Concepts in Federal Taxation 2017 24th Edition Murphy Solutions Manual 1

CHAPTER 4
INCOME EXCLUSIONS
Concepts in Federal Taxation 2017 24th

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2017
Edition Topic Status
Questions
1 Rationale for exclusions Unchanged
2 Exclusion versus deferral Unchanged
3 Gifts - effect on family income Unchanged
4 Life insurance proceeds exclusion Unchanged
5 Scholarships - excluded versus taxable Unchanged
6 Tax relief for foreign earned income Unchanged
7 Qualified pension plan payments Unchanged
8 Life insurance - group term versus whole life Unchanged
9 Medical insurance plans Unchanged
10 Health Savings Accounts Unchanged
11 Qualified employee discounts versus bargain purchases Unchanged
12 Cafeteria plan versus flexible benefit plans Unchanged
13 Worker's compensation versus employment compensation Unchanged
4-1
© 2017 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
4-2
2017
14 Definition of a personal injury Unchanged
15 Punitive damages Unchanged
16 Loss of income payments Unchanged
17 Payments received from health and accident insurance policies Unchanged
18 Municipal bond interest Unchanged
19 Exclusion for stock dividends Unchanged
Problems
20 Calculation of tax relief from an exclusion, deduction, tax credit, Unchanged
and deferral
21-CT Gift versus payment of expenses Unchanged
22 Gift of bond Unchanged
23 Gift of stock with payment of dividends to another Unchanged
24 Inheritance with subsequent sale and reinvestment Unchanged
25 Inheritance with subsequent receipt Unchanged
26-COMM Life insurance received in installments Unchanged
27 Scholarships - definition and limitation Unchanged
28 Scholarships – extension of #27 Unchanged
29 Scholarship definition - two scenarios Unchanged
30 Exclusion scenarios - inheritance, gift, life insurance Unchanged
31 Death benefits Unchanged
32-COMM Payments to an employee's husband after death Unchanged
33 Foreign earned income - exclusion versus credit Unchanged
34-COMM Foreign earned income - exclusion versus credit Modified
35 Pension plan payments - qualified versus non-qualified plans Unchanged
36 Payments received from pensions versus annuities Unchanged
37-COMM Taxation of life insurance proceeds versus death benefits Unchanged
4-3
2017
38 Group-term life insurance premiums - calculation of income Unchanged
under four scenarios
39 Medical reimbursement plans – effect of discrimination Unchanged
40 Medical reimbursement plans - effect of discrimination Unchanged
43-CT Meals and lodging exclusion - definition of a meal Unchanged
44 Lodging exclusion - definition of business premises Unchanged
45 Employee fringe benefits - four scenarios Unchanged
46 Provision of health club by employer - three scenarios Unchanged
47 Employee fringe benefits - calculation of gross income Modified
48 Employee fringe benefits - calculation of gross income Unchanged
49 Employee fringe benefits - calculation of gross income Unchanged
50 Flexible benefits plan Unchanged
51 Taxability of damage payments Unchanged
52 Payments for injuries Unchanged
53 Payments for injuries Unchanged
54 Taxability of various types of payments Unchanged
55 Gross income from investments Unchanged
56 Municipal bonds - interest received/loss on sale Unchanged
57 Gross income versus exclusions - three scenarios Unchanged
58 Municipal bonds - taxable bond equivalents Unchanged
59 Decision to sell investment and purchase tax exempt bonds Unchanged
60 Discharge of debt Unchanged
61 Discharge of debt - insolvency exception contrasted with principal Unchanged

residence indebtedness exception
62 Discharge of debt versus gifts and rebates Unchanged
4-4
2017
63 Discharge of debt - insolvency exception contrasted with principal Unchanged

residence indebtedness exception
64 Improvements by lessee Unchanged
65-COMM Improvements by lessee with rent reduction Unchanged
66-IID Gift versus compensation Unchanged
67-IID Gift/assignment of income Unchanged
68-IID Inheritance and a subsequent sale Unchanged
69-IID Inheritance/life insurance Unchanged
70-IID Inheritance versus compensation Unchanged
