TAX Ch. 5 (All questions)

52.The Royal Motor Company manufactures automobiles. Non-management employees of the company can buy a new automobile for Royal's cost plus 2%. The automobiles are sold to dealers at cost plus 20%. Generally, management employees of Local Dealer, Inc., are allowed to buy a new automobile from the company at the dealer's cost. Which of the following statements is correct? a. The non-management employees who buy automobiles at a discount are not required to recognize income from the purchase. b. None of the employees who take advantage of the fringe benefits described above are required to recognize income. c. Employees of Royal are required to recognize as gross income 18% (20% - 2%) of the cost of the automobile purchased. d. All of these. e. None of these.

a

52.Under the Swan Company's cafeteria plan, all full-time 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 full-time 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.

a

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 (HSA). Matilda's employer made the contributions in 2017 and 2018, and the account earned $100 interest in 2018. At the end of 2018, Matilda withdrew $3,100 from the account to pay the deductible portion 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.

a

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.

a

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.

a

.James, a cash basis taxpayer, received the following compensation and fringe benefits in the current year: Salary $66,000 Disability income protection premiums 3,000 Long-term care insurance premiums 4,000 His actual salary was $72,000. He received only $66,000 because his salary was garnished and the employer paid $6,000 on James's credit card debt he owed. The wage continuation insurance is available to all employees and pays the employee three-fourths of the regular salary if the employee is sick or disabled. The long-term care insurance is available to all employees and pays $150 per day towards a nursing home or similar facility. What is James's gross income from the above? a. $66,000. b. $72,000. c. $73,000. d. $75,000. e. None of these.

b

37.A scholarship recipient at State University may exclude from gross income the scholarship proceeds used to pay for: a. Only tuition. b. Tuition, books, and supplies. c. Tuition, books, supplies, meals, and lodging. d. Meals and lodging. e. None of these.

b

37.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.

b

37.Ron, age 19, is a full-time graduate student at City University. During 2018, 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 adviser 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 2018? a. $1,500. b. $3,900. c. $9,000. d. $15,400. e. None of these.

b

37.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.

b

52. Barry, a solvent individual but a recovering alcoholic, embezzled $6,000 from his employer. In the same year that he embezzled the funds, his employer discovered the theft. His employer did not fire him and told him he did not have to repay the $6,000 if he would attend Alcoholics Anonymous. Barry met the conditions and his employer canceled the debt. a. Barry did not realize any income because his employer made a gift to him. b. Barry must include $6,000 in gross income from discharge of indebtedness. c. Barry must include $6,000 in gross income under the tax benefit rule. d. Barry may exclude the $6,000 from gross income because the debt never existed. e. None of these.

b

52. Emily is in the 35% marginal tax bracket. She can purchase a York County school bond yielding 3.5% interest and the interest is not subject to a 5% state tax. But she is interested in earning a higher return for comparable risk. Which of the following is correct: a. If she buys a corporate bond that pays 6% interest, her after-tax rate of return will be less than if she purchased the York County school bond. b. If she buys a U.S. government bond paying 5%, her after-tax rate of return will be less than if she purchased the York County school bond. c. If she buys a common stock paying a 4% dividend, her after-tax rate of return will be higher than if she purchased the York County school bond. d. All of these are correct. e. None of these are correct.

b

52. 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. a. Harold must recognize $20,000 ($80,000 - $60,000) of gross income. b. Harold is notrequired to recognize gross income, but must reduce his cost basis in the land to $130,000. c. Harold is notrequired to recognize gross income, since he paid the debt before it was due. d. Jewel must recognize gross income of $20,000 ($80,000 - $60,000) from discharge of the debt. e. None of these.

