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Exam 5: Gross Income and Exclusions

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Question 51

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Joyce's employer loaned her $50,000 this year (interest-free) to buy a new car. If the federal interest rate was 3%, which of the following is correct?

A) Joyce recognizes $1,500 of taxable interest income.
B) Joyce's employer recognizes $1,500 of deductible interest expense.
C) Joyce recognizes $1,500 of imputed compensation income.
D) Joyce recognizes $1,500 of imputed dividend income.
E) None of these.

F) All of the above
G) A) and B)

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Question 52

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Brad was disabled for part of the year and he received $11,500 of benefits from a disability plan purchased by Brad's employer. Brad must include all $11,500 of benefits in his gross income because Brad was not taxed on the disability insurance premiums paid by his employer.

A) True
B) False

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Question 53

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The tax benefit rule applies when a taxpayer refunds amounts that were previously included in income.

Worker's compensation benefits are excluded from gross income.

Frank received the following benefits from his employer this year. What amount must Frank include in his gross income? $\begin{array} { l r } \underline{\text { Benefits Received }} &\underline{ \text { Amount }} \\\text { Salary } & \$ 54,450 \\\text { Health insurance } & 2,900 \\\text { Group term life insurance } ( \$ 50,000 ) & 1,800\end{array}$

Wendell is an executive with CFO Tires. At the beginning of this year the corporation loaned Wendell $50,000 at an interest rate of one percent. Wendell would have paid interest of $2,500 this year if the interest rate on the loan had been set at the prevailing Federal interest rate. Wendell used the funds as a down payment on a vacation home and during the year he paid $500 of interest to CFO. On December 31, CFO forgave the loan and remaining interest. What amount of gross income does Wendell recognize from the loan this year?

The assignment of income doctrine requires that to shift income from property to another person, the taxpayer must transfer only the income to the other person.

When a taxpayer sells an asset, the entire proceeds from the sale must be included in gross income regardless of the cost of the asset.

Opal deducted $2,400 of state income taxes on her tax return last year. This year she received a state income tax refund of $170. What amount of the refund, if any, should Opal include in her gross income if last year her total itemized deductions exceeded the standard deduction by $350?

A below-market loan (e.g., from an employer to an employee) is a common example of a transaction that generates taxable imputed income.

The exclusion ratio for a purchased annuity is the cost of the annuity divided by the interest rate.

The principle of realization for tax purposes is very different from realization as it is understood for financial reporting purposes.

Pam recently was sickened by eating spoiled peanut butter. She successfully sued the manufacturer for her medical bills ($3,700) , her emotional distress ($6,000 - she now fears peanut butter) , and punitive damages ($44,000) . What amount must Pam include in her gross income?

Barter clubs are an effective means of avoiding realization for tax purposes.

Harold receives a life annuity from his qualified pension that pays him $5,000 per year for as long as he lives. Later this year Harold will recover the remainder of his cost of the annuity. Which of the following correctly describes how the annuity payments are taxed after Harold has recovered the cost of the annuity?

Charles purchased an annuity from an insurance company that promised to pay him $20,000 per year for the next 12 years. Charles paid $180,000 for the annuity. How much of the first $20,000 payment should Charles include in gross income?

Juan works as a landscaper for local businesses on weekends, and he often provides services in exchange for property. This year Juan provided lawn-mowing services in exchange for $1,275 of car repair services, $3,570 of groceries, and a certificate of deposit (C.D.) for $4,050. The C.D. matures next year with interest. Finally, Juan received a gift card that can only be applied for $850 of clothing at a local mall. Juan has only applied the gift card to purchase $100 of clothing. Compute Juan's gross income assuming that he uses the cash basis of accounting. $1,275 + $3,570 + $4,050 + $850 = $9,745

Claim of right states that income has been realized if a taxpayer receives income and there are substantial restrictions on the taxpayer's use of the income.

Bobby and Sissy got married 2.5 years ago. Since that time, they have lived in Bobby's home. Sissy sold her previous home three years ago and excluded her entire gain ($80,000) at that time. Bobby and Sissy decided to move to a bigger home this year. As a result, they sold Bobby's home for $500,000 (original cost $150,000). How much of the gain from the sale is taxable?

Constructive receipt represents the principle that cash basis taxpayers should be taxed on income when it is made available to them without substantial restrictions.