Question 1

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 2

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 report the $4,800 housing supplement as part of her gross income in accordance with IRS regulations.

Question 3

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 a taxpayer to include a refund of a prior year deduction in the year of the refund if the deduction provided a tax benefit in the prior year. Since the taxpayer deducted the $5,500 state income tax on his 2012 tax return and received a refund in 2013, he must include the $900 in his 2013 Federal gross income.

Question 4

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 is because the IRS considers any income received as taxable unless explicitly exempted. However, certain payments, such as gifts or inheritances, may be exempt from taxation.

Question 5

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

A U.S. citizen working abroad may qualify for the foreign earned income exclusion if they meet either the bona fide residence test or the physical presence test. In this case, the individual could qualify for the exclusion in both 2011 and 2012 if they meet the requirements of either test for each respective year.

Question 6

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

The fact that the bakery does not incur any additional cost does not mean that the employees do not need to recognize gross income. The value of the unsold donuts taken by employees represents a form of compensation, and as such, it should be included in their gross income.

Question 7

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 tax benefit rule does not require the taxpayer to add the $5,000 to his 2013 gross income. Instead, the taxpayer should amend the 2012 tax return to correct the error.

Question 8

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

According to the IRS, the value of a gift must be included in the recipient's income for the year it was received, regardless of whether or not the giver was legally required to make the gift. The fact that the information was passed illegally does not affect the taxability of the gift. Therefore, Sharon must include the value of the pearl necklace in her gross income for the year it was received.

Question 9

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

Accepted Answer

Given that the taxpayer's marginal tax bracket is 25%, it means that for every $1 increase in taxable income, the taxpayer owes $0.25 in taxes. Therefore, if the taxpayer has a choice between $1.00 taxable income and $1.00 tax-exempt income, the taxpayer would prefer the tax-exempt income, as it would result in no tax liability. 
Similarly, if the taxpayer has a choice between $.80 tax-exempt income and $1.00 taxable income, the taxpayer would prefer the tax-exempt income. This is because the taxpayer would owe $0.25 in taxes for the $1.00 taxable income, leaving them with only $0.75 after taxes. On the other hand, the $.80 tax-exempt income would result in the taxpayer keeping the full amount.
Therefore, the best choice is B.

Question 10

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

Interest received as part of a condemnation award is considered taxable income and cannot be excluded from gross income.

Question 11

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 who receives a discharge of his or her liabilities has realized income but can exclude the debt reduction from gross income under certain circumstances. This is known as the "bankruptcy exclusion" and is authorized under section 108 of the Internal Revenue Code.

Question 12

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 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

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 15

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

Roger's contribution of $1,200 to the flexible spending account reduces his taxable income by $1,200, resulting in a tax savings of $420 (35% of $1,200). Since he only incurred $1,100 in expenses, the $100 remaining in the account is forfeited. Therefore, his after-tax cost of overfunding the plan is $1,200 - $420 - $1,100 = $65.

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 value of lodging provided to employees at a remote location like the South Pole is typically excluded from gross income if it is for the convenience of the employer and a condition of employment.

Question 17

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 total amount received ($175,000) exceeds the policy amount ($150,000) by $25,000. This excess is considered interest and is taxable. The interest portion per installment is $2,500 ($25,000/10 installments).

Question 18

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 regulations, employer-provided parking and transit benefits are excluded from an employee's gross income up to a certain amount ($280 per month in 2021). Therefore, Nicole can exclude both the $150 parking benefit and the $75 transit benefit from her gross income.

Question 19

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

When funds are withdrawn from a qualified state tuition program and used for qualified education expenses, they are not included in the beneficiary's (son's) gross income or the account owner's (mother's) gross income. Therefore, the correct answer is B-False.

Question 20

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

The use of the copying machine as a de minimis fringe benefit can be excluded from gross income. The fact that some employees may use it more than others, or that it may be located in a particular area of the office, does not affect its status as a de minimis benefit.

Quiz 5: Gross Income: Exclusions