b

52. In December 2018, Todd, a cash basis taxpayer, paid $1,200 of fire insurance premiums for the calendar year 2019 on a building he held for rental income. Todd deducted the $1,200 of insurance premiums on his 2018 tax return. He had $150,000 of taxable income that year. On June 30, 2019, he sold the building and, as a result, received a $500 refund on his fire insurance premiums. As a result of the above: a. Todd should amend his 2018 return and claim $500 less insurance expense. b. Todd should include the $500 in 2019 gross income in accordance with the tax benefit rule. c. Todd should add the $500 to his sales proceeds from the building. d. Todd should include the $500 in 2019 gross income in accordance with the claim of right doctrine. e. None of these.

b

52. In the case of interest income from state and Federal bonds: a. Interest on United States government bonds received by a state resident can be subject to that state's income tax. b. Interest on United States government bonds is subject to Federal income tax. c. Interest on bonds issued by State A received by a resident of State B cannot be subject to income tax in State B. d. All of these are correct. e. None of these are correct.

b

52. The exclusion of interest on educational savings bonds: a. Applies only to savings bonds owned by the child. b. Applies to parents who purchase bonds for which the proceeds are used for their child's education. c. Means that the child must include the interest in income if the bond is owned by the parent. d. Does apply even if used to pay for room and board. e. None of these

b

52.An employee can exclude from gross income the value of meals provided by his or her employer whenever: a. The meal is not extravagant. b. The meals are provided on the employer's premises for the employer's convenience. c. There are no places to eat near the work location. d. The meals are provided for the convenience of the employee. e. None of these.

b

52.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? a. Heather reduced her salary by $1,200, actually spent $1,500, and received only $1,200 as reimbursement for her medical expenses. Heather's gross income will be reduced by $1,500. b. Heather reduced her salary by $1,200, and received only $900 as reimbursement for her actual medical expenses. She is not refunded the $300 remaining balance, but her gross income is reduced by $1,200. c. Heather reduced her salary by $1,200, and received only $800 as reimbursement for her medical expenses. She is not refunded the $400. Her gross income is reduced by $800. d. Heather reduced her salary by $1,200, and received only $900 as reimbursement for her medical expenses. She forfeits the $300. Her gross income is reduced by $300. e. None of these.

b

52.The de minimisfringe benefit: a. Exclusion applies only to property received by the employee. b. Can be provided on a discriminatory basis. c. Exclusion is limited to $250 per year. d. Exclusion applies to employee discounts. e. None of these.

b

52.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.

b

Barney is a full-time graduate student at State University. He serves as a teaching assistant for which he is paid $700 per month for 9 months and his $5,000 tuition is waived. The university waives tuition for all of its employees. In addition, he receives a $1,500 research grant to pursue his own research and studies. Barney's gross income from the above is: a. $0. b. $6,300. c. $11,300. d. $12,800. e. None of these

b

The taxpayer is a Ph.D. student in accounting at City University. The student is paid $1,500 per month for teaching two classes. The total amount received for the year is $13,500. a. The $13,500 is excludible if the money is used to pay for tuition and books. b. The $13,500 is taxable compensation. c. The $13,500 is considered a scholarship and, therefore, is excluded. d. The $13,500 is excluded because the total amount received for the year is less than her standard deduction and personal exemption. e. None of these

b

37.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.

c

37.Jena is a full-time undergraduate student at State University and qualifies as a dependent of her parents. Her only source of income is a $10,000 athletic scholarship ($1,000 for books, $5,500 tuition, $500 student activity fee, and $3,000 room and board). Jena's gross income for the year is: a. $10,000. b. $4,000. c. $3,000. d. $500. e. None of these.

c

52. Doug and Pattie received the following interest income in the current year: Savings account at Greenbacks Bank $4,000 United States Treasury bonds 250 Interest on State of Iowa bonds 200 Interest on Federal tax refund 150 Interest on state income tax refund 75 Greenbacks Bank also gave Doug and Pattie a cellular phone (worth $100) for opening the savings account. What amount of interest income should they report on their joint income tax return? a. $4,775. b. $4,675. c. $4,575. d. $4,300. e. None of these.