71-IID Pension plans Unchanged
72-IID Health insurance reimbursements Unchanged
73-IID Employer provided lodging Unchanged
74-IID Damage payments Unchanged
75-IID Bargain purchase Unchanged
76-IID Forgiveness of debt Unchanged
77-IID Leasehold improvements Unchanged
78-TSC Tax Simulation Case Unchanged
79 INTERNET Assignment Unchanged
80 INTERNET Assignment Unchanged
81 Research Problem Unchanged
82 Research Problem Unchanged
83-TFP Tax Form Problem – Schedule B Unchanged
84-INTRP Integrative Tax Return Problem Unchanged
85-INT Integrative problem - calculation of taxable income and tax Unchanged

liability
4-5
2017
86-INT Integrative problem - comprehensive calculation of gross income. Unchanged
Calculation of taxable income is completed in Chapter 8, Problem
#98
87-DC Evaluation of two job offers with different salaries and benefits Unchanged
88-DC Evaluate which security to use to fund son’s new business/sale Unchanged
or gift to son
89-TPC Evaluation of investments with varying tax aspects - taxable, Unchanged

excludable, deferred
90-TPC- Tax effect of providing whole-life versus group - term life versus Unchanged
COMM cash payment
91-EDC-CT Application of SSTS's to possible non-reporting of income; use of Unchanged

third party information
CHAPTER 4
INCOME EXCLUSIONS
DISCUSSION QUESTIONS
1. What are the two reasons most commonly advanced for excluding items from income? Give
examples of each and explain how they accomplish the purpose of the exclusion.
The two reasons commonly advanced for the exclusion of income items are 1) to
alleviate the effects of double taxation, and 2) to encourage taxpayers to engage in
transactions for which relief is provided.
Exclusions that avoid double taxation include the foreign earned income exclusion
(credit), which prevents income earned in foreign countries from being taxed in the
foreign country and in the United States. The exclusion for property received by gift or
inheritance prevents double taxation by the income tax and the gift and estate tax on
the same transaction.
Most other exclusions encourage taxpayers to engage in specific transactions. For

example, the exclusion of all payments received from medical insurance policies
purchased by individuals encourages individuals to purchase medical insurance. The
exclusion for interest received on municipal bonds encourages taxpayers to invest in
such securities versus taxable investments.
2. What is the difference between an exclusion of income and a deferral of income?
An income item that is excluded is never subject to tax - either in the current period or
a future period. Deferred income items are not subject to tax in the current period, but
will be taxed in some future period. Most items are deferred until the taxpayer has the
wherewithal-to-pay the tax.
3. How can gifts be used to lower the overall tax paid by a family?
Because gifts are not subject to income tax, a high bracket taxpayer can make a gift of
income producing property to a low bracket member of his/her family (father to son,
grandmother to granddaughter, etc.). By using the annual gift tax exclusion and the
lifetime gift and estate tax exclusion, payment of the gift tax on the gift property can also
be avoided. When the property produces income, it will be taxed at a lower marginal tax
rate, thus reducing the overall tax paid by the family.
4-5
4-6 Chapter 4: Income Exclusions
4. Why are life insurance proceeds excluded from the gross income of the beneficiary of the
policy?
Because, in most instances, life insurance proceeds are counted as part of a decedent's
estate, they resemble inherited property, which is excluded from tax. Thus, to provide
equity with other forms of inherited property, they are excluded from tax.
5. Explain the circumstances under which a scholarship would not be excluded from gross
income.
Most scholarships are excluded from tax. However, the amount of the exclusion is
limited to the direct costs of education - tuition, fees, books, lab equipment, etc.
Therefore, if the scholarship exceeds the student's direct costs, the excess is taxable.
