employer. The employer forgave the indebtedness due to Harry's hard work. Also, Harry allowed the holder of the mortgage on his vacation home to foreclose on the property. Although Harry is solvent, he wanted to get out from under the indebtedness. Therefore, the vacation home, which had a fair market value of $200,000, an original cost of $180,000, and a mortgage encumbering the property of $200,000, was surrendered. How much gross income resulted from these events?

a. $- 0 -

b. $10,000

c. $20,000

d. $30,000

e. $210,000

ANSWER: d

100. Ormont Corporation owed Landry Inc., $250,000. Ormont became pressed for cash and was unable to pay the Landry debt when it came due. Rather than force Ormont into bankruptcy, Landry agrees to reduce the debt to $200,000. In which of the following cases will Ormont be required to recognize income from the discharge of the Landry debt?

b. $2,000,000 $3,000,000

c. $3,000,000 $3,300,000

d. $3,000,000 $3,050,000

ANSWER: a

101. David owes $120,000 to Second National Bank. David is having financial difficulties during the current year and Second National agrees to reduce David's debt to $80,000 to help him get his financial affairs in order and avoid bankruptcy.

I. If David's assets were $300,000 and his liabilities were $290,000 before the discharge, he is taxed on $10,000 of the $40,000 debt reduction.

II. If David's assets were $300,000 and his liabilities were $400,000 before the discharge, he is not taxed on any of the $40,000 debt reduction.

a. Only statement I is correct.

b. Only statement II is correct.

c. Both statements are correct.

d. Neither statement is correct.

ANSWER: b

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Total Liabilities Total Assets Before Discharge

a. $2,000,000 $2,020,000

102. Gus owes $50,000 in credit card debt to Neighbor's Bank. Gus was having financial difficulties during the current year and Neighbor's Bank agreed to reduce Gus's debt to $20,000 to help him get his financial affairs in order and avoid bankruptcy.

I. If Gus's assets were $100,000 and his liabilities were $150,000 before the discharge, he is not taxed on any of the $30,000 debt reduction.

II. If Gus's assets were $80,000 and his liabilities were $100,000 before the discharge, he is taxed on all $30,000 of the debt reduction.

a. Only statement I is correct.

b. Only statement II is correct.

c. Both statements are correct.

d. Neither statement is correct.

ANSWER: a

103. Chipper borrowed money from several creditors for personal uses. At a time when his assets are worth $120,000 and his debts are $140,000, his creditors agree on a compromise settlement in which they forgive $26,000 of the debt. How much of the $26,000 is included in Chipper's Gross Income?

a. $- 0 -

b. $6,000

c. $13,000

d. $20,000

e. $26,000

ANSWER: b

104. Bob and Linda purchased their vacation home in 2013 for $400,000. They financed the purchase with a $350,000 mortgage. In 2016, they fall upon hard times and cannot make the mortgage payments, and their mortgage is foreclosed. The mortgage company sells the house for $300,000. At the time of the sale, the mortgage balance is $325,000. The mortgage company cancels the remaining debt on the mortgage. How much income do Bob and Linda have from the cancellation of the remaining debt on their home?

a. $- 0 -

b. $25,000

c. $75,000

d. $100,000

ANSWER: b

105. Edward and Inez purchased their home in 2006 for $600,000. They financed the purchase with a $550,000 mortgage. In 2016, they fall upon hard times and cannot make the mortgage payments. They sell their home for $425,000. At the time of the sale, the mortgage balance is $450,000 on their home. The mortgage company cancels the remaining debt. Which of the following is true?

I. Edward and Inez will recognize no income on the cancellation of the mortgage loan.

II. Edward and Inez will realize a loss on the sale of their home.

a. Only statement I is correct.

b. Only statement II is correct.

c. Both statements are correct.

d. Neither statement is correct.

ANSWER: c

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106. Eduardo and Ana Maria own their home, purchased in 2003 for $600,000. They financed the purchase with a mortgage for $550,000. In 2011 they bought a vacation cottage for $100,000, financed with a second mortgage of $95,000 on their home. In 2016, they fall upon hard times and cannot make the mortgage payments. The mortgage company sells their home for $425,000 and the cottage for $85,000. At the time of the sale, the mortgage balances are $450,000 on their home and $90,000 on their second mortgage. The mortgage company cancels the remaining debt. How much income do Eduardo and Ana Maria recognize on the cancellation of their debt?

a. $-0-

b. $5,000

c. $15,000

d. $25,000

e. $30,000

ANSWER: b

107. Joan purchased her residence in 2010 for $500,000 by borrowing $450,000. In 2016, she becomes unemployed and can no longer afford to make the full monthly payment on the mortgage. When the mortgage balance is $430,000, the bank agrees to reduce her mortgage to avoid foreclosure. How much income would Joan have to recognize if the bank agrees to reduce the mortgage on the residence to $300,000?