c

52. George, an unmarried cash basis taxpayer, received the following amounts during 2018: Interest on savings accounts $2,000 Interest on a State tax refund 600 Interest on City of Salem school bonds 350 Interest portion of proceeds of a 5% bank certificate of deposit purchased on July 1, 2017, and matured on June 30, 2018 250 Dividends on USG common stock 300 What amount should George report as gross income from dividends and interest for 2018? a. $2,300. b. $2,550. c. $3,150. d. $3,500. e. None of these.

c

52. 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: a. Include $40,000 in gross income. b. Reduce the basis in its assets by $40,000. c. Include $25,000 in gross income and reduce its basis in its assets by $15,000. d. Include $15,000 in gross income and reduce its basis in the building by $25,000. e. None of these.

c

52. 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 adjusted gross income from the above is: or; Heather must report gross income in the amount of: a. $2,000. b. $1,800. c. $1,400. d. $1,300. e. None of these.

c

52.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.

c

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. Decrease by the same amount for all employees. b. Increase more for the lower paid employees (10% and 12% marginal tax bracket). c. Increase more for the higher income (35% marginal tax bracket) employees. d. Increase by the same amount for all employees. e. None of these

c

52. 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: a. Include $40,000 in gross income. b. Reduce the basis in its assets by $40,000. c. Include $25,000 in gross income and reduce its basis in its assets by $15,000. d. Include $15,000 in gross income and reduce its basis in the building by $25,000. e. None of these.

a

52. 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.

a

52. 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. $0. b. $4,800. c. $7,200. d. $12,000. e. None of these.

a

52.Adam repairs power lines for the Egret Utilities Company. He is generally working on a power line during the lunch hour. He must eat when and where he can and still get his work done. He usually purchases something at a convenience store and eats in his truck. Egret reimburses Adam for the cost of his meals. a. Adam must include the reimbursement in his gross income. b. Adam can exclude the reimbursement from his gross income since the meals are provided for the convenience of the employer. c. Adam can exclude the reimbursement from his gross income because he eats the meals on the employer's business premises (the truck). d. Adam may exclude from his gross income the difference between what he paid for the meals and what it would have cost him to eat at home. e. None of these.

a

52.Evaluate the following statements: I. De minimisfringe benefits are those that are so immaterial that accounting for them is impractical. II. De minimisfringe benefits are subject to strict anti-discrimination requirements. III. Generally, a fringe benefit of less than $50 is considered de minimisand can be excluded from gross income. a. Only I is true. b. Only III is true. c. Only I and III are true. d. I, II, and III are true. e. None of these.

a

52.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. If Louise worked in the foreign branch from May 1, 2017 until October 31, 2018, she may exclude $40,000 from gross income in 2017 and exclude $50,000 in 2018. b. If Louise worked in the foreign branch from May 1, 2017 until October 31, 2018, she cannot exclude anything from gross income because she was not present in the country for 330 days in either year. c. If Louise began work in the foreign country on May 1, 2017, she must work through November 30, 2018 in order to exclude $55,000 from gross income in 2018 but none in 2017. d. Louise will not be allowed to exclude any foreign earned income because she made less than $103,900. e. None of these.

a

52.Peggy is an executive for the Tan Furniture Manufacturing Company. Peggy purchased furniture from the company for $9,500, the price Tan ordinarily would charge a wholesaler for the same items. The retail price of the furniture was $12,500, and Tan's cost was $9,000. The company also paid for Peggy's parking space in a garage near the office. The parking fee was $600 for the year. All employees are allowed to buy furniture at a discounted price comparable to that charged to Peggy. However, the company does not pay other employees' parking fees. Peggy's gross income from the above is: a. $0. b. $600. c. $3,500. d. $4,100. e. None of these.

a

52.Randy is the manager of a motel. As a condition of his employment, Randy is required to live in a room on the premises so that he would be there in case of emergencies. Randy considered this a fringe benefit, since he would otherwise be required to pay $800 per month rent. The room that Randy occupied normally rented for $70 per night, or $2,100 per month. On the average, 90% of the motel rooms were occupied. As a result of this rent-free use of a room, Randy is required to include in gross income. a. $0. b. $800 per month. c. $2,100 per month. d. $1,890 ($2,100 × .90). e. None of these.