In addition, any scholarship that is specifically for room and board cannot be excluded
even if it does not exceed the direct costs.
6. What tax relief is provided to U.S. citizens who earn income in a foreign country and pay taxes
in that country?
To prevent double taxation of income, foreign earned income may either be excluded
from gross income (up to $101,300 in 2016) or the income may be included in gross
income and a tax credit taken for the taxes paid to the foreign country. However, the tax
credit cannot exceed the amount of U.S. taxes the taxpayer would have paid on the
income.
7. How do employees benefit from payments made into a qualified pension plan on their behalf?
From a tax perspective, an employee receives two benefits from the payments made by
an employer into a qualified pension plan. First, the payment constitutes compensation
income to the employee. However, payment of tax on the income is deferred until the
employee withdraws the money from the plan. This feature provides the time-value
savings common to deferrals of income. In addition, if the employee's marginal tax rate
is lower when the money is withdrawn, the employee pays less tax than if it is not
deferred (note that the opposite result could occur if tax rates went up or the employee
has higher income when the money is withdrawn).
The second tax advantage is that the earnings on the pension plan assets are not subject
to tax until they are withdrawn. This gives a higher rate of return each year the assets
are left in the plan, resulting in a larger amount in the plan at retirement than if the
income had been taxed as it was earned.
8. Distinguish group term life insurance from whole life insurance.
Group-term life insurance is insurance provided for a group of employees for a limited
term. The policy will only pay the beneficiaries if the employee dies during the term of
the policy. Term insurance is only insurance, there is no savings component.
A whole-life insurance policy is a policy on a single individual for the life of the
individual. That is, in contrast to term insurance, once the policy is paid for, the
proceeds are always paid at death. Whole life insurance includes an insurance
component and a savings component (i.e., it has a cash surrender value)
Chapter 4: Income Exclusions 4-7
9. What is the difference in the tax treatment of a medical insurance plan that is purchased from
a third-party insurer and a self-insured medical reimbursement plan?
There is no difference in treatment between the two types of plans. Premiums paid on
purchased medical insurance and payments for medical expenses from the plan are
excluded from the employees' income. Payments made from a self-insured medical plan
are also excluded from gross income as long as the plan does not discriminate in favor
of "highly compensated" employees. If a self-insured plan does discriminate, the
"highly compensated" employees must include the payments made from the plan in
their gross income (those who are not considered to be "highly compensated" still
receive the exclusion).
10. What is a Health savings account?
An HSA is a savings account used to pay medical expenses with pre-tax income.
Earnings on an HSA are not taxed. Distributions from an HSA that are used to pay
medical expenses are excluded from gross income. To be eligible to establish an HSA,
an individual must be covered by a high-deductible health insurance plan.
Contributions to an HSA can be made by an employer or the individual establishing the
account. Contributions by an employer are excluded from the employee’s gross income.
Contributions by an individual are deductible for adjusted gross income. In addition,
unlike a flexible benefits plan, the unused balance in the HSA is carried forward to future
tax years.
11. What is the difference between a qualified employee discount and a bargain purchase by an
employee?
Both a qualified employee discount and a bargain purchase allow employees to

purchase goods or services from an employer at a price below the normal selling price.
As such, they are a form of compensation. The difference between the two is that a
qualified employee discount must be offered to all employees in order for the employee
to exclude the discount from income. If all employees are not eligible for the discount,
then any discounts received become bargain purchases and are included in the
employee's gross income as compensation.
12. What is the difference between a cafeteria plan and a flexible benefits (salary reduction) plan?
In a cafeteria plan, the employer allows each employee a pre-determined dollar amount
of benefits. The employee chooses the benefits provided by the plan up to the pre-
determined amount or takes cash instead. Any benefits chosen are excluded from gross
income while any cash received is included in gross income.
