Question 1

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 employees are still receiving a benefit, the unsold donuts, which should be recognized as gross income even if there are no additional costs to the bakery.

Question 2

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 a 25% marginal tax bracket, $1.00 of taxable income would result in a tax liability of $.25, leaving only $.75 of after-tax income. In contrast, $.80 of tax-exempt income would result in $.80 of after-tax income, which is a higher net income than $1.00 of taxable income at the same level.

Question 3

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

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Question 4

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

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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

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Question 6

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 salary was reduced by $1,200 but he only spent $1,100, so he ended up with an extra $100 in his flexible spending account. However, he must forfeit this unused amount, which means he effectively paid $1,200 but only received $1,100 in benefits. Since he is in the 35% marginal tax bracket, the after-tax cost of overfunding the plan is $1,200 x 35% = $420. When we subtract the $100 that he forfeits from this amount, we get $420 - $100 = $320. Therefore, his after-tax cost is $320 / 5 = $64, which is closest to $65.

Question 7

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

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Question 8

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:

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Question 9

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 IRS regulations, gifts of any kind are generally taxable income to the recipient unless a specific exemption applies. In this case, the pearl necklace is worth $10,000, which means it meets the minimum threshold for reportable gifts. Additionally, the fact that the friend gave the necklace to Sharon as a result of the insider information suggests that the gift was not made out of pure generosity but rather as compensation for the tip. Therefore, the value of the necklace must be included in Sharon's gross income for the tax year it was received by her.

Question 10

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 employer's payment of $150 for parking and $75 for the rail pass can be excluded from Nicole's gross income, according to the IRS regulations regarding employer-provided parking and transit benefits.

Question 11

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

Mother does not have to include any amount in her gross income as long as the withdrawals from the qualified tuition program are used to pay for qualified education expenses, which include tuition, fees, books, and supplies required for the student's enrollment or attendance at an eligible educational institution. Therefore, the full amount of $20,000 is considered a qualified education expense and is not taxable to the mother.

Question 12

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

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Question 13

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 housing supplement provided by the county is considered a part of Carla's compensation and therefore must be included in her gross income for tax purposes.

Question 14

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

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Question 15

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

According to the tax benefit rule, if an itemized deduction in a prior year resulted in a tax benefit, any refunds or recoveries related to that deduction must be included in gross income in the year received. In this case, the taxpayer received a $5,500 deduction in 2012 for state income tax paid, which reduced his taxable income and resulted in a tax benefit. Therefore, the $900 refund he received in 2013 must be included in his 2013 gross income.

Question 16

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 17

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. However, certain gifts and inheritances may be excluded from gross income up to a certain amount.

Question 18

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 copy machine for personal purposes may be considered a de minimis fringe benefit, which is excluded from gross income for tax purposes. The fact that higher-paid employees use the machine more often does not change this classification.

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 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 20

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

This is known as the "debt discharge" exclusion and is provided for in the Internal Revenue Code. If a debtor's liabilities are discharged or forgiven as part of a bankruptcy reorganization, the amount forgiven is not considered taxable income.

Quiz 5: Gross Income: Exclusions