Reference no: EM132624983
ACC 380 Tax Treatment of Individuals and Property - DePaul University
Tax Treatment of Individuals and Property Transactions
Part 1:
With a presidential election quickly approaching, President Trump, form Vice President Biden, and Senator Sanders, are reaching out to you, the future of America, to help them address tax issues in the United States which are resulting in a perception of "class warfare", and the creation of a "welfare state".
Former President Obama, a very intelligent and constitutional scholar from the University of Chicago, but had had limited experience with the business community. President Trump has had many years of experience in business, but no experience in government. The country has chosen a very different direction, maybe good, maybe bad. Furthermore, a presidential election is less than 90 days away and the Democrats are being forced to promote a more left social agenda than they historically have promoted in the past. This agenda might be good for the country or bad. It is for you to decide.
During this time of reflection, they are asking you, the business students, to reach out to your family and friends, old and young, educated and uneducated, wealthy, middle class and struggling Americans and have a dialogue on the following topics.
There is no right or wrong answer. You are to evaluate each of the topics listed below and formulate a "pro" and "con" opinion regarding each of the issues. You as the future of America need to understand both sides of the issue and support those opinions.
A one or two page paper on this matter will be due by September 13th by 9:00 P.M.. Students will be called upon at random to present their positions (pro and con) on each or any of the topics listed. (This will be one of the topics of discussion during our first Zoom meeting.) Please do not simply state the law, I know the law already. I am searching for your thoughts on the law and the subject matter. Have fun!
1. The United States has the most progressive tax system in the world. It is too progressive? Half the people pay no federal income tax and the remaining half pay all of the tax. Is this a fair system?
2. Should the wealthy (you define wealthy) pay higher taxes (than paid today) and/or should everyone pay some federal income taxes? I keep hearing "pay their fair share". What is their fair share? I want you to state with a number, what is wealthy? What rate of tax would be their fair share?
3. Should we tax "wealth" or the increase in wealth? Your condo increased in value $10,000 over the past year, should that increase be taxed as income?
4. Should your "estate" be taxed upon your death?
5. Should income from investments (dividends, interest, capital gains) be taxed at a higher, lower or same rate as wages?
6. Is the payroll tax system (FICA) fair from the perspective of the employee who is paying the taxes and the benefits the taxpayer ultimately receives? How can the system be improved?
7. What are your thoughts on raising the minimum wage to a living wage? What is a living wage? Consider as if you were an employee and also a business owner.
8. Finally, I would like each of you to have a question prepared which you would like your fellow students to answer in class regarding taxation? This is always a fun discussion!
Part 2:- Gross Income Concept and Inclusion
1. The Blue Utilities Company paid Sue $2,000 for the right to lay an underground electric cable across her property anytime in the future.
a. Sue must recognize $2,000 gross income in the current year if the company did not install the cable during the year.
b. Sue is not required to recognize gross income from the receipt of the funds, but she must reduce her cost basis in the land by $2,000.
c. Sue must recognize $2,000 gross income in the current year regardless of whether the company installed the cable during the year.
d. Sue must recognize $2,000 gross income in the current year, and when the cable is installed, she must reduce her cost basis in the land by $2,000.
e. None of these.
2. For purposes of determining gross income, which of the following is true?
a. A mechanic completed repairs on an automobile during the year and collects money from the customer. The customer was not satisfied with the repairs and sued the mechanic for a refund. The mechanic can defer recognition of the income until the suit has been settled.
b. A taxpayer who finds a wallet full of money is required to recognize income even though someone may eventually ask for the return of the money.
c. Embezzlement proceeds are not included in the embezzler's gross income because the embezzler has an obligation to repay the owner.
d. All of these are false.
e. All of these are true.
3. Freddy purchased a certificate of deposit for $20,000 on July 1, 2018. The certificate's maturity value in two years (June 30, 2020) is $21,218, yielding 3% before-tax interest.
a. Freddy must recognize $1,218 gross income in 2018.
b. Freddy must recognize $1,218 gross income in 2020.
c. Freddy must recognize $600 (.03 × $20,000) gross income in 2020.
d. Freddy must recognize $300 (.03 × $20,000 × .5) gross income in 2018.
e. None of these.
