Deck 5: Gross Income: Exclusions

Question 1

Sam was unemployed for the first two months of 2019. 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 this is $18,000 ($4,000 +
$14,000).

Answer 1

True

Question 2

Agnes receives a $5,000 scholarship that covers her tuition at Parochial High School. She may not exclude the
$5,000 because the exclusion applies only to scholarships to attend college.

Answer 2

False

Question 3

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.

Answer 3

False

Question 4

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.

Question 5

Mel was the beneficiary of a $45,000 group term life insurance policy on his deceased wife. His wife's employer had paid all of the premiums on the policy. Mel used the life insurance proceeds to purchase a U.S. government bond, which paid him $2,500 interest during the current year. Mel's Federal gross income from this is $2,500.

Question 6

In 2019, Theresa was in an automobile accident and suffered physical injuries. The accident was caused by Ramon's negligence. In 2020, 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 that she had deducted on her 2019 tax return (the amount in excess of 10% of adjusted gross income). As a result of this, Theresa's 2020 gross income is increased by $56,000.

Question 7

Brooke works part-time as a waitress in a restaurant. For groups of seven or more customers, the customer is charged 15% of the bill for Brooke's services. For parties of less than seven, the tips are voluntary. Brooke received
$11,000 from the groups of seven 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.

Question 8

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.

Question 9

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.

Question 10

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.

Question 11

In December 2019, Emily, a cash basis taxpayer, received a $2,500 cash scholarship for the spring semester of 2020.
However, she did not use the funds to pay the tuition until January 2020. Emily can exclude the $2,500 from her gross income in 2019.

Question 12

Zack was the beneficiary of a life insurance policy on his deceased 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.

Question 13

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.

Question 14

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 eight 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's estate 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.

Question 15

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

Question 16

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

Question 17

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. Her 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.

Question 18

If an employer pays for an 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.

Question 19

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.

Question 20

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 not required to recognize any gross income from the HSA for the year.

Question 21

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.

Question 22

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 she received it.
E) None of these.

Question 23

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.

Question 24

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.

Question 25

A U.S. citizen who works in France from February 1, 2019 until January 31, 2020 is eligible for the foreign earned income exclusion in 2019 and 2020.

Question 26

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.

Question 27

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.

Question 28

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.

Question 29

Nicole's employer pays her $150 per month toward 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.

Question 30

Calvin miscalculated his income in 2017 and overpaid his state income tax by $10,000. In 2018, he amended his 2017 state income tax return and received a $10,000 refund and $900 interest. Calvin itemized his deductions in 2017, deducting $12,000 in state income tax and $30,000 total itemized deductions (in 2017, individuals were not limited to a $10,000 state tax deduction when they itemized deductions). As a result of the amended return in 2018, Calvin must recognize $10,900 of gross income.

Question 31

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.

Question 32

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.

Question 33

Cash received by an employee from an employer:

A) Is not included in gross income if it was not earned.
B) Is not taxable 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 not legally obligated to make the payment.
E) None of these.

Question 34

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.

Question 35

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.

Question 36

Benny loaned $100,000 to his controlled corporation. When it became apparent that 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.

Question 37

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.

Question 38

Sam, a single individual, took an itemized deduction of $5,500 for state income tax paid in 2019. His total itemized deductions in 2019 were $18,000 and did not include any other state or local taxes. In 2020, he received a $900 refund of his 2019 state income tax. Sam must include the $900 refund in his 2020 Federal gross income in accordance with the tax benefit rule.

Question 39

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.

Question 40

A taxpayer incorrectly took a $5,000 deduction (e.g., incorrectly calculated depreciation) in 2019 and as a result, his taxable income was reduced by $5,000. The taxpayer discovered his error in 2020. The taxpayer must add $5,000 to his 2020 gross income in accordance with the tax benefit rule to correct for the 2019 error.

Question 41

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.

Question 42

Early in the year, Marlon 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: $\begin{array} { l } \text { Reimbursement of medical expenses Marlon paid by a medical}\\ \text {insurance policy he purchased }&\$10,000\\ \text {Damage settlement to replace his lost salary }&15,000\\\end{array}$
What is the amount that Marlon must include in gross income for the current year?

A) $25,000.
B) $15,000.
C) $12,500.
D) $10,000.
E) $0.

Question 43

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, 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.

Question 44

The exclusion for health insurance premiums paid by an 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.

Question 45

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.

Question 46

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 each 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.

Question 47

Ron, age 19, is a full-time graduate student at City University. During 2019, he received the following payments: $\begin{array}{lr}\text { Cash award for being the outstanding resident adviser } & \$ 1,500 \\\text { Resident adviser housing } & 2,500 \\\text { State scholarship for ten months (tuition and books) } & 6,000 \\\text { State scholarship (meals allowance) } & 2,400 \\\text { Loan from college financial aid office } & 3,000 \\\text { Cash support from parents } & 2,000 \\&\$17,400\\\hline\end{array}$ 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 2019?

A) $1,500.
B) $3,900.
C) $9,000.
D) $15,400.
E) None of these.

Question 48

Christie sued her former employer for a back injury she suffered on the job in 2019. As a result of the injury, she was partially disabled. In 2020, 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 2019 return, reducing her taxable income by $12,000. Christie's 2020 gross income from the above is:

A) $415,000.
B) $412,000.
C) $255,000.
D) $175,000.
E) $172,000.