A flexible benefit plan (also called a salary reduction plan) differs in that the employee
directs the employer to reduce his/her salary by the amount he/she wishes to put into
the plan. The amounts in the plan can then be used to pay unreimbursed medical
expenses, dental costs, eye-care, child-care, etc. Any amounts paid into the plan that
are not spent by the employee during the plan year revert to the plan and the employee
effectively loses that amount.
13. Why are workers' compensation payments treated differently from unemployment
compensation payments for tax purposes?
Worker's compensation payments are paid when a worker is injured on the job. As such,
they are intended to make the taxpayer whole (restore the human capital lost by the
injury) and thus, are not taxed. Unemployment compensation is a substitute for earned
income lost due to unemployment. Because it is a payment for loss of income, it is
taxed according to the general rule that taxes all payments that are for loss of income.
14. What is a personal physical injury for purposes of excluding damage payments received?
Only: 1) compensatory payments received for personal physical injuries or personal

physical sickness and 2) medical payments for emotional distress can be excluded from
income. Under this provision, if the action creating the payment has as its origin a
physical injury or physical sickeness then all compensatory payments received are
excluded.
In addition, courts often award loss-of-income damages and punitive damages. Loss-
of-income payments can be excluded only if the payment is due to physical injury or
physical sickness. All punitive damage payments received are taxable.
15. Are punitive damages taxable? Explain.
Punitive damages are always taxable.
16. Are payments for loss of income taxable? Explain.
Payments for loss of income are generally included in gross income. However, if the
payment is related to a physical injury or a personal physical sickness, the loss-of-
income payment is excluded from gross income. In addition, payments for loss of
income from an insurance policy purchased by the taxpayer are excluded from income.
17. Discuss the difference in the tax treatment of payments received from an employer-provided
health and accident insurance policy and a health and accident insurance policy purchased by
the taxpayer.
The exclusion for payments received from an employer provided medical insurance plan
are limited to those payments for medical costs (up to the amount of the actual medical
expenses), loss of body parts or disfigurement, and payments made for specific types
of injuries. Payments received from an employer provided plan for loss of income (sick
pay) must be included in the gross income of the employee.
All payments received from a medical insurance policy purchased by the taxpayer are
excluded from tax. Thus, loss of income payments from such a plan are not taxable as
they are when received by an employer provided plan.
18. What is the purpose of excluding municipal bond interest from gross income?
The purpose of excluding interest on municipal bonds is to allow state and local
governments to obtain financing easier and at lower rates than for comparable taxable
bonds. By excluding the interest on municipal bonds from tax, municipalities do not
have to pay as high an interest rate as a comparable taxable bond to achieve the same
after-tax return.
19. Are all stock dividends received excluded from gross income?
The general rule is that a dividend received in the form of stock is not taxable because
it does not represent an increase in the wealth of the taxpayer. However, when the
stockholder has the option of taking cash in lieu of the stock, the dividend is taxable
(even if the stock is taken). In this case, the stock is deemed to have a cash-equivalent
that represents an increase in wealth and therefore, is subject to tax.
PROBLEMS
20. Throughout the textbook, it has been stated that tax relief can come in several
forms. Assuming that the taxpayer in question is in a 28% marginal tax rate
bracket and the time-value of money is 6%, determine the tax value of the
following forms of relief:
a. A $2,000 item of income that is excluded from income
Because there is no tax paid on the $2,000 of excluded income, there is an
implicit savings of the tax that would have been paid if the income been
taxable, in this case $560 ($2,000 x 28%).
b. A $2,000 expenditure that is deductible in computing taxable income

A tax deduction results in a reduction of tax 560 tax saving for a 28%
marginal tax rate payer.
c. A $2,000 expenditure that is eligible for a 10% tax credit

The value of a tax credit is equal to the amount of the tax credit because it
is a direct reduction in the tax liability. The value of the tax credit is $200.
d. A $2,000 item of income that is deferred for five years (Assume no change in the
marginal tax rate.)
The value of a deferral is equal to the time value of money tax savings on
the item. In this case, the payment of the $560 tax is deferred for 5 years.