4. Office Palace, Inc. leased an all-in-one printer to a new customer, Ashley, on December 27, 2018. The printer was to rent for $600 per month for a period of 36 months beginning January 1, 2019. Ashley was required to pay the first and last month's rent at the time the lease was signed. Ashley was also required to pay a $1,500 damage deposit. Office Palace must recognize as income for the lease:
a. $0 in 2018, if Office Palace is an accrual basis taxpayer.
b. $7,800 in 2019, if Office Palace is a cash basis taxpayer.
c. $2,700 in 2018, if Office Palace is a cash basis taxpayer.
d. $1,200 in 2018, if Office Palace is an accrual basis taxpayer.
e. None of these.
5. The Maroon & Orange Gym, Inc. uses the accrual method of accounting. The corporation sells memberships that entitle the member to use the facilities at any time. A one-year membership costs $480 ($480/12 = $40 per month); a two-year membership costs $720 ($720/24 = $30 per month). Cash payment is required at the beginning of the membership period. On July 1, 2018, the company sold a one-year membership and a two-year membership. The company should report as gross income from the two contracts:
a. $1,200 in 2018.
b. $ 960 in 2018.
c. $ 180 in 2020.
d. $ 780 in 2019.
e. None of these.
6. Orange Cable TV Company, and accrual basis taxpayer, allows its customers to pay by the year in advance ($600 per year) or two years in advance ($960. In September 2018, the company collected the following amounts applicable to future services:
October 2018 - September 2020 services (200 two year contracts) $192,000
October 2018 - September 2029 services (200 one year contracts) $120,000
Total $312,000
As a result of the above, Orange Cable should report as gross income in 2019:
a. $54,000
b. $78,000
c. $258,000
d. $312,000
e. None of these
7. With respect to the prepaid income from services, which of the following is true?
a. The treatment of prepaid income is the same for tax and financial accounting.
b. A cash basis must report all of the income in the year received
c. An accrual basis taxpayer can spread the income over the period services are to be provided if all of the services will be completed within three years following the year of receipt.
d. An accrual basis taxpayer can spread the income over the period services are to be provided on a contract for three years or less.
e. None of these.
8. The Green Company, an accrual basis taxpayer, provides business-consulting services. Clients generally pay a retainer at the beginning of a 12-month period. This entitles the client to no more than 40 hours of services. Once the client has received 40 hours of services, Green charges $500 per hour. Green Company allocates the retainer to income based on the number of hours worked on the contract. At the end of the tax year, the company had $50,000 of unearned revenues from these contracts. The company also had $10,000 in unearned rent income received from excess office space leased to other companies. Based on the above, Green must include in gross income for the subsequent year:
a. $60,000.
b. $50,000.
c. $10,000.
d. $0.
e. None of these.
9. On January 1, 2019, Tim purchased a bond paying interest at 6% for $30,000. On March 31, 2019, he gave the bond to Jane. The bond pays $1,800 interest on December 31. Tim and Jane are cash basis taxpayers. When Jane collects the interest in December 2019:
a. Tim must include all of the interest in his gross income.
b. Jane must report $1,800 gross income for 2019.
c. Jane reports $1,350 of interest income in 2019, and Tim reports $450 of interest income in 2019.
d. Jane reports $450 of interest income in 2019, and Tim reports $1,350 of interest income in 2019.
e. None of these is correct.
10. As a general rule:
I. Income from property is taxed to the person who owns the property.
II. Income from services is taxed to the person who earns the income.
III. The assignee of income from property must pay tax on the income.
IV. The person who receives the benefit of the income must pay the tax on the income.
a. Only I and II are true.
b. Only III and IV are true.
c. I, II, and III are true, but IV is false.
d. I, II, III, and IV are true.
e. None of these is true
11. Darryl, a cash basis taxpayer, gave 1,000 shares of Copper Company common stock to his daughter on September 29, 2018. Copper Company is a publicly held company that has declared a $2.00 per share dividend on September 30th every year for the last 20 years. Just as Darryl had expected, Copper Company declared a $2.00 per share dividend on September 30th, payable on October 15th, to stockholders of record as of October 10th. The daughter received the $2,000 dividend on October 18, 2018.
a. The daughter must recognize the income because she owned the stock when the dividend was declared and she received the $2,000.
b. Darryl must recognize the income of $2,000 because the purpose of the gift was to avoid taxes.
c. Darryl must recognize $1,500 of the dividend because he owned the stock for three-fourths of the year.
d. Darryl must recognize the $2,000 dividend as his income because he constructively received the dividend.
e. None of these.