a. $- 0 -

b. $20,000

c. $30,000

d. $50,000

e. $80,000

ANSWER: a

108. Jolie purchased her residence in 2010 for $500,000 by borrowing $450,000. In 2016, she becomes unemployed and can no longer afford to make the full monthly payment on the mortgage. When the mortgage balance is $430,000, the bank agrees to reduce her mortgage to avoid foreclosure. What is Jolie’s basis in her residence if the bank agrees to reduce the mortgage on the residence to $300,000?

a. $- 0 -

b. $300,000

c. $370,000

d. $430,000

e. $500,000

ANSWER: c

109. In July, Bruce leases a building to Vanessa for a period of twenty years at a monthly rental of $1,500. As part of the lease agreement, Vanessa pays a $3,000 security deposit. In addition, the lease agreement states that any improvements that Vanessa made to the building become Bruce's property. Prior to moving in on July 1, Vanessa makes improvements to the building at a cost of $13,000. How much gross income does Bruce have from the lease arrangement in the first year of the lease?

a. $9,000

b. $12,000

c. $22,000

d. $25,000

e. None of the above.

ANSWER: a

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110. Benton leases a Park City condominium from Walnut Rental for $750 a month. Benton operates a carpet store in Park City. During October and November Benton does not make his monthly payments. Instead, Walnut allows him to replace the carpeting in another rental property of his instead of paying rent. What is Walnut's tax treatment of these events?

I. Walnut can capitalize the $1,500 and depreciate it.

II. Walnut can deduct the $1,500 as an operating expense.

III. Walnut includes the $1,500 in its gross income for the year.

IV. The $1,500 must be added to the basis of the condominium.

a. Statements II and III are correct.

b. Statements I, II, and III are correct.

c. Statements I and III are correct.

d. Only statement II is correct.

e. Only statement I is correct.

ANSWER: a

111. Which of the following statements is/are correct?

I. Terry's divorce decree provides that his ex-wife is to pay him alimony of $500 per month until their son reaches age 18 or dies, at which time the payment will be reduced to $300. Terry recognizes $300 of alimony income each month.

II. Jerry is the manager of Northgate apartments. He is required to live in an apartment in the complex that normally rents for $600 per month. Jerry must recognize $600 per month as income from his management job.

III. Lorraine's aunt dies during the current year. The aunt's $20,000 life insurance policy names Lorraine as the beneficiary. Lorraine receives $20,000 from the policy in December. Lorraine must include the $20,000 in her gross income.

IV. Helen receives a teaching assistantship from the music department that pays her $300 per month. Helen must work as a lab assistant 15 hours per week. Helen's total direct education costs are $9,000. Helen includes the $300 per month in her income.

a. Statements I and IV are correct.

b. Statements II and III are correct.

c. Statements II and IV are correct.

d. Statements I and III are correct.

ANSWER: a

112. Which of the following statements is/are correct?

I. Danny falls off a ladder at work and is hospitalized for two weeks. He receives $650 from the state worker's compensation fund, his regular $1,800 salary, and $925 disability pay from his employer's health and accident insurance plan. Danny must recognize $2,725 of income from the payments.

II. Donna's grandfather dies and leaves her City of Goldsboro bonds that are worth $57,000. The bonds have a face value of $50,000 and pay 5% annual interest. Donna must include the $2,500 of interest she receives in her gross income.

a. Only statement I is correct.

b. Only statement II is correct.

c. Both statements are correct.

d. Neither statement is correct.

ANSWER: a

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113. Which of the following statements is/are correct?

I. Belle is retired. Her only sources of income are her $1,500 per month pension and $12,000 of Social Security benefits. Belle must include $6,000 of the Social Security benefits in her gross income.

II. Eileen and Daren divorce during the current year. Per the divorce agreement, Daren is to receive alimony of $600 per month, $400 per month for child support, and the family house that is valued at $200,000. Daren must recognize $600 per month as income.

a. Only statement I is correct.

b. Only statement II is correct.

c. Both statements are correct.

d. Neither statement is correct.

ANSWER: b

114. For each of the following situations, determine the amount of gross income that the taxpayer should recognize. Explain why any amounts are excluded from gross income.

a. Harvey is injured in an automobile accident. The driver of the other car is found to be at fault. A judge awards Harvey $10,000 for pain and suffering, $20,000 in punitive damages, and $15,000 for medical expenses. Harvey's total medical costs are $25,000 and his employer provided insurance policy pays $8,000 of the remaining medical costs. He also receives $800 of worker's compensation while he was unable to work. In addition, his employer provided insurance pays him $450 of disability pay while he recuperated and a separate plan that Harvey purchased paid $300 of disability payments.

b. Heather owes $35,000 of credit card debt to First City Bank. Heather is having financial difficulties during the current year and First City agrees to reduce her debt to $20,000 to help her get her financial affairs in order and avoid bankruptcy. Heather's assets were $100,000 and her liabilities were $110,000 before the discharge.

c. On May 1, Ernie receives 1,000 shares of Glimmer Company stock as a graduation present from his uncle. The shares have a fair market value of $5 per share on May 1. Ernie receives an additional 100 shares on July 25 as a result of a 10% stock dividend that Glimmer had declared on July 1. On December 1, Glimmer declares and distributes a $.50 per share cash dividend.

d. Garry works as a reservations clerk for Big Apple Hotels. Big Apple Hotels also owns Mideastern Airlines. Big Apple allows all employees to fly on Mideastern Airlines and to stay in Big Apple Hotels free, on a space available basis. Garry takes advantage of Big Apple's generosity and took a trip to Reno to visit the casinos. The cost of the airfare would have been $480 and the lodging would have cost $600 if he had not been an employee of Big Apple.