The tax savings then is equal to the difference between the $560 of tax that
would have been paid currently without the deferral minus the present
value of the $560 tax payment 5 years from now. The present value factor
for 6% for 5 years is .747, giving a present value of $418. Thus, the tax
savings on the time value of money is $142 ($560 - $418).
21. A fire extensively damaged a small Alaska town where Intech Company had its
primary plant. Intech decided to give $200 to each household that lost its
residence. About 12% of the payments were made to Intech employees. Is the
receipt of $200 by some Intech employees taxable as compensation or
excludable as a gift?
The question to be resolved is whether the payments made to Intech
employees are gifts (excluded) or are a form of compensation. In order to
be a gift, the payment must be made with a "detached and disinterested
generosity" that is out of "affection, respect, admiration, charity, or like
impulses." In making this determination, the courts have held that it is the
intention of the transferor that is the controlling factor in determining
whether a payment is a gift. The facts would indicate that the payments to
Intech employees do constitute gifts. Because Intech gave $200 to all
households that suffered damage, the payments show detachment
(payments to individuals that are not its employees) and charitable intent
(helping out the community), with no specific intent to compensate its
employees.
22. On May 1, Raisa received a $10,000, 9% bond of Altomba Corporation as a

graduation present from her Aunt Lenia. The bond pays interest on June 30 and
December 31. What are the tax effects of this transfer for Raisa and Lenia for
the current year?
The value of a gift is excluded from income. Under the assignment of
income doctrine, Lenia is taxed on the $300 [$10,000 x 9% x (4 ÷ 12)] of
interest earned up to the date of the gift. Because Raisa receives the entire
$450 semi-annual interest payment, the $300 of interest earned by Lenia is
part of the excludable gift. However, the exclusion is limited to the value
of the gift. Any subsequent earnings on the bonds are taxable. Raisa must
recognize $150 of interest from the June 30 payment and the entire $450
December 31 payment, a total of $600 of interest income for the year.
23. During the current year, Alexis gives her daughter Tabatha stocks worth $80,000
on the condition that she pay her son Rory the first $7,000 in dividends on the
stock each year. Discuss the taxability of this arrangement in each of the
following cases.
The value of a gift is excluded from income. The receipt of the stock would
not be taxable. Any subsequent earnings on the stock would be taxable.
The question to be resolved is whether the transfer of the dividends from
Tabatha to Rory is an assignment of income that will be taxed to Tabatha.
In this case, Alexis is making a gift of up to $7,000 of the income from the
stock to Rory. The gift of income is not excludable; it is taxed to Rory.
Tabatha will only have income from any dividends she retains.
a. The stocks pay total dividends of $8,000. Tabatha pays Rory $7,000 under the
agreement.
Rory includes the $7,000 in his gross income. Tabatha is taxed on the
$1,000 of dividends that she retains.
b. The stocks pay total dividends of $5,500. Tabatha pays Rory $5,500 under the
agreement.
Rory is taxed on the entire $5,500. Tabatha receives no dividends and has
no income from the dividends.
Instructor's Note: If the terms of the gift required Tabatha to always pay
Rory $7,000 regardless of the amount of dividends, then Tabatha would
have to sell some of the stock in part b to make the required payment. In
this case, the additional $1,500 payment would have been from principal
and therefore, not subject to tax under the capital recovery concept.
24. Herman inherits stock with a fair market value of $100,000 from his grandfather
on March 1. On May 1, Herman sells half of the stock at a gain of $10,000 and
invests the $60,000 proceeds in Jordan County school bonds. The bonds'
annual interest rate is 6%, which is paid on July 31 and January 31. On October
15, Herman receives a $2,200 dividend on the remaining shares of stock. How
much gross income does Herman have from these transactions?
