Question 1

In September of 2015, Michelle sold shares of qualified small business stock for $1,000,000 that had a basis of $200,000. She had held the stock for 7 months. Forty-five days after the sale she purchased other qualified small business stock for $1,100,000. How much of the gain will she recognize?

Accepted Answer

If the proceeds from the sale of small business stock held more than 6 months are reinvested in other small business stock within 60 days of the sale, no gain is recognized.

Question 2

Adam purchased stock in 2006 for $100,000. He is considering selling it in 2015. It is currently worth $2,100,000 so he would realize a $2,000,000 gain. Adam is in the top tax bracket. Determine the taxes due under the following independent situations (ignore any additional Medicare taxes on investment income):
(a) Adam sells the stock, and no special circumstances apply.
(b) The stock is qualified small business corporation stock.
(c) The stock is qualified small business corporation stock. Within 60 days Adam invests $2,500,000 in new qualifying small business corporation stock.
(d) The stock is qualified small business corporation stock. Within 60 days Adam invests $2,000,000 in new qualifying small business corporation stock.

Accepted Answer

The answer of Adam purchased stock in 2006 for $100,000....

Question 3

Faye is a marketing manager for Healthy Corp. She earns a salary of $100,000 and has received the following benefits:
• Healthy pays 75% of all employees' health and accident insurance coverage. Healthy paid $6,000 towards the cost of Faye's health insurance during the year.
• Faye participates in the cafeteria plan and had elected to have $2,000 withheld from her pay to cover the remaining cost of the health insurance premiums and an additional $1,500 to cover dental and other health care costs not paid by insurance (i.e. funding a flexible spending account). The full $1,500 was used to pay for various qualifying medical costs.
• Healthy pays the cost of disability insurance coverage for all employees. The insurance will pay 75% of salary if employees are out of work for a significant period. The cost of Faye's premiums was $600.
• Healthy pays for the cost of veterinary insurance for all employees. The cost of coverage for Faye's dog was $400.
• Healthy pays for the cost of daycare for its employees' children. The cost for Faye's two children was $8,000.
• All employees receive a 20% discount on Healthy's products. The typical markup on their products is 25%. Faye enjoyed $1,200 of savings through the discount program.
• Faye won the manager of the year award earlier in the year and received an all-expense paid week at a desert spa valued at $3,500.
• Healthy pays Faye's annual membership dues of $500 to the American Marketing Association.
• Healthy paid for the full $2,500 cost of Faye's attendance at the American Marketing Association's annual conference in Orlando.
How much income must Faye recognize from her employment?

Accepted Answer

The answer of Faye is a marketing manager for Healthy...

Question 4

After he was denied a promotion, Daniel sued his employer claiming sex discrimination. He was awarded $20,000 to cover medical bills he incurred because of the related emotional distress, $80,000 to punish his employer for discrimination, and $50,000 to compensate him for lost wages. What is the amount that must be included in Daniel's gross income for the year?

Accepted Answer

The answer of After he was denied a promotion, Daniel...

Question 5

In 2014 Betty loaned her son, Juan, $10,000 to help him buy a car. In 2015, before he repaid the $10,000, Betty told Juan that she was "tearing up" the $10,000 note as a graduation present. How should Juan treat the amount forgiven?

Accepted Answer

The amount forgiven is an excludable gift in the year of forgiveness.

Question 6

In 2006, Gita contributed property with a basis of $500,000 and a fair market value of $3,000,000 to a qualified small business corporation for all of its common stock. She sells the stock in 2015 for $4,000,000. What is the amount of taxable gain on the transaction?

Accepted Answer

The answer of In 2006, Gita contributed property with a...

Question 7

Exter Company is experiencing financial difficulties. It has assets worth $2 million, but owes liabilities of $2.1 million. It has a longstanding relationship with the bank. The bank has agreed to forgive $300,000 of debt principal. Because of this debt forgiveness, Exter will recognize income of

Accepted Answer

While debt forgiveness is normally recognized, Exter is insolvent to the extent of $100,000 ($2 million assets - $2.1 million liabilities). The remaining $200,000 of debt forgiven must be recognized.

Question 8

In September of 2015, Michelle sold shares of qualified small business stock for $1,000,000 that had a basis of $200,000. She had held the stock for 7 months. Forty-five days after the sale she purchased other qualified small business stock for $1,100,000. What is the basis in the new stock she purchased?

Accepted Answer

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Question 9

Mark, a cash basis taxpayer, died on September 30, 2015. His wife, Charlotte, provides you with the following information.
From January 1, 2015 until his death, Mark received a salary of $35,000. Charlotte received a salary of $68,000 during 2015. Mark had earned commissions of $20,000 which Charlotte received after his death. Charlotte was the beneficiary of a $100,000 whole life policy purchased by Mark and a $50,000 group term life insurance policy purchased by Mark's employer. The employer had paid premiums of $250 on Mark's behalf. In addition, the corporation paid Charlotte a $10,000 employee death benefit in Mark's name. All employees' families received similar benefits regardless of financial need. Mark and Charlotte had itemized deductions of $15,600. What is the amount of their taxable income on their 2014 tax return?