ANSWER:

a. The $450 of disability pay from the employer provided plan and the $20,000 in punitive damages is included in Harvey' gross income. The pain and suffering, and the medical expense judgement are excluded as damages for personal physical injuries. The medical expenses from the employer's plan are excluded because they are less than actual expenses. Worker's compensation payments are specifically excluded as a return or human capital. The $300 of disability payments are not taxable because they came from a plan that Harvey purchased.

b. Heather has $5,000 of gross income from the discharge. Because she was insolvent before the discharge, she can exclude the discharge from income. However, if the discharge makes her solvent, she must include in income the extent that the discharge makes her solvent. The $15,000 debt reduction makes her solvent by $5,000 [$100,000 - ($110,000 - $15,000)].

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c. Ernie has $550 of gross income. The receipt of the shares from his Uncle is a gift that is excluded from income. The stock dividend shares are not subject to tax. The cash dividend received on the 1,100 shares of stock he owns on December 1 is included in gross income.

d. Garry has gross income of $480 from the free airfare. Employee's can exclude the value of no additional cost services provided by an employer as long as the services are offered on a nondiscriminatory basis and they are in the same line of business as that of the employee. Both services are non-discriminatory, but the free airfare does not qualify for exclusion because Garry does not work in the airline portion of Big Apple's business.

115. For each of the following situations, determine the amount of gross income that the taxpayer should recognize. Explain why any amounts are excluded from gross income.

a. Gary is an employee of G&K Electronics. G&K allows all employees to buy goods from inventory at a 20% discount. Gary purchases a television under the discount plan for $800. The television, which cost G&K $700, normally sells for $1,000.

b. Carolyn receives an $8,000 National Merit Scholarship and a $2,000 Honors at Entrance Scholarship to attend State Tech. The scholarships were given based on national testing scores and high school grades, and require no future services on Carolyn's part. Tuition and other fees are $6,500 per year at State Tech. Carolyn also pays $6,000 for room and board in University housing.

c. Donnie's employer provides free parking to certain management level employees. In 2016, Donnie's employer provided parking cost his employer $3,180.

d. Gretchen receives $5,000 of 6% City of Orlando bonds as a graduation present from her boyfriend on May 1. The bonds pay interest on June 30 and December 31. Gretchen sells the bonds at a gain of $750 in August.

ANSWER: a. Gary does not have any gross income from the qualified employee discount on goods. The discount is excluded because it is available to all employees and the 20% discount is less than G&K's normal 30% gross profit percentage.

b. Carolyn has $3,500 ($8,000 + $2,000 - $6,500) in gross income. Scholarships are excluded to the extent that they do not exceed the direct education costs. Scholarship amounts that exceed the student's direct education costs must be included in gross income.

c. Donnie has gross income of $120 [$3,180 - (12 × $255)]. Employer provided parking is an excludible working condition fringe (working condition fringes can be given on a discriminatory basis). The maximum amount of the exclusion is $255 per month in 2016. Donnie must include the value of the parking in excess of the $3,060 excluded amount in his gross income.

d. Gretchen has $750 of income from the sale of the bonds. The receipt of the bonds is an excludable gift. The interest payment she receives on the bonds is excluded because it is a taxexempt municipal bond.

116. Explain why the taxpayer in each of the following situations either does or does not have taxable income and determine the amount, if any, that the taxpayer would have to recognize.

a. Leon works for Golfshop America, a large retailer of golf items. Golfshop allows all employees to purchase golf items at a 40% discount. Leon purchases a set of golf clubs for $700 that normally sells for $1,000 (cost of the golf clubs to Golfshop was $600). In addition, Leon is selected as salesman of the year and receives a gold putter worth $900.

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b. Brenda is a student at Atlantic University. Brenda pays the $15,000 cost ($10,000 for tuition and books; $5,000 for living expenses) of attending Atlantic University with a $5,000 general scholarship from the college of economics, a $5,000 student loan, and $3,000 from her parents.

c. Becky pays off the loan on her son's car while he is a student at State University. The son, Daryl, owed $5,400 before Becky made the payment.

d. Leona is injured while on the job. She receives $4,000 from workers' compensation during the time she was away from her job.

ANSWER: a. Leon has $900 of gross income. The purchase of the golf clubs is a qualified employee discount - it is available to all employees, is in the same line of business, and is less than the gross profit percentage of the goods purchased. The receipt of the putter is a form of compensation and must be included in Leon's gross income at its fair market value. It is not an excludable employee award.

b. Brenda has no income. The general scholarship is less than tuition and books and is excluded. The student loan is not income. The $3,000 received from her parents is an excludable gift.

c. The debt relief would be considered a gift due to the relationship between Becky and Daryl. Therefore, the $5,400 is not taxable to Daryl.

d. Workers' compensation payments are excluded from gross income. They are characterized as a return of (human) capital.

