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Exam 5: Gross Income: Exclusions

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Question 31

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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.

F) C) and E)
G) B) and E)

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Question 32

True/False

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Mel was the beneficiary of a $45,000 group term life insurance policy on his wife.His wife's employer paid all of the premiums on the policy.Mel used the life insurance proceeds to purchase a United States Government bond,which paid him $2,500 interest during the current year.Mel's Federal gross income from the above is $2,500.

A) True
B) False

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Question 33

Multiple Choice

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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:

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

The exclusion of interest on educational savings bonds:

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.

Louise works in a foreign branch of her employer's business.She earned $5,000 per month throughout the relevant period.Which of the following is correct:

A U.S.citizen who works in France from February 1,2015 until January 31,2016 is eligible for the foreign earned income exclusion in 2015 and 2016.

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

Heather is a full-time employee of the Drake Company and participates in the company's flexible spending plan that is available to all employees.Which of the following is correct?

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.

Employers can provide numerous benefits to their employees and the employees are permitted to exclude the value of these benefits from gross income.What are the effects of the exclusions on: a.The progressiveness of the tax system? b.The complexity of the tax system?

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:

Tonya is a cash basis taxpayer.In 2015,she paid state income taxes of $8,000.In early 2016,she filed her 2015 state income tax return and received a $900 refund.

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

Ashley received a scholarship to be used as follows: tuition $6,000;room and board $9,000;and books and laboratory supplies $2,000.Ashley is required to include only $9,000 in her gross income.

Mia participated in a qualified state tuition program for the benefit of her son Michael.She contributed $15,000.When Michael entered college,the balance in the fund satisfied the tuition charge of $20,000.When the funds were withdrawn to pay the college tuition for Michael,neither Mia nor Michael must include $5,000 ($20,000 - $15,000) in 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.

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.

The CEO of Cirtronics Inc. ,discovered that the company's competitor had adopted a cafeteria plan for its employees.The CEO is concerned about retaining his talented employees and would like you to provide a brief explanation as to why a cafeteria plan may be attractive to the company's employees.