Accepted Answer

The answer of Mark, a cash basis taxpayer, died on...

Question 10

Connor owes $4 million and has assets of only $1 million. He declares and files personal and business bankruptcy and his creditors approve a payment plan of $.25 per dollar. Connor has a net operating loss carryover of $2 million. The remaining 75 percent of his debt will be canceled. Connor must recognize income of

Accepted Answer

Gross income does not include income from discharge of indebtedness where discharge occurs in bankruptcy even if the reduction exceeds the available tax attributes.

Question 11

This year, Jason sold some qualified small business stock that he acquired in 2006. His basis in the stock was $95,000 and he sold it for a $30,000 gain. How much of Jason's gain is taxable?

Accepted Answer

$30,000 × .50 = $15,000. Gain on qualifying small business stock is allowed a 50% exclusion. However, note that qualified stock acquired between February 18, 2009 and December 31, 2014 may instead be eligible for a 75% or 100% exclusion.

Question 12

Daniel purchased qualified small business corporation stock for $200,000. In 2015 he sells the stock for $2,200,000, realizing a $2,000,000 gain. Determine the taxes due under the following independent situations (apply current tax rates, but ignore any additional Medicare taxes on investment income):
(a) Daniel purchased the stock on February 1, 2006.
(b) Daniel purchased the stock on March 1, 2009.
(c) Daniel purchased the stock on October 1, 2010.

Accepted Answer

The answer of Daniel purchased qualified small business corporation stock...

Question 13

Jan has been assigned to the Rome office of ABC Corporation. She arrives in Rome on November 1, 2013 and does not return to the U.S. until March 5, 2016. During her stay in Rome, Jan earned $112,000 in 2015. Jan may exclude

Accepted Answer

The allowable exclusion is the lower of $100,800 or the taxpayer's earned income ($112,000).

Question 14

Jeremy, an American citizen, earned $200,000 during 2015 while employed in Switzerland. Jeremy is entitled to the maximum foreign-earned income exclusion. Jeremy also incurred $40,000 of deductible expenses attributable to the foreign-earned income. Jeremy may deduct how much in expenses?

Accepted Answer

($100,800/$200,000) × $40,000 = $20,160 is attributable to non-taxable income and may not be deducted. Therefore, Jeremy may deduct $40,000 - $20,160 = $19,840.

Question 15

Tim earns a salary of $40,000. This year, Tim's employer establishes a cafeteria plan under which Tim signed a salary reduction of $2,500 for which $1,500 is to cover his health insurance premiums and $1,000 is transferred to a flexible spending account to reimburse medical expenses. During the year, he is reimbursed $900 for medical expenses. What is the total taxable to Tim this year?

Accepted Answer

The answer of Tim earns a salary of $40,000. This...

Question 16

The discharge of certain student loans is excluded from income if all of the following are present except for

Accepted Answer

Age is not a provision for excluding the forgiveness of a student loan.

Question 17

Jamal, age 52, is a human resources manager for Triple W Company. His annual salary is $110,000 and he receives the following fringe benefits during the current year:
• Triple W pays for all employees' health and accident insurance. Triple W pays $7,000 for Jamal's health insurance during the year.
• Triple W provides Jamal with group-term life insurance coverage of $200,000 during the year. The monthly inclusion amount per $1,000 of coverage is $.23.
• Triple W has a flexible benefits plan in which employees may participate to pay any qualifying medical costs not reimbursed by their health insurance. Jamal has $1,600 withheld from his salary under the plan. During the year he receives reimbursements of $1,300.
• Triple W pays parking costs for all management employees. Jamal's parking costs $220 month.
• Triple W pays Jamal's annual membership dues of $450 to the Society of Human Resource Management Association. The company also subscribes to several management journals for Jamal costing $650 a year.
• Jamal took a college class on financial accounting and Triple W reimbursed his tuition of $6,000 through its tuition assistance program for all employees.
• Jamal's consumption of coffee provided by Triple W is valued at $250 a year.
How much income must Jamal report from his job?

Accepted Answer

The answer of Jamal, age 52, is a human resources...

Question 18

For a taxpayer who is not insolvent nor under bankruptcy proceedings, the discharge of debt is generally

Accepted Answer

If the taxpayer is solvent at the time of cancellation of debt, discharge of indebtedness is generally includable in gross income.

Question 19

Melanie, a U.S. citizen living in Paris, France, for the last three years earns a salary of $125,000 in 2015. Melanie's housing costs are $24,000 per year, which is reasonable. How much can Melanie exclude from income?

Accepted Answer

$100,800 foreign earned income exclusion + $7,872 housing exclusion ($24,000 - $16,128).

Question 20

In 2014 Bonnie, a sole proprietor, loaned her employee, John, $10,000 to help him buy a car. In 2015, before he repaid the $10,000, Bonnie told John that she was "tearing up" the $10,000 note in recognition of his strong job performance. How should John treat the amount forgiven?

Accepted Answer

Forgiven debt is normally included in gross income. The cancellation of debt due to job performance would be characterized as compensation income rather than as a gift, bequest or renegotiation of a purchase price.

Quiz 4: Gross Income: Exclusions