117. Explain why the taxpayer in each of the following situations either does or does not have taxable income and determine the amount, if any, that the taxpayer would have to recognize.

a. Cory is an employee of Simmons, Inc. Several years ago Cory purchased a used bus from Simmons. The bus had an adjusted basis of $30,000. Cory agreed to pay $20,000 (the fair market value of the bus) for the bus if Simmons would finance the purchase over four years. During the current year, when the debt on the bus was $5,000, Simmons told Cory that he didn't have to make any more payments on the bus because of his perfect safety record over the last five years.

b. Several years ago Lauren's grandfather gave her $10,000 worth of City of Eau Claire, Wisconsin bonds. After receiving $400 of interest in the current year, she sells the bonds for a gain of $800.

c. Portal Corporation employs Berry at an annual salary of $40,000. Portal provides a qualified pension plan into which all employees are permitted to contribute up to 6% of their annual salaries. Portal matches contributions dollar-for-dollar. Berry contributes 6%.

d. Carla, a student at State College, receives a $3,000 scholarship for her grades in previous years. She also earns $6,000 from a part time job. Her annual costs are $6,000 for tuition, books and supplies and $7,000 for room and board. Her parents pay the remaining $4,000 of her college costs.

ANSWER:

a. Cory has $5,000 of income from the discharge of debt. The sale of the bus was entered into at arms-length and there was no intent to compensate through the sale. Discharges of debt are taxable. It cannot be excluded as an employee safety award because the debt is not tangible property.

b. Lauren has $800 of income (long-term capital gain) from the sale of the bonds. The value of the bonds is an excludable gift. The interest on the bonds is excludable municipal bond interest.

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c. Contributions to qualified employee pension plans are excludable from the current year gross income. However, these amounts are taxable when withdrawn at retirement. The amounts matched by the employer are also not currently includible in gross income. Therefore, Berry's gross salary is reduced by his contributed amount of $2,400 (6% × $40,000) to $37,600.

d. Carla has gross income of $6,000 (part-time job). The scholarship is excluded because it is less than her direct education costs. The $4,000 received from her parents is an excludable gift.

118. What are the differences between a cafeteria plan and a flexible benefits (salary reduction) plan?

ANSWER: A cafeteria plan is funded by the employer and offers employees a menu of tax-free benefits. A certain dollar amount of benefits may be chosen at the employer's cost. If an employee chooses to take cash instead of another benefit, the amount of cash is taxed.

A flexible benefits plan permits employees to have an annual amount withheld from his or her salary that is used to pay for medical, child-care or certain other expenses. The amounts withheld are not included in the employee's gross income, thus the term salary reduction plan. These plans allow employees to pay for medical and/or childcare with before-tax dollars.

119. Christine, age 23, is an employee of Higgins Hardware Distributors whose annual salary is $35,000. Higgins provides employees with free group-term life insurance at twice their annual gross salary, free health and accident insurance, a qualified pension plan, and a flexible benefits plan. Christine's health and accident insurance cost Higgins $1,920. The cost of her group-term life insurance coverage is $520. Higgins pension plan allows employees to contribute up to 6% of their annual salary, which Higgins matches. Christine elects to have the maximum pension plan contribution made into the plan and has $400 of her salary paid into the flexible benefits plan. She submits medical insurance claims totaling $900 to the health insurance policy and is reimbursed $550. She receives the remaining $350 of medical insurance claims from the flexible benefits plan. How much gross income does Christine have from her employment with Higgins?

ANSWER: Her gross income from Higgins is $32,512:

Christine can exclude the premiums on $50,000 of group-term life insurance. She receives $70,000 of coverage and must include $12 (20 × $.60) as income from the coverage in excess of $50,000. Employer provided health and accident insurance is excluded from income. Christine's $35,000 salary is reduced by her $2,100 ($35,000 × 6%) pension plan contribution and the $400 paid into the flexible benefits plan. Her employer's matching $2,100 pension plan contribution is excluded from current period income. The payments received from her employer's health insurance plan are excluded because they are less than actual costs. The $50 paid into the flexible benefits plan that Christine did not use is lost and has no tax effect.

120. Bonita, age 23, is an employee of Watson Hardware Distributors whose annual salary is $40,000. Watson provides employees with free group-term life insurance at twice their annual gross salary, free health and accident insurance, a qualified pension plan, and a cafeteria plan. Bonita's health and accident insurance cost Watson $1,920. The cost of her group-term life insurance coverage is $520. Watson pension plan allows employees to contribute up to 6% of their annual salary, which Watson matches. Bonita elects to have the maximum pension plan contribution made into the plan. Watson’s cafeteria plan provides for $4,000; she elect to have dental coverage for $3,000 and elects to take the other $1,000 in cash. She submits medical insurance claims totaling $900 to the health insurance policy and is reimbursed $550. She receives the remaining $350 of medical insurance claims from the flexible benefits plan. How much gross income does Bonita have from her employment with Watson?