12. Wayne owns a 30% interest in the capital and profits of Emerald Company (a calendar year partnership). For tax year 2019, the partnership earned revenue of $900,000 and had operating expenses of $660,000. During the year, Wayne withdrew from the partnership a total of $90,000. He also invested an additional $30,000 in the partnership. For 2019, Wayne's gross income from the partnership is:
a. $72,000.
b. $90,000.
c. $132,000.
d. $162,000.
e. None of these.
13. Travis and Andrea were divorced in 2016. Their only marital property consisted of a personal residence (fair market value of $400,000, cost of $200,000), and publicly-traded stocks (fair market value of $800,000, cost basis of $500,000). Under the terms of the divorce agreement, Andrea received the personal residence and Travis received the stocks. In addition, Andrea was to receive $50,000 for eight years.
I. If the $50,000 annual payments are to be made to Andrea or her estate (if she dies before the end of the eight years), the payments will qualify as alimony.
II. Andrea has a taxable gain from an exchange of her one-half interest in the stocks for Travis' onehalf interest in the house and cash.
III. If Travis sells the stocks for $900,000, he must recognize a $400,000 gain.
a. Only III is true.
b. Only I and III are true.
c. Only I and II are true.
d. I, II, and III are true.
e. None of these are true.
14 Thelma and Mitch were divorced in 2017. The couple had a joint brokerage account that included stocks with a basis of $600,000 and a fair market value of $1,000,000. Under the terms of the divorce agreement, Mitch would receive the stocks and Mitch would pay Thelma $100,000 each year for 6 years, or until Thelma's death, whichever should occur first. Thelma and Mitch lived apart when the payments were made by Mitch. Mitch paid the $600,000 to Thelma over the sixyear period. The divorce agreement did not contain the word "alimony." Then, Mitch sold the stocks for $1,300,000. Mitch's recognized gain from the sale is:
a. $0.
b. $1,000,000 ($1,300,000 - $300,000).
c. $700,000 ($1,300,000 - $600,000).
d. $300,000 ($1,300,000 - $1,000,000).
e. None of these.
15 Under the terms of a divorce agreement, Kim was to pay her husband Tom $7,000 per month in alimony. Kim's payments will be reduced to $3,000 per month when their 9 year-old son becomes 21. The husband has custody of their son. For a twelve-month period, Kim can deduct from gross income (and Tom must include in gross income):
a. $60,000.
b. $48,000.
c. $36,000.
d. 0.
e. None of these.
16. The purpose of the tax rules that apply to below-market loans between family members is to:
a. Discourage loans between related parties.
b. Prevent shifting of income among family members.
c. Prevent gifts from being disguised as bad debt expenses.
d. Prevent gift tax avoidance.
e. None of these is true.
17. On January 1, Father (Dave) loaned Daughter (Debra) $100,000 to purchase a new car and to pay off college loans. There were no other loans outstanding between Dave and Debra. The relevant Federal rate on interest was 6 percent. The loan was outstanding for the entire year.
a. If Debra has $15,000 of investment income, Dave must recognize $6,090 of imputed interest income.
b. Dave must recognize $6,090 of imputed interest income regardless of the amount of Debra's investment income.
c. Debra must recognize $6,090 of imputed interest income.
d. Debra must recognize $6,090 of imputed interest income if Dave has at least $6,090 of investment income.
e. None of these.
18. The effects of a below-market loan for $100,000 made by a corporation to its chief executive officer as an enticement to get him to remain with the company are:
a. The corporation has imputed interest income and the employee is deemed to have received a gift.
b. The corporation has imputed interest income and dividends paid.
c. The employee has no income unless the funds are invested and produce investment income for the year.
d. The employee has imputed compensation income and the corporation has imputed interest income.
e. None of these.
