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Exam 5: Gross Income: Exclusions

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Question 31

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Mother participated in a qualified state tuition program for the benefit of her son.She contributed $15,000.When the son entered college,the balance in the fund satisfied the tuition charge of $20,000.When the funds were withdrawn to pay the college tuition for her son,Mother must include $5,000 ($20,000 - $15,000)in her gross income.

A) True
B) False

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Question 32

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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.

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Gull is not required to recognize income...

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Question 33

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George,an unmarried cash basis taxpayer,received the following amounts during 2012: What amount should George report as gross income from dividends and interest for 2012?

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

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.

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?

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 must be included in Steve's gross income.

Zack was the beneficiary of a life insurance policy on his wife.Zack had paid $20,000 in premiums on the policy.He collected $50,000 on the policy when his wife died from a terminal illness.Because it took several months to process the claim,the insurance company paid Zack $53,000,the face amount of the policy plus $3,000 interest.Zack must include $23,000 in his gross income.

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:

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 $10,000 of premiums on the policy.The insurance company has offered to pay him $75,000 to cancel the policy,although its cash surrender value was only $60,000.Albert accepted the $75,000.Albert used $5,000 to pay his medical expenses.Albert made a miraculous recovery and lived another 20 years.As a result of cashing in the policy:

The plant union is negotiating with the Eagle Company,which is on the verge of bankruptcy.Eagle has offered to pay for the employees' hospitalization insurance in exchange for a wage reduction.The employees each currently pay premiums of $4,000 a year for their insurance.

Calvin's property was taken by the State of Louisiana to build a highway overpass.He disputed the amount of the condemnation award he was to receive and ultimately collected an amount for the property plus $15,000 interest on the award.Calvin can exclude from gross income the $15,000 interest he received from the State of Louisiana associated with the condemnation award.

Emily is in the 35% marginal tax bracket.She can purchase a York County school bond yielding 5% interest,but she is interested in earning a higher return for comparable risk.

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.

Ben was hospitalized for back problems.While he was away from the job,he collected his regular salary from an employer-sponsored income protection insurance policy.Ben's employer-sponsored hospitalization insurance policy also paid for 90% of his medical expenses.Ben also collected on an income protection policy that he purchased.Which of the above sources of income are taxable? Explain the basis for excluding any item or items.

The exclusion for health insurance premiums paid by the employer applies to:

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.

Carmen had worked for Sparrow Corporation for thirty years when she died of a heart attack at age 60.She was practically penniless at the time of her death,owed a $12,000 hospital bill,and had a disabled spouse.The company was very concerned about its public image,and rather than run the risk of embarrassment from one of its long-term employees dying and leaving her spouse with insufficient means,the Board of Directors agreed to pay Carmen's hospital bill and to give her spouse $6,000 per year for the rest of his life.Discuss both sides of the question whether Carmen (or her estate)and her spouse realize any taxable income from the above.

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.

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.