Question 1

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.

Accepted Answer

According to IRC Section 132(e)(1), occasional personal use of office equipment, such as a copying machine, may be excluded from gross income as a de minimis fringe benefit, as long as it is not a form of additional compensation. The fact that the lower paid employees do not use the machine does not affect its classification as a de minimis fringe benefit.

Question 2

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.

Accepted Answer

According to the IRS, employer-provided parking benefits and qualified transportation benefits (such as a rail pass) are excluded from an employee's gross income as long as they meet certain requirements. The amount of exclusion for parking benefits is up to $270 per month in 2020, and for transit passes, it is up to $270 per month as well. Therefore, in this scenario, Nicole can exclude both the parking benefit and the rail pass from her gross income since they are both within the allowable limits.

Question 3

The taxpayer incorrectly took a $5,000 deduction (e.g., incorrectly calculated depreciation) in 2012 and as a result his taxable income was reduced by $5,000. The taxpayer discovered his error in 2013. The taxpayer must add $5,000 to his 2013 gross income in accordance with the tax benefit rule to correct for the 2012 error.

Accepted Answer

The answer of The taxpayer incorrectly took a $5,000 deduction...

Question 4

A debtor undergoing a Chapter 11 reorganization under the bankruptcy laws who receives a discharge of his or her liabilities has realized income but can exclude the debt reduction from gross income.

Accepted Answer

Under the bankruptcy laws, a debtor undergoing a Chapter 11 reorganization who receives a discharge of their liabilities has realized income but can exclude the debt reduction from gross income. This exclusion is known as the "bankruptcy exclusion."

Question 5

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 not be 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.

Accepted Answer

The answer of Amber Machinery Company purchased a building from...

Question 6

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.

Accepted Answer

The earnings from a qualified state tuition program, also known as a 529 plan, are not taxed when they are withdrawn for qualified higher education expenses. The distributions are tax-free if they are used for eligible expenses, and they do not have to be included in the gross income of the contributor or the beneficiary.

Question 7

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.

Accepted Answer

Carla must include the housing supplement in her gross income because it is considered taxable income by the IRS.

Question 8

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.

Accepted Answer

The answer of Calvin's property was taken by the State...

Question 9

Cash received by an individual:

Accepted Answer

Cash received by an individual may be included in gross income even if the payor is not legally obligated to make the payment. This includes gifts, prizes, and awards that are not tied to employment.

Question 10

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.

Accepted Answer

The value of the necklace must be included in Sharon's gross income for the tax year it was received by her. Even though the friend was not legally required to make the gift, Sharon still received a valuable item which constitutes as income. Additionally, the fact that Sharon passed insider information is irrelevant for determining whether the necklace should be included in her gross income for tax purposes.

Question 11

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

Accepted Answer

Even though the bakery may not incur additional cost by allowing employees to take the leftover donuts, the value of the donuts received by the employees is considered taxable income and should be recognized as such on their tax return.

Question 12

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

Accepted Answer

The taxpayer would prefer $.80 tax-exempt income rather than $1.00 taxable income because in the 25% marginal tax bracket, $1.00 taxable income would only result in $.75 after-tax income ($1.00 - (.25 x $1.00) = $.75), while $.80 tax-exempt income would result in $.80 after-tax income. Therefore, the taxpayer would have a higher after-tax income with the tax-exempt income option. None of the other options would result in a higher after-tax income than $.80 tax-exempt income.

Question 13

Generally, a U.S.citizen is 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.

Accepted Answer

The answer of Generally, a U.S.citizen is required to include...

Question 14

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.

Accepted Answer

There is no need for Mother to include the $5,000 in her gross income since it was used to pay for qualified education expenses. Withdrawals from qualified state tuition programs that are used for qualified education expenses are tax-free.

Question 15

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:

Accepted Answer

The answer of Carin, a widow, elected to receive the...

Question 16

Members of a research team must include in gross income the value of their lodging furnished at the research base located at the South Pole.

Accepted Answer

The answer of Members of a research team must include...

Question 17

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.

Accepted Answer

Since Roger is in the 35% marginal tax bracket, he saves $420 in taxes ($1,200 x 0.35) by contributing to the flexible spending plan. However, since he only incurred $1,100 in actual expenses, he can only be reimbursed for that amount and must forfeit the remaining $100. This means his after-tax cost of overfunding the plan is $65 ($100 - $35 in tax savings).

Question 18

A U.S.citizen who works in France from February 1, 2011 until January 31, 2012 is not eligible for the foreign earned income exclusion in 2011 but is eligible for it in 2012.

Accepted Answer

The answer of A U.S.citizen who works in France from...

Question 19

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.

Accepted Answer

According to IRS regulations, cancellation of debt by a shareholder to a controlled corporation is treated as a contribution to capital and is nontaxable. Therefore, in this scenario, the cancellation of the loan by Benny should be treated as a nontaxable contribution to capital.

Question 20

A cash basis taxpayer took an itemized deduction of $5,500 for state income tax paid in 2012. His total itemized deductions in 2012 were $18,000. In 2013, he received a $900 refund of his 2012 state income tax.The taxpayer must include the $900 refund in his 2013 Federal gross income in accordance with the tax benefit rule.

Accepted Answer

The tax benefit rule requires that if a taxpayer receives a refund of a previously deducted expense, the refund must be included in the taxpayer's gross income in the year received to the extent the deduction provided a tax benefit in a prior year. Since the taxpayer deducted $5,500 for state income tax paid in 2012 and received a refund in 2013, he must include the $900 refund in his 2013 Federal gross income.

Quiz 5: Gross Income: Exclusions