19. In 2018 Todd purchased an annuity for $150,000. The annuity is to pay him $2,500 per month for the rest of his life. His life expectancy is 100 months. Which of the following is correct?
a. Todd is not required to recognize any income until he has collected 60 payments (60 × $2,500 = $150,000).
b. If Todd collects 20 payments and then dies in 2018, Todd's estate should amend his tax returns for 2018 and 2019 and eliminate all of the reported income from the annuity for those years.
c. For each $2,500 payment received in the first year, Todd must include $1,000 in gross income.
d. For each $2,500 payment received in the first year, Todd must include $1,500 in gross income.
e. None of these.
20. Green, Inc. provides group term life insurance for all of its employees. The coverage equals twice the employee's annual salary. Sam, a vice-president, worked all year for Green, Inc., and received $200,000 of coverage for the year at a cost to Green of $1,500. The Uniform Premiums (based on Sam's age) are $.25 per month for $1,000 of protection. How much must Sam include in gross income this year?
a. $0.
b. $375.
c. $450.
d. $600.
e. None of these.
21. The amount of Social Security benefits received by an individual that he or she must include in gross income:
a. Is computed in the same manner as an annuity [exclusion = (cost/expected return) × amount received].
b. May not exceed the portion contributed by the employer.
c. May not exceed 50% of the Social Security benefits received.
d. May be zero or as much as 85% of the Social Security benefits received, depending upon the taxpayer's Social Security benefits and other income.
e. None of these
22. José, a cash method taxpayer, is a partner in J&T Accounting Services, a calendar year partnership. Under the partnership agreement, José is to receive 20% of the partnership's profits or losses. Each partner is allowed to withdraw $10,000 each month for his or her living expenses. José withdrew $120,000 during the year as his monthly draw in 2018. However, in December the partnership was short on cash and José was required to invest an additional $10,000 in the partnership. In March 2018, José received $40,000 as his share of distributed 2016 profits. The partnership earnings before partners' withdrawals for 2018 totaled $1 million. Compute José's gross income from the partnership for 2018.
23. Margaret made a $90,000 interest-free loan to her son, Adam, who used the money to retire a mortgage on his personal residence and to buy a certificate of deposit. Adam's only income for the year is his salary of $35,000 and $1,400 interest income on the certificate of deposit. The relevant Federal interest rate is 8% compounded semiannually. The loan is outstanding for the entire year.
a. Based on the above information, what is the effect of the loan on Margaret's gross income for the year?
b. The facts are the same as above, except you discovered that Margaret had made an additional loan of $15,000 to Adam in the previous year. Adam used the funds to pay his child's private school tuition. What are the effects of the loans on Margaret's gross income?
Part 3 - Gross Income: Exclusions
Multiple Choice:
1. Sharon had some insider information about a corporate takeover. She unintentionally informed a friend, who immediately bought the stock in the target corporation. The takeover occurred and the friend made a substantial profit from buying and selling the stock. The friend told Sharon about his stock dealings, and gave her a pearl necklace because she "made it all possible." The necklace was worth $10,000, but she already owned more jewelry than she desired.
a. The necklace is a nontaxable gift received by Sharon because the friend was not legally required to make the gift.
b. The value of the necklace is not included in Sharon's gross income unless she sells it.
c. The value of the necklace is not included in Sharon's gross income because passing the information was an illegal act and the SEC can confiscate the necklace.
d. The value of the necklace must be included in Sharon's gross income for the tax year it was received by her.
e. None of these.
2. Carin, a widow, elected to receive the proceeds of a $150,000 life insurance policy on the life of her deceased husband in 10 installments of $17,500 each. Her husband had paid premiums of $60,000 on the policy. In the first year, Carin collected $17,500 from the insurance company. She must include in gross income:
a. $0.
b. $2,500.
c. $10,000.
d. $25,000.
e. None of these.