a

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 after-tax 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.

c

37.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: a. Albert must recognize $55,000 of gross income, but he has $15,000 of deductible medical expenses. b. Albert must recognize $65,000 ($80,000 - $15,000) of gross income. c. Albert must recognize $40,000 ($80,000 - $25,000 - $15,000) of gross income. d. Albert is notrequired to recognize any gross income because of his terminal illness. e. None of these.

d

37.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.

d

37.Cash received by an employee from an employer: a. Is notincluded in gross income if it was not earned. b. Is nottaxable unless the payor is legally obligated to make the payment. c. Must always be included in gross income. d. May be included in gross income although the payor is notlegally obligated to make the payment. e. None of these.

d

37.Iris collected $150,000 on her deceased husband's life insurance policy. The policy was purchased by the husband's employer under a group policy. Iris's husband had included $5,000 in gross income from the group term life insurance premiums during the years he worked for the employer. She elected to collect the policy in 10 equal annual payments of $18,000 each. a. None of the payments must be included in Iris's gross income. b. The amount she receives in the first year is a nontaxable return of capital. c. For each $18,000 payment that Iris receives, she can exclude $500 ($5,000/$180,000 × $18,000) from gross income. d. For each $18,000 payment that Iris receives, she can exclude $15,000 ($150,000/$180,000 × $18,000) from gross income. e. none of these

d

37.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.

d

37.Swan Finance Company, an accrual method taxpayer, requires all of its customers to carry credit life insurance. If a customer dies, the company receives from the insurance company the balance due on the customer's loan. Ali, a customer, died owing Swan $1,500. The balance due included $200 accrued interest that Swan has included in income. When Swan collects $1,500 from the insurance company, Swan: a. Must recognize $1,500 income from the life insurance proceeds. b. Must recognize $1,300 income from the life insurance proceeds. c. Does not recognize income because life insurance proceeds are tax-exempt. d. Does not recognize income from the life insurance because the entire amount is a recovery of capital. e. None of these.

d

37.The taxpayer's marginal federal and state tax rate is 25%. Which would the taxpayer prefer? a. $1.00 taxable income rather than $1.25 tax-exempt income. b. $1.00 taxable income rather than $.75 tax-exempt income. c. $1.25 taxable income rather than $1.00 tax-exempt income. d. $1.40 taxable income rather than $1.00 tax-exempt income. e. None of these.

d

52. A U.S. citizen worked in a foreign country for the period July 1, 2017 through August 1, 2018. Her salary was $10,000 per month. Also, in 2017 she received $5,000 in dividends from foreign corporations (not qualified dividends). No dividends were received in 2018. Which of the following is correct? a. The taxpayer cannot exclude any of the income because she was not present in the foreign country more than 330 days in either 2017 or 2018. b. The taxpayer can exclude a portion of the salary from U.S. gross income in 2017 and 2018, and all of the dividend income. c. The taxpayer can exclude from U.S. gross income $60,000 salary in 2017, but in 2018 the taxpayer will exceed the twelve month limitation and, therefore, all of the 2018 compensation must be included in gross income. All of the dividends must be included in 2017 gross income. The taxpayer must include the dividend income of $5,000 in 2017 gross income, but the taxpayer can exclude a portion of the compensation income from U.S. gross income in 2017 and 2018. e. None of these

d

52. Assuming a taxpayer qualifies for the exclusion treatment, the interest income on educational savings bonds: a. Is gross income to the person who purchased the bond in the year the interest is earned. b. Is gross income to the student in the year the interest is earned. c. Is included in the student's gross income in the year the savings bonds are sold or redeemed to pay educational expenses. d. Is notincluded in anyone's gross income if the proceeds are used to pay college tuition. e. None of these.

d

52. 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.