Herman must include the $10,000 capital gain from the sale of half of the
stock and the $2,200 of dividend income in his gross income. The receipt
of the inherited stock is excluded from income. However, any subsequent
earnings on the stock is not part of the inheritance and must be included
in gross income. The interest Herman receives from the Jordan County
school bonds is excludable municipal bond interest.
25. Fatima inherits a rental property with a fair market value of $90,000 from her
aunt on April 30. On May 15, the executor of the estate sends her a check for
$7,000. A letter accompanying the check states that the $7,000 comes from the
rent received on the property since her aunt's death. Fatima receives $6,600 in
rent on the property during the remainder of the year and pays allowable
expenses of $4,200 on the property. How much gross income does Fatima have
from these transactions?
Fatima has $2,400 ($6,600 - $4,200) of rental income from the property. The
receipt of the inherited rental property is excluded. The $7,000 received
from the estate is also an excludable inheritance. Although the $7,000
represents rent on the property, the estate held ownership during the
period covered by the rental payments. Under the assignment of income
doctrine, the owner of property is taxed on the income from the property,
regardless of who actually receives the property. Therefore, the estate
must include the $7,000 of rental income on its income tax return.
26. Allison dies during the current year. She is covered by a $1,000,000 life
insurance policy payable to her husband Bob. Bob elects to receive the policy
proceeds in 10 annual installments of $120,000. Write a letter to Bob explaining
the tax consequences of the receipt of each installment.
Life insurance proceeds are excluded from tax. Therefore, the $1,000,000
face value of the policy is excluded as it is received. However, the earnings
on the policy during the time it is held by the insurance company are not
excludable. The total interest earned is $200,000 [($120,000 x 10) -
$1,000,000]. As each payment on the policy is received, Bob will exclude
$100,000 ($1,000,000 ÷ 10) and include $20,000 ($200,000 ÷ 10) in gross
income.
27. Earl is a student at Aggie Tech. He receives a $5,000 general scholarship for
his outstanding grades in previous years. Earl is also a residence hall assistant,
for which he receives a $1,000 tuition reduction and free room and board worth
$6,000 per year. Earl's annual costs for tuition, books, and supplies are $8,000.
Does Earl have any taxable income from the scholarship or the free room and
board?
Earl has $7,000 ($6,000 + $1,000) of income from the receipt of the free
room and board. Even if the room and board were considered to be a
scholarship, it could not be excluded because it is designated for payment
of costs that are not direct education costs. The $5,000 general
scholarship is excluded because it is less than the actual direct costs.
NOTE: Earl may be able to exclude the value of the room and board and
the $1,000 tuition reduction if it meets the requirements for meals and
lodging provided by an employer. To exclude the value of meals, the meals
must be provided on the employer's premises and be for the convenience
of the employer. The same requirements are applicable to lodging with the
extra provision that the lodging be required in order to accept employment.
In determining whether this exclusion applies, one would first have to
determine whether Earl is an employee of the residence hall. Assuming
that he is, the meals may not meet the convenience of employer test (there
is no advantage to the employer in having Earl eat in the residence hall
cafeteria) and would not be excludable. The lodging would meet the
convenience test and would be excludable.
28. Assume the same facts as in problem 27, except that Earl is not a residence hall
assistant and his general scholarship is for $10,000.
Scholarships can be excluded up to the amount of the direct education
costs. In case a, the scholarship is less than the $8,000 of direct costs and
fully excludable. In case b, the scholarship exceeds Earl's direct costs and
he is taxed on the $2,000 excess.
29. Fawn receives a $2,500 scholarship to State University. Discuss the taxability
of the scholarship under each of the following assumptions:
a. The scholarship is paid from a general scholarship fund and is awarded to
students with high academic potential. Recipients are not required to perform
any services to receive the scholarship.
The scholarship is excluded from income to the extent of Fawn's direct
education costs (tuition, fees, books, supplies, special equipment). The
scholarship is excluded because it was awarded based on academic
potential (i.e., all students were eligible for the scholarship) and there are
no future services to be performed as a result of receiving the scholarship.
b. The scholarship is paid by the finance department. Recipients are required to
work 10 hours per week for a professor designated by the department.