ANSWER: Her gross income from Higgins is $38,618: Salary $40,000

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Salary $35,000 Less: Pension Plan Payment (2,100) Flexible Benefits Plan Payment (400) Group-term Life Insurance 12 Total $32,512

Bonita can exclude the premiums on $50,000 of group-term life insurance. She receives $80,000 of coverage and must include $18 (30 × $.60) as income from the coverage in excess of $50,000. Employer provided health and accident insurance is excluded from income. Bonita's $40,000 salary is reduced by her $2,400 ($40,000 × 6%) pension plan contribution. Her employer's matching $2,400 pension plan contribution is excluded from current period income. The payments received from her employer's health insurance plan are excluded because they are less than actual costs. The $1,000 cash she received in lieu of benefits from her cafeteria plan are taxable.

121. Darren is a single individual who worked the entire year for Woodworks Company in Brazil. He paid $15,000 in Brazilian taxes on his Woodworks salary of $70,000. What is Darren' lowest tax liability if his taxable income is $40,000, before considering the Woodworks salary?

ANSWER: Darren' lowest tax liability is $8,836.75. Darren has the option of either excluding $70,000 of his salary or including all of the Woodworks salary in income and taking a foreign tax credit for the $15,000 of Brazilian taxes paid.

Exclude the $70,000 Tax on $110,000 ($70,000 + $40,000): $18,558.75 + [28% × ($110,000- $91,150)] $23,836.75

Less: Tax on $70,000 $5,183.75 + [25% × ($70,000 - $37,650)] 13,271.25

Net tax savings by using the foreign tax credit option

The foreign tax credit cannot exceed U.S. tax on Brazilian income: [$70,000/$110,000 × $23,836.75] = $15,169. Because $15,000 is less than $15,169, the full foreign tax of $15,000 can be taken as a credit.

122. Isabel, age 51 and single, is an electrical engineer employed by Regis Corporation. Isabel's annual salary is $80,000. Regis Corporation's qualified pension plan matches employee's contributions to the plan up to 5% of the employee's annual salary. During the current year, Isabel contributes the $4,000 maximum to the plan, which is matched by Regis. Due to high cost of medical insurance, the corporation does not provide any medical insurance to its employees. Instead, it offers a flexible benefits plan that employees can use to pay for medical insurance, unreimbursed medical costs, and childcare costs. Isabel elects to have $2,500 paid into the plan. Isabel uses the plan to purchase medical insurance costing $2,200. Isabel spends an additional $150 from the plan on eyeglasses and dental costs. Regis Corporation also provides group-term life insurance at twice the employee's annual gross salary. The cost of Isabel's insurance was $600. Regis also provides engineers in Isabel's department with free parking in the company's parking garage. Non-employees pay $3,120 per year to park in the garage. Isabel's $250 dues to the Electrical Engineer's Association and her $1,560 health club membership are also paid by Regis. Compute Isabel's taxable compensation from Regis Corporation.

Chapter 4 Copyright Cengage Learning. Powered by Cognero. Page 32 Pension Plan Payment (2,400) Group-term Life Insurance 18 Cash from cafeteria plan 1,000 Total $38,618

Tax

$40,000 $10,565.50 Foreign tax Credit: Tax on $110,000 $23,836.75 Tax credit for Brazilian tax paid 15,000.00 Net tax due $8,836.75

$1,728.75

Equals

ANSWER: Isabel's taxable compensation from Regis Corporation is $75,424:

Regis's $4,000 matching pension plan contribution is deferred. Reimbursements received from flexible benefits plans are excluded from income. The fact that Isabel did not spend the entire $2,500 she contributed to the flexible benefits plan does not affect her taxable compensation. Premiums paid on $50,000 of groupterm life insurance are excluded from income. Premiums on coverage in excess of $50,000 are taxable per the IRS Table (4-1). Employer provided parking is excluded up to $255 per month. The payment of the dues to the Electrical Engineer's Association is an excludible working condition fringe. The payment of the health club membership is taxable to Isabel. It is not a qualified employer's athletic facility.

123. Todd, age 26 and single, is an employee of the Ice Corporation. Todd's annual salary is $50,000. Ice has a qualified pension into which employees may contribute 5% of their annual salary (Todd contributes the maximum). The corporation also offers employees a flexible benefits plan. Todd pays $500 into the plan and is reimbursed for $500 of medical expenses not covered by his medical insurance. Ice also provides Todd with the following benefits:

What is Todd's

from his

Todd is not taxed on his employer's $2,000 contribution to his retirement plan. He is not taxed on the reimbursement of medical expenses from the flexible benefits plan. The provision of medical insurance and the payment of his dues to professional organizations are also excludable fringe benefits.