d

52. Tonya is a cash basis taxpayer. In 2018, she paid state income taxes of $8,000. In early 2019, she filed her 2018 state income tax return and received a $900 refund. a. If Tonya itemized her deductions in 2018 on her Federal income tax return, she should amend her 2018 return and reduce her itemized deductions by $900. b. If Tonya itemized her deductions in 2018 on her Federal income tax return and her itemized deductions exceeded the standard deduction by at least $900, the refund will not affect her 2019 tax return. c. If Tonya itemized her deductions in 2018 on her Federal income tax return, she must amend her 2018 Federal income tax return and use the standard deduction. d. If Tonya itemized her deductions in 2018 on her Federal income tax return and her itemized deductions exceeded the standard deduction by more than $900, she must recognize $900 income in 2019 under the tax benefit rule. e. None of these.

d

52.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 "no-additional-cost service" fringe benefit. e. None of these.

d

52.Kristen's employer owns its building and provides parking space for its employees. The value of the free parking is $150 per month. Karen's employer does not have parking facilities, but reimburses its employee for the cost of parking in a nearby garage, up to $150 per month. a. Kristen and Karen must recognize gross income from the parking services. b. Kristen can exclude the employer provided parking from gross income, but Karen must include her reimbursement in gross income. c. Kristen must include the value of the employer provided parking from her gross income, but Karen can exclude her reimbursement from gross income. d. Neither Kristen nor Karen is required to include the cost of parking in gross income. e. None of these.

d

52.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.

d

52.The employees of Mauve Accounting Services are permitted to use the copy machine for personal purposes, provided the privilege is not abused. Ed is the president of a civic organization and uses the copier to make several copies of the organization's agenda for its meetings. The copies made during the year would have cost $150 at a local office supply. a. Ed must include $150 in his gross income. b. Ed may exclude the cost of the copies as a no-additional cost fringe benefit. c. Ed may exclude the cost of the copies only if the organization is a client of Mauve. Ed may exclude the cost of the copies as ade minimisfringe benefit. e. None of these

d

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: a. $0. b. $100,000. c. $120,000. d. $270,000. e. None of these.

d

The exclusion for health insurance premiums paid by the employer applies to: a. Only current employees and their spouses. b. Only current employees and their spouses and dependents. c. Only current employees and their disabled spouses. d. Current employees, retired former employees, and their spouses and dependents. e. None of these.

d

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. Which of the following is correct: a. If an employee's wages are reduced by $5,000 and the employee is in the 24% marginal tax bracket, the employee would benefit from the offer. b. If an employee's wages are reduced by $4,000 and the employee is in the 12% marginal tax bracket, the employee would benefit from the offer. c. If an employee's wages are reduced by $6,000 and the employee is in the 35% marginal tax bracket, the employee would benefit from the offer. d. a., b., and c. e. None of these

d

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.

e

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? a. $25,000. b. $15,000. c. $12,500. d. $10,000. e. $0.

e

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.

e

A U.S. citizen is always required to include in gross income the salary and wages earned while working in a foreign country even if the foreign country taxes the income.

false

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

false

Amber Machinery Company purchased a building from Ted for $250,000 cash and a mortgage of $750,000. One year after the transaction, the mortgage had been reduced to $725,000 by principal payments by Amber, but it was apparent that Amber would notbe able to continue to make the monthly payments on the mortgage. Ted reduced the amount owed by Amber to $600,000. This reduced the monthly payments to a level that Amber could pay. Amber must recognize $125,000 income from the reduction in the debt by Ted

false

Employees of a CPA firm located in Maryland may exclude from gross income the meals and lodging provided by the employer while they were on an audit in Delaware.

false

For a person who is in the 35% marginal tax bracket, $1,000 of tax-exempt income is equivalent to $1,350 of income that is subject to tax

false

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

false

Gary cashed in an insurance policy on his life. He needed the funds to pay for his terminally ill wife's medical expenses. He had paid $12,000 in premiums and he collected $30,000 from the insurance company. Gary is not required to include the gain of $18,000 ($30,000 - $12,000) in gross income

false

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

false

If an employer pays for the employee's long-term care insurance premiums, the employee can exclude from gross income the premiums but all of the benefits collected must be included in gross income.