3. Turquoise Company purchased a life insurance policy on the company's chief executive officer, Joe. After the company had paid $400,000 in premiums, Joe died and the company collected the $1.5 million face amount of the policy. The company also purchased group term life insurance on all its employees. Joe had included $16,000 in gross income for the group term life insurance premiums. Joe's widow, Rebecca, received the $100,000 proceeds from the group term life insurance policy.
a. Rebecca can exclude the life insurance proceeds of $100,000, but Turquoise Company must include
$1,100,000 ($1,500,000 - $400,000) in gross income.
b. Turquoise Company and Rebecca can exclude the life insurance proceeds of $1,500,000 and $100,000, respectively, from gross income.
c. Turquoise Company can exclude $1,100,000 ($1,500,000 - $400,000) from gross income, but Rebecca must include $84,000 in gross income.
d. Turquoise Company must include $1,100,000 ($1,500,000 - $400,000) in gross income and Rebecca must include $100,000 in gross income.
e. None of these.
4. Ben was diagnosed with a terminal illness. His physician estimated that Ben would live no more than 18 months. After he received the doctor's diagnosis, Ben cashed in his life insurance policy and used the proceeds to take a trip to see relatives and friends before he died. Ben had paid $12,000 in premiums on the policy, and he collected $50,000, the cash surrender value of the policy. Henry enjoys excellent health, but he cashed in his life insurance policy to purchase a new home. He had paid premiums of $12,000 and collected $50,000 from the insurance company.
a. Neither Ben nor Henry is required to recognize gross income.
b. Both Ben and Henry must recognize $38,000 ($50,000 - $12,000) of gross income.
c. Henry must recognize $38,000 ($50,000 - $12,000) of gross income, but Ben does not recognize any gross income.
d. Ben must recognize $38,000 ($50,000 - $12,000) of gross income, but Henry does not recognize any gross income.
e. None of these.
5. Ron, age 19, is a full-time graduate student at City University. During 2019, he received the following payments:
Cash award for being the outstanding resident adviser $ 1,500
Resident adviser housing 2,500
State scholarship for ten months (tuition and books) 6,000
State scholarship (meals allowance) 2,400
Loan from college financial aid office 3,000
Cash support from parents 2,000
$17,400
Ron served as a resident advisor in a dormitory and, therefore, the university waived the $2,500 charge for the room he occupied. What is Ron's adjusted gross income for 2019?
a. $1,500.
b. $3,900.
c. $9,000.
d. $15,400.
e. None of these.
6. As an executive of Cherry, Inc., Ollie receives a fringe benefit in the form of annual tuition scholarships of $10,000 to each of his three children. The scholarships are paid by the company on behalf of the children of key employees directly to each child's educational institution and are payable only if the student maintains a B average.
a. The tuition payments of $30,000 may be excluded from Ollie's gross income as a scholarship.
b. The tuition payments of $10,000 each must be included in the child's gross income.
c. The tuition payments of $30,000 may be excluded from Ollie's gross income because the payments are for the academic achievements of the children.
d. The tuition payments of $30,000 must be included in Ollie's gross income.
e. None of these
7. During the current year, Khalid was in an automobile accident and suffered physical injuries. The accident was caused by Rashad's negligence. Khalid threatened to file a lawsuit against Amber Trucking Company, Rashad's employer, claiming $50,000 for pain and suffering, $90,000 for loss of income, and $70,000 in punitive damages. Amber's insurance company will not pay punitive damages; therefore, Amber has offered to settle the case for $100,000 for pain and suffering, $90,000 for loss of income, and nothing for punitive damages. Khalid is in the 35% marginal tax bracket. What is the aftertax difference to Khalid between Khalid's original claim and Amber's offer?
a. Amber's offer is $20,000 less. ($50,000 + $90,000 + $70,000 - $100,000 - $90,000).
b. Amber's offer is $7,000 less. [($50,000 + $90,000 + $70,000 - $100,000 - $90,000) × .35)].
c. Amber's offer is $4,500 more. {$190,000 - ($50,000 + $90,000) + [$70,000 × (1 - .35)]}.
d. Amber's offer is $22,000 more. [($190,000 - $210,000) + ($120,000 × .35)].
e. None of these.
