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Exam 5: Gross Income Exclusions

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Question 21

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Flora Company owed $95,000,a debt incurred to purchase land that serves as security for the debt.

A) If Flora had borrowed the funds from a bank,the bank accepts $85,000 in full payment of the debt,and Flora is solvent after the transfer,Flora does not recognize income,but the company must reduce the cost of the land by $10,000.
B) If Flora had borrowed the funds from a bank,and the bank accepts $85,000 in full payment of the debt,when the value of the property is $80,000,Flora can deduct a loss.
C) If Flora transfers to the bank other property,with a basis of $90,000 and a fair market value of $95,000,in full payment of the debt,Flora can recognize a $5,000 loss.
D) If the $95,000 is owed to the person who sold the property to Flora,and the creditor accepts $85,000 in full payment for the debt,Flora does not recognize gain but must reduce its basis in the land.
E) None of these.

F) A) and E)
G) A) and B)

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Question 22

True/False

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Calvin miscalculated his income in 2014 and overpaid his state income tax by $10,000.In 2016,he amended his 2014 state income tax return and received a $10,000 refund and $900 interest.Calvin itemized his deductions in 2014,deducting $12,000 in state income tax and $30,000 total itemized deductions.As a result of the amended return in 2016,Calvin must recognize $10,900 of gross income.

A) True
B) False

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Question 23

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

Betty received a graduate teaching assistantship that was awarded on the basis of academic achievement.The payments must be included in her gross income.

Harold bought land from Jewel for $150,000.Harold paid $50,000 cash and gave Jewel an 8% note for $100,000.The note was to be paid over a five-year period.When the balance on the note was $80,000,Jewel began having financial difficulties.To accelerate her cash inflows,Jewel agreed to accept $60,000 cash from Harold in final payment of the note principal.

Jack received a court award in a civil libel and slander suit against National Gossip.He received $120,000 for damages to his professional reputation,$100,000 for damages to his personal reputation,and $50,000 in punitive damages.Jack must include in his gross income as a damage award:

Stuart owns 300 shares of Turquoise Corporation stock and 2,000 shares of Blue Corporation stock.During the year,Stuart received 150 shares of Turquoise as a result of a 1 for 2 stock split.The value of the shares received was $4,800.Stuart also received 100 shares of Blue Corporation stock as a result of a 5% stock dividend.Stuart did not have the option of receiving cash from Blue.The additional shares he received had a value of $7,200.Stuart's gross income from the receipt of the additional Turquoise and Blue shares is:

A cash basis taxpayer took an itemized deduction of $5,500 for state income tax paid in 2016.His total itemized deductions in 2016 were $18,000.In 2017,he received a $900 refund of his 2016 state income tax.The taxpayer must include the $900 refund in his 2017 Federal gross income in accordance with the tax benefit rule.

Benny loaned $100,000 to his controlled corporation.When it became apparent the corporation would not be able to repay the loan in the near future,Benny canceled the debt.The corporation should treat the cancellation as a nontaxable contribution to capital.

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

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

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

In 2016,Theresa was in an automobile accident and suffered physical injuries.The accident was caused by Ramon's negligence.In 2017,Theresa collected from his insurance company.She received $15,000 for loss of income,$10,000 for pain and suffering,$50,000 for punitive damages,and $6,000 for medical expenses which she had deducted on her 2016 tax return (the amount in excess of 10% of adjusted gross income).As a result of the above,Theresa's 2017 gross income is increased by $56,000.

Early in the year,Marion was in an automobile accident during the course of his employment.As a result of the physical injuries he sustained,he received the following payments during the year: Reimbursement of medical expenses Marion paid by a medical insurance policy he purchased $10,000 Damage settlement to replace his lost salary 15,000 ​ What is the amount that Marion must include in gross income for the current year?

Workers' compensation benefits are included in gross income if the employer also pays the employee while the employee is recovering from his or her injury.

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

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

John told his nephew,Steve,"if you maintain my house when I cannot,I will leave the house to you when I die." Steve maintained the house and when John died Steve inherited the house.The value of the residence can be excluded from Steve's gross income as an inheritance.

Albert had a terminal illness which required almost constant nursing care for the remaining two years of his estimated life,according to his doctor.Albert had a life insurance policy with a face amount of $100,000.Albert had paid $25,000 of premiums on the policy.The insurance company has offered to pay him $80,000 to cancel the policy,although its cash surrender value was only $55,000.Albert accepted the $80,000.Albert used $15,000 to pay his medical expenses.Albert made a miraculous recovery and lived another 20 years.As a result of cashing in the policy:

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