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Chapter 5 Solutions

PROBLEMS
5-27
a. No. The increase in value is not recognized as income until it is realized (e.g.,
when Q sells or otherwise disposes of the property). (See p. 5-5.)
b. Yes. This is a bargain purchase. The $4,000 difference between the sales price
of $3,000 and the property's value of $7,000 would constitute compensation
unless R can establish that the bargain element of the sale was a gift. Note,
however, that so-called qualified employee discounts are excludable, as
discussed in Chapter 6. These discounts must be on property other than real
property that is offered for sale to customers in the employer's ordinary line of
business in which the employee is performing services and they must not
exceed the employer's gross profit margin. (See p. 5-7 and § 132.)
c. No. Although I has "cashed in" on the increase in value of the property, no
income is realized because there has not been a disposition of the property,
and I still remains obligated to repay the $10,000 loan. Moreover, I's net worth
has not increased. Assets have increased, but so have liabilities. (See p. 5-8.)
d. Yes. S would be treated as having received $60 (30% × $200) per month as
income from using the car for personal purposes. Because S is controlling
shareholder of the business, the income probably would be treated as a
constructive dividend from the corporation. (See p. 5-10 and § 61.)

5-29
a. Yes. The $39,000 reimbursement for mental anguish might appear to be
excluded from income because it represents a return of capital. However, §
104(a)(2) as amended in 1996 allows an exclusion only for physical personal
injury. Section 104 makes it clear that emotional distress shall not be treated
as a physical injury or physical sickness. The remaining $61,000 is included
as it is in lieu of compensation. (See Example 6 and p. 5-9.)
b. No. The discount is an employee fringe benefit that historically has been
excluded. This treatment was codified in § 132 in 1984. Now, so-called
qualified employee discounts are excludable, as discussed in Chapter 6. These
are discounts on property other than real property and services that are offered
for sale to customers in the ordinary course of the line of business of the
employer in which the employee is performing services, and do not exceed the
employer's gross profit margin. (See p. 5-10 and § 132.)
c. No. Historically, noncash transfers of small value to employees are treated as
nontaxable employee fringe benefits. Under the de minimis fringe benefit
rules of §132, property with a value that is so small as to make accounting for
it unreasonable or administratively impracticable are excluded. (See 5-10 and
§ 132.)

(See Example 28 and pp.000 in 2017.) c.000 of the payments are reported in the year of receipt regardless of how the payments are reported for financial accounting purposes. 2017. the balance of the payments received. all $700." Under the full-inclusion method all $200. Therefore $256. As in parts (a).000) would be reported in the following year.) b.) d. The answer is the same as in (a) in terms of the full-inclusion method.000 . since significant services are provided in addition to the room. LL would report one-fourth or $50. $150. This result occurs notwithstanding the fact that services are performed over three accounting periods and would be reported over three accounting periods for financial accounting purposes.e. When the deferral method is used $25. as well. and (c) the taxpayer may use the full inclusion method or the deferral method. as long as the rooms are to be rented prior to the end of 2017. The remainder will be deferred because the services (i. (See Example 28 and pp. The rules applying to prepaid services are used rather than those for prepaid rents. all $10. Under the deferral method.000 ($200. 26 and 27. 2016. 2016. the income not included under financial accounting purposes in 2016 will be deferred until 2017 when it is earned for financial accounting purposes.000 of the payments would be included in the earlier year.000 of the payments are reported in the year of the receipt regardless of how the payments are reported for financial accounting purposes. 26 and 27. LL has two options for reporting the $200. 26 and 27. the taxpayer may use the full inclusion method or the deferral method. the basketball operation would report the income in the same manner as it does for financial accounting purposes.5-39 a.) .. Tax would follow this approach and LL would report $50. Since one-fourth of the services are provided in the first year. These are: a "full-inclusion method" and a "deferral method. 2016. Under the deferral method.000 of advanced payments for services. in the first year. If the full inclusion method is used. 2016. LL reports the payments to the extent they are included in the revenues of the taxpayer's financial statements and the balance is reported as income in the following year. In this case. (b). As in parts (a) and (b). For tax purposes.$50.000 should be reported in 2016 and $175. Under the full inclusion method. as it is earned (as the games are played).000 in the first year.098 [(15 games played/41 total games during season) × $700.000] will be included in the income of 2015. 26 and 27. (See Example 28 and pp. the games) will be provided in 2016 (See Example 28 and pp. Technically. LL probably would report the income for financial accounting purposes as it is earned. If the deferral method is used. for financial accounting purposes.000 as income for tax purposes in the first year.