This is not a scholarship that is eligible for exclusion. To be excluded from
income, a scholarship must be gratuitous in nature and not be a form of
compensation for past, present, or future services. In this case, the
recipient is required to provide future services as a condition of the award,
making it a form of compensation; it is not a gratuitous transfer.
30. Determine whether the taxpayers in each of the following situations have
realized taxable income:
a. Alexander inherited a tract of land from his uncle who died during the current
year. A friend of Alexander's who is a petroleum engineer told him he thought
there might be oil on the land. Alexander had the land surveyed, and an oil
deposit worth an estimated $5,000,000 was discovered on the property.
The value of the land is excluded because it is received through
inheritance. The discovery of the oil deposit does not constitute a
realization. Although the form of the property may be altered by the
discovery, the value of the discovery has not been realized through an
arm's-length transaction.
b. Mickey was given 2 tickets to the World Series by a friend. Mickey sold the
tickets for $500 apiece.
Mickey has realized income of $1,000 less his basis in the tickets. The
receipt of the tickets is excluded as a gift. However, the subsequent sale
of the tickets is not excludable. Note: The tickets have a basis equal to
Mickey's friend's basis, which reduces the gain on the sale. Basis rules
for gifts are covered in Chapter 10.
c. Hannah is the purchasing agent for Slim Diet Centers. Harold, a salesman who
does considerable business with Hannah, gave her a set of golf clubs worth
$750. Harold told Hannah that he was giving her the clubs to show his
appreciation for being such a good friend throughout their business dealings.
The question to be answered is whether the golf clubs are a valid gift or a
payment for past, present or future services. In this case, the business
relationship is so strong that is likely that the golf clubs would not meet
the criteria for a gift. It appears that Harold is attempting to compensate
Hannah for their past relationship in hopes of continuing the relationship.
d. Melanie's father died during the current year. She was the beneficiary of a
$200,000 insurance policy on her father's life. She received the proceeds on
August 1 and immediately invested them in a bank certificate of deposit with a
9% annual earnings rate.
The receipt of the $200,000 face value of the life insurance policy is
excluded from tax. However, any subsequent earnings on the $200,000
would be taxable.
31. Armando, a manager for Petros Pizza Pies (PPP), dies in an accident on July
12. PPP pays his wife, Penelope, $600 in salary that had accrued before
Armando died. Armando was covered by a $90,000 group term life insurance
policy, which is also paid to Penelope. In addition, the board of directors of PPP
authorizes payment of $6,000 to Penelope and $4,000 to their child in
recognition of Armando's years of loyal service and contributions to the success
of the company. What are the tax consequences of the payments to Penelope
and her child?
Penelope has $6,600 ($600 + $6,000) of gross income. Death benefit
payments are fully taxable. Penelope must include in income the $6,000
she receives from PPP due to Armando’s loyal service and the $600 salary
Armando earned prior to his death. The receipt of the $90,000 life
insurance proceeds is excluded. Her daughter must include in income the
$4,000 she receives from PPP.
32. Lucinda, a welder for Big Auto Inc. dies in an automobile accident on March 14
of this year. Big Auto has a company policy of paying $5,000 to the spouse of
any employee who dies. In addition to the $5,000 payment, Big Auto pays
Harvey, Lucinda's husband, $1,600 in salary and $1,100 in vacation pay
Lucinda had earned before her death. Harvey also collects $120,000 from a
group-term life insurance policy Big Auto provided as part of Lucinda's
compensation package. Lucinda had contributed to a qualified employer
sponsored pension plan. Big Auto had matched Lucinda's contributions to the
plan. The plan lets the beneficiary of an employee who dies before payments
begin take the plan balance as an annuity or in a lump-sum. Harvey elects to
take the $250,000 plan balance in a lump-sum. Write a letter to Harvey
explaining the tax consequences of each payment he receives.