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Gross salary $80,000 Less:

contribution (4,000) Flexible benefits plan payment (2,500) Group-term life insurance in excess of $50,000: $80 × 2 = $160

= $110 × $2.76 304 Parking in excess of $255 per month: $3,120 - ($12 × $255) 60 Health club membership 1,560 Taxable compensation $75,424

Isabel's pension plan

- $50

Medical insurance $3,200 Group-term life insurance ($80,000 of coverage) 900 Free-parking 3,240 Dues to professional organizations 300 Health club membership 860

taxable income

employment? ANSWER: Todd's gross income is $48,076: Salary $50,000 Less: Pension plan payment by Todd ($50,000 × 5%) (2,500) Flexible benefits plan payment (500) Group-term life coverage in excess of $50,000 50 × $.72 36 Free parking - $3,240 - (12 × $255) 180 Health club membership 860 Taxable income $48,076

124. Graham and Lucy purchased their home in 2003 for $400,000. They finance the purchase with a $350,000 mortgage. In 2011, when their original mortgage balance was $340,000, they took out a second mortgage for $100,000 and added a second garage. In 2016, they fall upon hard times and cannot make the mortgage payments. The mortgage company sells their home for $350,000. At the time of the sale, the mortgage balances are $330,000 on their home and $90,000 on their second mortgage. The mortgage company cancels the remaining debt. What are the income tax consequences of the sale of the residence and cancellation of the debt by the mortgage company?

ANSWER: Graham and Lucy have $70,000 [$350,000 - ($330,000 + $90,0000)] of income from the cancellation of the debt. However, taxpayers can elect to exclude from income up to $2 million of acquisition indebtedness on the taxpayer’s principal residence. Acquisition debt is debt secured by the taxpayer’s principal residence that is used to acquire, construct, or substantially improve the residence. A taxpayer can only have one principal residence. The exclusion does not apply to debt discharges on second homes, business property, or rental property.

Because the mortgages are secured by the residence and used to acquire and substantially improve the residence, both of the mortgages are qualified principal residence indebtedness. Because the total debt canceled is less than $2 million, Graham and Lucy do not have to recognize any income from the mortgage debt cancellation.

125. Sergio owns Sergio's Auto Restoration as a sole proprietorship. His business has fallen on hard times and his bank has agreed to reduce the debt on his warehouse from $175,000 to $150,000. The warehouse, which was purchased in 1995 at cost of $190,000, has a fair market value of $160,000 and an adjusted basis of $140,000. Before the debt reduction Sergio's total assets are $680,000 and his total liabilities are $700,000. Discuss the tax effect of the debt reduction and determine the minimum amount of income Sergio must recognize from the discharge.

ANSWER: Sergio must recognize $5,000 of income from the $25,000 discharge of debt. He must reduce the basis of the warehouse by the $20,000 of income that he is allowed to exclude. In general, discharges of debt constitute taxable income because the taxpayer receives a claim of right to the debt it no longer is under obligation to pay. However, the tax law provides that insolvent taxpayers can exclude debt discharges, but must recognize income to the extent the discharge makes them solvent. Because Sergio is solvent by $5,000 [$680,000($700,000 - $25,000)] after the $25,000 reduction in the building debt, he can only exclude $20,000 of the $25,000 discharge under this provision.

126. Simon Leasing, Inc., an accrual basis taxpayer, owns and leases residential, business, and industrial properties. During the current year it collects $800,000 in rents on its various properties. Included in the $800,000 in rents is $80,000 of the last month's rent payments it requires on new rentals. The company also receives $30,000 of security deposits on new residential rentals. In addition, one of its business tenants pays $40,000 to cancel a long-term lease during the year.

Simon Leasing, Inc., also sold one of its industrial buildings for $1,700,000. Simon Leasing had purchased the building for $900,000 in 1986. The tenant made improvements to the building valued at $100,000 in 1986. At the termination of the original lease last year, the building was worth $1,600,000 ($150,000 of that was attributable to the improvements made by the tenant) and the adjusted basis was $500,000. The adjusted basis at the date of sale is $460,000. How much income must Simon Leasing, Inc., recognize in the current year? Explain how you arrived at the gross amount in terms of the income tax concepts.

ANSWER: Simon Leasing has gross rental income of $880,000 ($800,000 + $80,000), a gain on the sale of the building of $1,240,000, and the $40,000 lease cancellation payment , which is taxable under the All-inclusive Income Concept - it is an increase in Lease's wealth that has been realized in an arm's-length transaction. The $800,000 of rents received are taxable in the year of receipt. Under the Wherewithal-to-Pay Concept, Leases must include the $80,000 of advance rental payments in the year of receipt even though it uses the accrual method of accounting. The security deposits are not taxable because Leases does not have a Claim of Right to the deposits. The gain on the sale of the building is the difference between the $1,700,000 selling price and Lease's $460,000 adjusted basis (Capital Recovery Concept). Lease's would not have recognized any income from the improvements to the building either when they were made or at the termination of the lease. Lease's did not have the Wherewithal-to-Pay when the improvements were made, nor was the increase in value realized at that time. When the lease terminated, an arms-length transaction did take place; however, there was

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no Wherewithal-to-Pay tax from the lease termination transaction. Lease will recognize the value of the improvements through the increased selling price in the year of disposition when it does have the Wherewithal-to-Pay from the sales transaction.