8. Christie sued her former employer for a back injury she suffered on the job in 2018. As a result of the injury, she was partially disabled. In 2019, she received $240,000 for her loss of future income, $160,000 in punitive damages because of the employer's flagrant disregard for the employee's safety, and $15,000 for medical expenses. The medical expenses were deducted on her 2018 return, reducing her taxable income by $12,000. Christie's 2019 gross income from the above is:
a. $415,000.
b. $412,000.
c. $255,000.
d. $175,000.
e. $172,000.
9. Theresa sued her former employer for age, race, and gender discrimination. She claimed $200,000 in damages for loss of income, $300,000 for emotional harm, and $500,000 in punitive damages. She settled the claim for $700,000. As a result of the settlement, Theresa must include in gross income:
a. $700,000.
b. $500,000.
c. $490,000 [($700,000/$1,000,000) × $700,000].
d. $0.
e. None of these.
10. Olaf was injured in an automobile accident and received $25,000 for his physical injury, $50,000 for his loss of income, and $10,000 punitive damages. As a result of the award, the amount Olaf must include in gross income is:
a. $10,000.
b. $50,000.
c. $60,000.
d. $85,000.
e. None of these
11. Julie was suffering from a viral infection that caused her to miss work for 90 days. During the first 30 days of her absence, she received her regular salary of $8,000 from her employer. For the next 60 days, she received $12,000 under an accident and health insurance policy purchased by her employer. The premiums on the health insurance policy were excluded from her gross income. During the last 30 days, Julie received $6,000 on an income replacement policy she had purchased. Of the $26,000 she received, Julie must include in gross income:
a. $0.
b. $6,000.
c. $8,000.
d. $14,000.
e. $20,000.
12. Matilda works for a company with 1,000 employees. The company has a hospitalization insurance plan that covers all employees. However, the employee must pay the first $3,000 of his or her medical expenses each year. Each year, the employer contributes $1,500 to each employee's health savings account (HAS). Matilda's employer made the contributions in 2017 and 2018, and the account earned $100 of interest in 2018. At the end of 2018, Matilda withdrew $3,100 from the account to pay the deductible portions of her medical expenses for the year and other medical expenses not covered by the hospitalization insurance policy. As a result, Matilda must include in her 2018 gross income?
a. $ 0
b. $ 100
c. $1,600
d. $3,100
e. None of these.
13. The First Chance Casino has gambling facilities, a bar, a restaurant, and a hotel. All employees are allowed to obtain food from the restaurant at no charge during working hours. In the case of the employees who operate the gambling facilities, bar, and restaurant, 60% of all of Casino's employees, the meals are provided for the convenience of the Casino. However, the hotel workers, demanded equal treatment and therefore were also allowed to eat in the restaurant at no charge while they are at work. Which of the following is correct?
a. All the employees are required to include the value of the meals in their gross income.
b. Only the restaurant employees may exclude the value of their meals from gross income.
c. Only the employees who work in gambling, the bar, and the restaurant may exclude the meals from gross income.
d. All of the employees may exclude the value of the meals from gross income.
e. None of these.
14. Tommy, a senior at State College, receives free room and board as full compensation for working as a resident advisor at the university dormitory. The regular housing contract is $2,000 a year in total, $1,200 for lodging and $800 for meals in the dormitory. Tommy had the option of receiving the meals or $800 in cash. Tommy accepted the meals. What must Tommy include in gross income from working as a resident advisor?
a. All items can be excluded from gross income as a scholarship.
b. The meals must be included in gross income.
c. The meals may be excluded because he did not receive cash.
d. The lodging must be included in gross income because it was compensation for services.
e. None of these.
15. Under the Swan Company's cafeteria plan, all fulltime employees are allowed to select any combination of the benefits below, but the total received by the employee cannot exceed $8,000 a year.