false

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

false

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

false

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

false

The earnings from a qualified state tuition program account are deferred from taxation until they are used for qualified higher education expenses. At that time, the amount taken from the fund must be included in the gross income of the person who contributed to the account

false

The taxpayer incorrectly took a $5,000 deduction (e.g., incorrectly calculated depreciation) in 2018 and as a result his taxable income was reduced by $5,000. The taxpayer discovered his error in 2019. The taxpayer must add $5,000 to his 2019 gross income in accordance with the tax benefit rule to correct for the 2018 error

false

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

false

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.

false

Zork Corporation was very profitable and had accumulated excess cash. The company decided to repurchase some of its bonds that had been issued for $1,000,000. Because of an increase in market interest rates, Zork was able to retire the bonds for $900,000. The company is not required to recognize $100,000 of income from the discharge of its indebtedness but must reduce the basis in its assets

false

4. Carla is a deputy sheriff. Her employer requires that she live in the county where she is employed. Housing is very expensive; so the county agreed to pay her $4,800 per year to cover the higher cost of housing. Carla must include the housing supplement in her gross income.

true

A U.S. citizen who works in France from February 1, 2018 until January 31, 2019 is eligible for the foreign earned income exclusion in 2018 and 2019

true

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

true

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

true

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

true

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.

true

Calvin miscalculated his income in 2016 and overpaid his state income tax by $10,000. In 2017, he amended his 2016 state income tax return and received a $10,000 refund and $900 interest. Calvin itemized his deductions in 2016, deducting $12,000 in state income tax and $30,000 total itemized deductions. As a result of the amended return in 2017, Calvin must recognize $10,900 of gross income

true

Ed died while employed by Violet Company. His wife collected $40,000 on a group term life insurance policy that Violet provided its employees, and $6,000 of accrued salary Ed had earned prior to his death. All of the premiums on the group term life insurance policy were excluded from the Ed's gross income. Ed's wife is required to recognize as gross income only the $6,000 she received for the accrued salary

true

In 2018, Theresa was in an automobile accident and suffered physical injuries. The accident was caused by Ramon's negligence. In 2019, 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 2018 tax return (the amount in excess of 7.5% of adjusted gross income). As a result of the above, Theresa's 2019 gross income is increased by $56,000.

true

In December 2018, Emily, a cash basis taxpayer, received a $2,500 cash scholarship for the Spring semester of 2019. However, she did not use the funds to pay the tuition until January 2019. Emily can exclude the $2,500 from her gross income in 2018.

true

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.

true

Melody works for a company with only 22 employees. Her employer contributed $2,000 to her health savings account (HSA), and the account earned $100 in interest during the year. Melody withdrew only $1,200 to pay medical expenses during the year. Melody is notrequired to recognize any gross income from the HSA for the year.

true

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.

true

Nicole's employer pays her $150 per month towards the cost of parking near a railway station where Nicole catches the train to work. The employer also pays the cost of the rail pass, $75 per month. Nicole can exclude both of these payments from her gross income

true

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

true

Sam was unemployed for the first two months of 2018. During that time, he received $4,000 of state unemployment benefits. He worked for the next six months and earned $14,000. In September, he was injured on the job and collected $5,000 of workers' compensation benefits. Sam's Federal gross income from the above is $18,000 ($4,000 + $14,000).

true

Sam, a single individual, took an itemized deduction of $5,500 for state income tax paid in 2018. His total itemized deductions in 2018 were $18,000. In 2019, he received a $900 refund of his 2018 state income tax. Sam must include the $900 refund in his 2019 Federal gross income in accordance with the tax benefit rule

true

Sarah's employer pays the hospitalization insurance premiums for a policy that covers all employees and retired former employees. After Sarah retires, the hospital insurance premiums paid for her by her employer can be excluded from her gross income.

true

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.

true