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Exam 5: Gross Income: Exclusions

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Question 21

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On January 1, 2002, Cardinal Corporation issued 5% 25-year bonds at par and used the $12,000,000 proceeds to finance the construction of a new plant.On January 1, 2012, the company acquired the bonds on the open market for $11,500,000.Assuming that Cardinal Corporation is neither bankrupt nor insolvent, the acquisition and retirement of the bonds results in which of the following:

A) The company must recognize a $500,000 gain.
B) The company can make an election to recognize a $500,000 gain or reduce the company's basis in the plant by $500,000.
C) The company must recognize a $500,000 gain and increase the company's basis in the plant by $500,000.
D) The company can amortize the $500,000 gain, recognizing income over the remaining life of the bonds.
E) None of the above.

F) A) and B)
G) A) and C)

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Question 22

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In 2012, Theresa was in an automobile accident and suffered physical injuries.The accident was caused by Ramon's negligence.In 2013, Theresa collected from his insurance company.She received $15,000 for loss of income, $25,000 punitive damages, and $8,000 for medical expenses which she had deducted on her 2012 tax return (the amount in excess of 7.5% of adjusted gross income).As a result of the above, Theresa's 2013 gross income is increased by $33,000.

A) True
B) False

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Question 23

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When Betty was diagnosed as having a terminal illness, she sold her life insurance policy to Insurance Purchase, Inc., a company that is licensed to invest in these types of contracts.Betty sold the policy for $32,000 and Insurance Purchase, Inc., became the beneficiary.She had paid total premiums of $19,000.Betty died 8 months after the sale.Insurance Purchase, Inc., collected $50,000 on the policy.The company had paid additional premiums of $4,000 on the policy.Betty is not required to recognize a $13,000 gain from the sale of her life insurance policy and Insurance Purchase, Inc., is required to recognize a $14,000 gain from the insurance policy.

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.

Brooke works part-time as a waitress in a restaurant. For groups of 7 or more customers, the customer is charged 15% of the bill for Brooke's services. For parties of less than 7, the tips are voluntary. Brooke received $11,000 from the groups of 7 or more and $7,000 in voluntary tips from all other customers. Using the customary 15% rate, her voluntary tips would have been only $6,000.Brooke must include $18,000 ($11,000 + $7,000) in gross income.

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 $1,200.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 is not taxed on any of the above amounts.

Margaret is trying to decide whether to place funds in a qualified tuition program.Her son will be attending college in 4 years.She is in the 35% marginal tax bracket and she believes she can earn an 7% before tax return on alternative investments.Thus, $10,000 will accumulate to $11,948 (after-tax) in 4 years.Margaret expects tuition to increase at the rate of 5% each year to $12,155 in 4 years.Her son will be in the 15% marginal tax bracket in all relevant years.Given these assumptions, should Margaret participate in the qualified tuition program?

If a scholarship does not satisfy the requirements for a gift, the scholarship must be included in gross income.

Cash received by an individual:

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.

Tonya is a cash basis taxpayer.In 2012, she paid state income taxes of $6,000.In early 2013, she filed her 2012 state income tax return and received a $600 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.

Gold Company was experiencing financial difficulties, but was not bankrupt or insolvent.The National Bank, which held a mortgage on other real estate owned by Gold, reduced the principal from $110,000 to $85,000. The bank had made the loan to Gold when it purchased the real estate from Silver, Inc.Pink, Inc., the holder of a mortgage on Gold's building, agreed to accept $40,000 in full payment of the $55,000 due.Pink had sold the building to Gold for $150,000 that was to be paid in installments over 8 years.As a result of the above, Gold must:

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?

In the case of interest income from state and Federal bonds:

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 be excluded from gross income as a de minimis fringe benefit.

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.

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 is Tommy's gross income from working as a resident advisor?

The taxpayer's marginal tax bracket is 25%.Which would the taxpayer prefer?

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 directly to each child's educational institution and are payable only if the student maintains a B average.