Question 1

A U.S.citizen who works in France from February 1,2014 until January 31,2015 is eligible for the foreign earned income exclusion in 2014 and 2015.

Accepted Answer

The taxpayer was working in the foreign country for at least 330 days in 12 consecutive months.So the taxpayer qualifies for the foreign earned income exclusion for the eleven month period in 2014 and the one month in 2015.

Question 2

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 reduction in the debt is being made by the person who sold the property to Amber.Therefore,Amber can reduce its basis in the building by $125,000,rather than recognizing income of $125,000.

Question 3

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

The § 119 exclusion for lodging does not apply because the employer does not provide housing on the employer's premises.

Question 4

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 no-additional-cost exclusion applies only to services.

Question 5

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

When a shareholder forgives his or her solvent corporation of its liability,the corporation is not required to recognize income.The corporation is deemed to have received a contribution of capital from the shareholder.

Question 6

Calvin miscalculated his income in 2012 and overpaid his state income tax by $10,000.In 2014,he amended his 2012 state income tax return and received a $10,000 refund and $900 interest.Calvin itemized his deductions in 2012,deducting $12,000 in state income tax and $30,000 total itemized deductions.As a result of the amended return in 2014,Calvin must recognize $10,900 of gross income.

Accepted Answer

The $10,000 is included in gross income under the tax benefit rule.Interest on a state tax refund does not qualify for the state and local interest exclusion.

Question 7

Cash received by an employee from an employer:

Accepted Answer

See the discussion of Comm.v.Duberstein.

Question 8

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.

Accepted Answer

The benefit is "de minimis," which means the cost of accounting for the benefit is great in relation to the benefit conferred;thus,the anti-discrimination rules do not apply.

Question 9

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

Accepted Answer

The $1.40 of taxable income is greater after­tax than $1.00 in taxable income [(1 - .25)($1.40)= $1.05].Choice b.is incorrect because the $1.00 of taxable income and $.75 of tax-exempt income are equal on an after­tax basis (1 - .25)× $1.00 = $.75.Choice c.is incorrect because (1 - .25)× $1.25 = $.9375.

Question 10

The taxpayer incorrectly took a $5,000 deduction (e.g. ,incorrectly calculated depreciation)in 2014 and as a result his taxable income was reduced by $5,000.The taxpayer discovered his error in2015.The taxpayer must add $5,000 to his 2015 gross income in accordance with the tax benefit rule to correct for the 2014 error.

Accepted Answer

The tax benefit rule applies when the taxpayer claims a deduction in one year,but in a later year receives an adjustment (e.g. ,a refund)to the amount of the expense.

Question 11

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.

Accepted Answer

The reduction in liabilities increases the corporation's net worth and,thus,the corporation realized income.The basis reduction rules do not apply because the company is not bankrupt or insolvent.

Question 12

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 income is included in gross income unless the foreign earned income exclusion applies.To be eligible for the foreign earned income exclusion,the taxpayer must either (1)be a bona fide resident of the foreign country or (2)be present in a foreign country for at least 330 days during any 12 consecutive months.The exclusion applies regardless of whether the foreign country taxes the income.

Question 13

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.

Accepted Answer

The earnings of a qualified state tuition program are excluded from gross income provided that the contributions and earnings are used for qualified higher education expenses.

Question 14

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

Under this "use or lose" plan,his gross income was reduced by the $100 he forfeited.Therefore,his after­tax loss from overfunding was $65 [(1 - .35)($100)].

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 interest element of $25,000 ($175,000 - $150,000)is included in Carin's gross income.The payments are taxed as an annuity,and therefore $2,500 [($25,000/$175,000)× $17,500] is included in Carin's gross income in the first year.

Question 16

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 necklace Sharon received from her friend was compensation for the information,rather than an amount received out of detached generosity.The fact the friend was not legally obligated to make the payment does not affect the outcome in this case.

Question 17

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.

Accepted Answer

Such amounts do not qualify for the meals and lodging exclusion under § 119 because they are not provided on the employer's business premises.Note such amounts can be excluded as the reimbursement of employee business expenses.

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

The parking and the rail pass are considered qualified transportation fringe benefits and can be excluded from Nicole's gross income.If the parking were not excludible as a qualified transportation fringe,the amount would be includible in Nicole's gross income because it is a nondeductible commuting expense.The cost of the rail pass would not be deductible for the same reason.Both of these amounts are below the statutory monthly ceiling.

Question 19

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 tuition program are excluded from gross income of the contributor and the student when the funds are withdrawn to pay for qualified higher education expenses.So exclusion treatment is appropriate in this situation.

Question 20

A cash basis taxpayer took an itemized deduction of $5,500 for state income tax paid in 2014.His total itemized deductions in 2014 were $18,000.In 2015,he received a $900 refund of his 2014 state income tax.The taxpayer must include the $900 refund in his 2015 Federal gross income in accordance with the tax benefit rule.

Accepted Answer

The taxpayer's 2014 taxable income was reduced by $5,500 as a result of paying the state income tax.Therefore,under the tax benefit rule,the $900 refund must be included in 2015 gross income.

Quiz 5: Gross Income: Exclusions