I. Group medical and hospitalization insurance for the employee, $3,600 a year.
II. Group medical and hospitalization insurance for the employee's spouse and children, $1,200 a year.
III. Child-care payments, actual cost but not more than $4,800 a year.
IV. Cash required to bring the total of benefits and cash to $8,000.
Which of the following statements is true?
a. Sam, a full-time employee, selects choices II and III and $2,000 cash. His gross income must include the $2,000.
b. Paul, a fulltime employee, elects to receive $8,000 cash because his wife's employer provided these same insurance benefits for him. Paul is not required to include the $8,000 in gross income.
c. Sue, a full-time employee, elects to receive choices I, II and $3,200 for III. Sue is required to include $3,200 in gross income.
d. All of these.
e. None of these.
16. Employees of the Valley Country Club are allowed to use the golf course without charge before and after working hours on Mondays, when the number of players on the course is at its lowest. Tom, an employee of the country club played 40 rounds of golf during the year at no charge when the non-employee charge was $20 per round.
a. Tom must include $800 in gross income.
b. Tom is not required to include anything in gross income because it is a de minimis fringe benefit.
c. Tom is not required to include the $800 in gross income because the use of the course was a gift.
d. Tom is not required to include anything in gross income because this is a "noadditionalcost service" fringe benefit.
e. None of these.
17. A company has a medical reimbursement plan for officers that covers all costs that the insurer will not pay. However, for all employees who are not officers, the medical reimbursement plan applies only after the employee has paid $1,000 from his or her own funds. An officer incurred $1,500 in medical expenses and was reimbursed for that amount. An hourly worker also incurred $1,500 in medical expense and was reimbursed $500.
a. Both employees must include all benefits received in gross income.
b. The officer must include $500 in gross income.
c. The officer must include $1,500 in gross income.
d. The hourly employee must include $1,000 in gross income.
e. None of these.
18. Heather's interest and gains on investments for the current year are as follows:
Interest on Madison County school bonds $600
Interest on U.S. government bonds 700
Interest on a Federal income tax refund 200
Gain on the sale of Madison County school bonds 500
Heather's gross income from the above is:
a. $2,000.
b. $1,800.
c. $1,400.
d. $1,300.
e. None of these.
19. Martha participated in a qualified tuition program for the benefit of her son. She invested $6,000 in the fund. Four years later her son withdrew $8,000, the entire balance in the program, to pay his college tuition.
a. Martha is not required to include the $2,000 ($8,000 - $6,000) in her gross income when the funds are used to pay the tuition.
b. Martha's son must include the $2,000 ($8,000 - $6,000) in his gross income when the funds are used to pay the tuition.
c. Martha must include $8,000 in her gross income.
d. Martha's son must include $8,000 in his gross income.
e. None of these.
20. 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.
a. Hazel did not realize any income because her employer made a gift to her.
b. Hazel must include $6,000 in gross income from discharge of indebtedness.
c. Hazel must include $6,000 in gross income under the tax benefit rule.
d. Hazel may exclude the $6,000 from gross income because the debt never existed.
e. None of these.
21. Beverly died during the current year. At the time of her death, her accrued salary and commissions totaled $3,000 and were paid to her husband. The employer also paid the husband $35,000 which represented an amount equal to Beverly's salary for the year prior to her death. The employer had a policy of making the salary payments to "help out the family in the time of its greatest need." Beverly's spouse collected her interest in the employer's qualified profit sharing plan amounting to $30,000. As beneficiary of his wife's life insurance policy, Beverly's spouse elected to collect the proceeds in installments. In the year of death, he collected $8,000 which included $1,500 interest income. Which of these items are subject to income tax for Beverly's spouse?
22. Barbara was injured in an automobile accident. She has threatened to file a suit against the other party involved in the accident and has proposed the following settlement:
|
Damages for 25% loss of the use of her right arm
|
$200,000
|
|
Medical expenses
|
30,000
|
|
Loss of wages
|
10,000
|
|
Punitive damages
|
100,000
|
|
|
$340,000
|
The defendant's insurance company is reluctant to pay punitive damages. Also, the company disputes the amount of her loss of wages amount. Instead, the company offers to pay her $300,000 for damages to her arm and $30,000 medical expenses. Assuming Barbara is in the 35% marginal tax bracket, will her after-tax proceeds from accepting the offer be equal to what she considers to be her actual damages (listed above)?
Attachment:- Tax Treatment of Individuals.rar