127. Carson, age 34 and single, is an electrical engineer employed by Summit Corporation. Carson's annual salary is $84,000. Summit Corporation's qualified pension plan matches employee's contributions to the plan up to 5% of the employee's annual salary. During the current year, Carson contributes the $4,200 maximum to the plan, which is matched by Summit. Due to high cost of medical insurance, the corporation does not provide any medical insurance to its employees. Instead, it offers a flexible benefits plan that employees can use to pay for medical insurance, unreimbursed medical costs, and childcare costs. Carson elects to have $2,500 paid into the plan. Carson uses the plan to purchase medical insurance costing $2,100. Carson spends an additional $650 from the plan on eyeglasses and dental costs. Carson has asked you to prepare his tax return. Your initial interview with him discloses that he has $1,050 of allowable deductions for adjusted gross income and $3,700 of allowable itemized deductions.

a. Compute Carson's taxable income and his tax liability.

b. After your initial interview, Carson calls you and says that he just received two statements concerning sales of investments that he had forgotten about. On January 15, he sold shares of stock for $5,500. Carson purchased the stock in November for $4,500. He also received $2,000 on March 15 from the sale of some land that he had received as an inheritance from his grandfather in 2000. He has a statement from the executor of his grandfather's estate listing his basis in the land at $10,000. Explain the effect of these two sales on Carson's taxable income and his tax liability.

ANSWER:

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a. Carson's taxable income is $65,900 ($84,000 - $4,200 - $2,500 - $1,050$6,300- $4,050) and his tax liability is $12,218.75. Gross Income: Gross Salary $84,000 Less: His pension plan payment (4,200) Flexible benefits plan payment (2,500) Net Salary $77,300 Deductions for adjusted gross income ( 1,050) Adjusted Gross Income $ 76,250 Deductions from adjusted gross income: The greater of: 1. Itemized deductions $3,700 or 2. Standard deduction $6,300 ( 6,300) Personal exemption ( 4,050) Taxable Income $ 65,900

Tax Liability = $5,183.75 + [25% x ($65,900$37,650)

$ 12,246

b. The two transactions reduce his taxable income $3,000 and his tax liability $750 ($3,000 × 25% marginal tax rate). Stock and land are capital assets. The sale of the stock results in a short-term capital gain of $1,000 ($5,500 - $4,500). The sale of the land results in a long-term capital loss of $8,000 ($2,000 - $10,000). Capital gains and losses are netted together, resulting in a net long-term capital loss of $7,000. Capital losses are deductible for adjusted gross income, but are limited to $3,000 per year. Carson's taxable income will decrease by the $3,000 deduction and his tax liability will be reduced at his marginal tax rate. The remaining $4,000 ($7,000 - $3,000) loss is carried forward for use in future years.

128. Summary Problem: Ralph, age 44, is an account executive for Cobb Advertising, Inc. Ralph's annual salary is $90,000. Other benefits paid by Cobb Advertising were:

addition to the benefits above, Cobb Advertising has a qualified pension plan into which employees can contribute (and Cobb matches) up to 5% of their annual salary. Ralph contributes the maximum allowable to the plan.

Ralph has never been able to itemize his allowable personal deductions (i.e., he always uses the standard deduction). In 2016, Ralph receives a refund of $300 of his 2015 State income taxes and a 2015 Federal tax refund of $400.

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Health and Accident Insurance Premiums $1,500 Group-Term Life Insurance Policy ($135,000 of coverage) 250 Payment of Country Club Dues 3,660 Dues to professional organizations, trade journals 550 Parking space in downtown garage 3,240 In

Other sources of income: Interest credited to savings account $980 Value of stock received from Western Power & Light Company (Ralph had the option to take the dividend in cash) 400 Sale of Sea Island Adventures Common Stock (cost of the stock was $2,200) 3,500 Value of land inherited from grandfather 80,000

Crop-share payments received on inherited land

Required: Compute Ralph's 2016 gross income.

ANSWER: Ralph's 2016 gross income is $94,942:

2,820

Ralph does not include the employer provided health insurance, premiums on $50,000 of group-term life insurance, dues paid to professional organizations and trade journals in his gross income. The premiums on $135,000 of life insurance coverage, the country club dues, and the value of the parking in excess of $255 per month must be included in gross income. Ralph's payment into the pension plan is a reduction of his taxable salary; his employer's matching payment is excluded from income. The state and federal tax refunds are not subject to tax because he has never deducted the taxes (no tax benefit rule application). Ralph must include the savings account interest, the value of the stock dividend received, the gain on the sale of the stock, and the crop-share payments in his gross income. The value of the inherited land is excluded.

129. Summary Problem: Tommy, a single taxpayer with no dependents, has the following items that may affect his taxable income. What is his adjusted gross income?