Question 49

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 must include $1,100,000 ($1,500,000 - $400,000) in gross income.
B) Turquoise and Rebecca can exclude the life insurance proceeds of $1,500,000 and $100,000, respectively, from gross income.
C) Turquoise can exclude $1,100,000 ($1,500,000 - $400,000) from gross income, but Rebecca must include $84,000 in gross income.
D) Turquoise 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.

Question 50

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 nine months and his $5,000 tuition is waived. The university waives tuition for all of its employees. In addition, Barney 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.

Question 51

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.

Question 52

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.

Question 53

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) × 0.35)].
C) Amber's offer is $4,500 more. {$190,000 - ($50,000 + $90,000) + [$70,000 × (1.00 - 0.35)]}.
D) Amber's offer is $22,000 more. [($190,000 - $210,000) + ($120,000 × 0.35)].
E) None of these.

Question 54

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 for 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.

Question 55

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 2018 and 2019, and the account earned $100 interest in 2019. At the end of 2019, 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 2019 gross income:

A) $0.
B) $100.
C) $1,600.
D) $3,100.
E) None of these.

Question 56

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.

Question 57

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.

Question 58

Albert had a terminal illness that would require 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. He 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. He 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 not required to recognize any gross income because of his terminal illness.
E) None of these.

Question 59

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.

Question 60

A scholarship recipient at State University may exclude from gross income the scholarship proceeds used to pay for:

A) Tuition only.
B) Tuition, books, and supplies.
C) Tuition, books, supplies, meals, and lodging.
D) Meals and lodging.
E) None of these.

Question 61

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.
D) Ed may exclude the cost of the copies as a de minimis fringe benefit.
E) None of these.

Question 62

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 nonemployee 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.

Question 63

In the case of interest income from state and Federal bonds:

A) Interest on U.S. government bonds received by a state resident can be subject to that state's income tax.
B) Interest on U.S. 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 is correct.

Question 64

Peggy is an executive for the Tan Furniture Manufacturing Company. She 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.

Question 65

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.

Question 66

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.

Question 67

Under Swan Company's cafeteria plan, all full-time employees are allowed to select any combination of the following benefits, but the total received by each 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 provides these same insurance benefits, which would cover him (II). 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.

Question 68

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, 2018 until October 31, 2019, she may exclude $40,000 from gross income in 2018 and exclude $50,000 in 2019.
B) If Louise worked in the foreign branch from May 1, 2018 until October 31, 2019, 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, 2018, she must work through November 30, 2019 in order to exclude $55,000 from gross income in 2019 but none in 2018.
D) Louise will not be allowed to exclude any foreign earned income because she made less than $105,900.
E) None of these.

Question 69

A U.S. citizen worked in a foreign country for the period July 1, 2018 through August 1, 2019. Her salary was $10,000 per month. Also, in 2018 she received $5,000 in dividends from foreign corporations (not qualified dividends). No dividends were received in 2019. 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 2018 or 2019.
B) The taxpayer can exclude a portion of the salary from U.S. gross income in 2018 and 2019, and all of the dividend income.
C) The taxpayer can exclude from U.S. gross income $60,000 salary in 2018, but in 2019 she will exceed the 12- month limitation and, therefore, all of the 2019 compensation must be included in gross income. All of the dividends must be included in 2018 gross income.
D) The taxpayer must include the dividend income of $5,000 in 2018 gross income, but she can exclude a portion of the compensation income from U.S. gross income in 2018 and 2019.
E) None of these.

Question 70

Heather's interest and gains on investments for the current year are as follows: $\begin{array}{lr}\text { Interest on Madison County school bonds } & \$ 600 \\\text { Interest on U.S. government bonds } & 700 \\\text { Interest on a Federal income tax refund } & 200 \\\text { Gain on the sale of Madison County school bonds } & 500\end{array}$ 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.

Question 71

Heather is a full-time employee of 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.

Question 72

A company has a medical reimbursement plan for officers that covers all costs that the company's 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.

Question 73

James, a cash basis taxpayer, received the following compensation and fringe benefits in the current year: $\begin{array}{lr}\text { Salary } & \$ 66,000 \\\text { Disability income protection premiums } & 3,000 \\\text { Long-term care insurance premiums } & 4,000\end{array}$ His actual salary was $72,000. He received only $66,000 because his salary was garnished and the employer paid the $6,000 owed on James's credit card. 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 toward 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.

Question 74

The de minimis fringe 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.

Question 75

The Royal Motor Company manufactures automobiles. Nonmanagement 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 nonmanagement 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.

Question 76

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.

Question 77

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 × 0.90).
E) None of these.

Question 78

Tommy, a senior at State College, receives free room and board as full compensation for working as a resident adviser 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. He had the option of receiving the meals or $800 in cash and accepted the meals. What must Tommy include in gross income from working as a resident adviser?

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.

Question 79

Evaluate the following statements: I. De minimis fringe benefits are those that are so immaterial that accounting for them is impractical.
II) De minimis fringe benefits are subject to strict antidiscrimination requirements.
III) Generally, a fringe benefit of less than $50 is considered de minimis and 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.

Question 80

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 employees 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.