The following items are included in computing adjusted gross income:

The child support payment ($12,000) is not deductible and the itemized deductions ($3,000) are deductible from adjusted gross income. The gift ($7,000), insurance proceeds ($40,000), and the fringe benefits received

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Salary $90,000 Less: Pension Plan Payment ($90,000 × 5%) (4,500) Group-Term Life Insurance (85 × $1.20) 102 Country Club Dues 3,660 Free Parking [$3,240 - ($255 × 12)] 180 Interest on Savings Account 980 Stock Dividend with cash option 400 Gain on Sale of Stock ($3,500 - $2,200) 1,300 Crop-share Payments 2,820 Total Gross Income $94,942

Employee salary received $70,000 Child support paid to ex-wife 12,000 Total allowable itemized deductions 3,000 Cash gift received from parents 7,000 Gain on the sale of stock 5,000 Loss on the sale of personal residence (10,000) Loss on the sale of stock (6,000) Amount collected from a life insurance policy 40,000 Health insurance premiums paid by his employer 3,000 Winnings from gambling trip to Las Vegas 800 Cost of employer paid parking space 1,200 Government pension benefits received 15,000 Amount his dog earned from being in a television commercial 2,000 ANSWER:

Salary $70,000 Gain on stock $5,000 Loss on stock (6,000) Net capital loss (1,000) Gambling winnings 800 Pension 15,000 Dog commercial 2,000 Adjusted gross income $86,800

from the employer ($3,000 and $1,200), are excluded from income. The loss on the sale of the personal residence ($10,000) is not deductible.

Match each statement with the correct term below.

a. An employee may exclude up to $5,000 annually of these employer-provided services.

b. If cash is received under this program, taxpayers are taxed on the amount of cash received.

c. A salary reduction plan that allows employees to pay for medical and child care costs with before-tax dollars.

d. A transfer of property without any profit motivation with an intention that includes affection, charity, and respect.

e. Payments made into an employee's account are not taxable in the current period; taxation is deferred until funds are withdrawn.

f. Employer provided benefit that may be excluded from income because the dollar amounts are too small for a reasonable accounting.

130. Cafeteria plan ANSWER: b

131. Child & dependent care ANSWER: a

132. De minimus fringe ANSWER: f

133. Flexible benefits plan ANSWER: c

134. Gift ANSWER: d

135. Qualified pension plan ANSWER: e

Match each statement with the correct term below.

a. Dues, uniforms, subscriptions.

b. Intended to punish and are taxable.

c. Taxable if from an employer-provided policy.

d. Any personal wrong, such as libel, slander, or assault.

e. Excludable amount limited to gross profit percentage.

f. Gratuitous and not a form of compensation for services.

g. Excludability requires that it must be a condition of employment.

h. Excluded if for compensatory payments for sickness or personal physical injury.

i. To replace lost earnings and is excluded if due to personal physical injury.

j. Excluded if provided on the employer's business premises and for the convenience of employer.

136. Damage payments ANSWER: h

137. Disability payment

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ANSWER: c

138. Employee discount ANSWER: e

139. Employer-provided lodging ANSWER: g

140. Loss-of-income damages ANSWER: i

141. Meals provided by employer ANSWER: j

142. Personal injury ANSWER: d

143. Punitive damages ANSWER: b

144. Scholarship ANSWER: f

145. Working condition fringe ANSWER: a

Each of the numbered items below is accorded only one of the following lettered treatments. Use the existing law as it applies to the current year, match the best answer to the statements below.

a. Fully excluded from gross income.

b. Fully included in gross income.

c. Partially excluded from gross income.

146. Laura's employer pays the first $5,000 in childcare benefits under their childcare assistance plan. ANSWER: a

147. Michelle's employer pays for her graduate school classes. Tuition during the year totals $2,500 (her employer does not have a qualified plan). ANSWER: b

148. Frank receives $1,000 interest income from City of St Louis bonds. ANSWER: a

149. Katrina receives $1,000 interest income from U.S. Treasury bonds that her uncle had given to her. ANSWER: b

150. Tina receives 100 shares of Welby stock as a result of a 2 for 1 stock split. The shares have a value of $7,000 the day of the split.

ANSWER: a

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151. Raymond dies on July 8th of the current year. Out of love and respect for Raymond, his employer gives his widow $5,000.

ANSWER: b

152. Julian's tenant improves her side of the duplex by making improvements to the bathroom and kitchen that are worth $750. Julian does not adjust her rent for the $750 improvements.

ANSWER: a

153. Sarah, the managing partner in an accounting firm, has her downtown parking space ($325/per month) paid by the firm. None of the accounting staff receive parking privileges.

ANSWER: c

154. Jeane's employer pays his medical premiums each month ($130/month). ANSWER: a

155. Jeane's medical insurance carrier reimburses him 80% of his qualified medical expenses. During the current year Jeane receives $3,682 in payments.

ANSWER: a

156. Julia receives $6.3 million in compensatory damages for a personal physical injury.

ANSWER: a

157. Marline receives $14 million in punitive damages for a personal physical injury. ANSWER: b

158. Kenneth receives a new Ford Explorer worth $28,900 that his parents bought him for his 24th birthday. ANSWER: a

159. Dick lives rent-free in an apartment (value $675/month) in a complex where he is the apartment manager and must be on the premises to handle problems.

ANSWER: a

160. David's employer laid him off for three months during the slow winter season. He collects $4,375 in unemployment compensation.

ANSWER: b

161. Hank's employer gives him fishing gear that is worth $1,250 at his retirement party. ANSWER: c

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