Salary and vacation pay - the $1,600 salary and $1,100 of vacation pay
were earned prior to Lucinda's death and must be included in gross
income.
Payment due to death - the $5,000 payment to Lucinda’s spouse is
included in gross income. Death benefits are fully taxable.
Life insurance proceeds - the $120,000 life insurance proceeds are
excludable.
Pension plan payment - because the $250,000 is from a qualified plan,
none of the amounts contributed to the plan or the earnings on the
contributions have been subject to tax. Therefore, the entire $250,000
payment is taxable.
33. Joan is a single individual who works for Big Petroleum, Inc. During all of 2016,
she is stationed in West Africa. She pays West African taxes of $20,000 on her
Big Petroleum salary of $92,000. Her taxable income without considering her
salary from Big is $36,000. How should Joan treat the salary she receives from
Big Petroleum on her 2016 U.S. tax return?
Because Joan has worked in West Africa for the entire year, she has the
option of excluding the $92,000 salary from her income (less than
$101,300) or including the entire salary in her income and taking a foreign
tax credit for the West African taxes she paid (the foreign tax credit cannot
exceed the U.S. tax that would have been paid on her West African
income). If Joan elects the exclusion option, her taxable income will be
$36,000 ($92,000 - $92,000 + $36,000). The exclusion cannot exceed her
salary. The tax on the $36,000 is the difference between the tax on the
taxable income without the exclusion ($128,000) and the tax on the
excluded amount ($92,000). Under the foreign tax credit option, her taxable
income will be $128,000 ($92,000 + $36,000). Joan's net tax payable will be
$1,203 ($8,877 versus $10,080) lower with the tax credit option:
Options:
1. Exclude $92,000 from taxable income:
Income tax on $128,000:
$18,558.75 + [28% x ($128,000 - $91,150)] $ 28,877
Less: Tax on $92,000
$18,558.75 + [28% x ($92,000 - $91,150)] 18,797
Equals: Tax on $36,000 $ 10,080
2. Foreign Tax Credit Alternative:
Income tax on $128,000:
$18,558.75 + [28% x ($128,000 - $91,150)] $ 28,877
Tax credit for West African taxes paid* (20,000)
Net tax due $ 8,877
Tax savings using tax credit option $ 1,203
* The foreign tax credit cannot exceed the amount of U.S. tax that would
have been paid on the West African income. In this case, the U.S. tax
on her West African income is $20,755 and Joan is allowed a foreign
tax credit for the $20,000 of actual taxes paid:
$28,877 x ($92,000  $128,000) = $20,755
34. Boris is an unmarried systems specialist with a public accounting firm. During
all of 2016, he is on temporary assignment in London. He pays $21,000 in British
income tax on his $100,000 salary. Boris knows little about taxes and seeks
your advice on the taxability of the salary he earns while in London. Write Boris
a memorandum explaining the tax treatment of his London salary. Assume that
Boris has no other income sources and that he does not itemize deductions.
Because Boris has worked in London for the entire year, he has the option
of excluding his $100,000 British income (less than $101,300) from his U.S.
income or including his British income in his U.S. income and taking a
foreign tax credit for the $21,000 of British income tax he paid (the foreign
tax credit cannot exceed the U.S. tax he would have paid on his British
income). Boris should elect the option that provides the lowest U.S. tax.
Without the exclusion, his taxable income is $89,650. If Boris elects to
exclude $90,000 of his British income, his taxable income will be zero.
Using the foreign tax credit, his net tax is also zero. He cannot get a refund
of foreign taxes paid.
Calculation of taxable income without exclusion:
Gross income = adjusted gross income $100,000
Deductions from adjusted gross income:
Standard deduction (6,300)
Personal exemption (4,050)
Taxable income $ 89,650
Options:
1. Exclude $100,000 - Taxable Income = $0
2. Include $100,000 salary income

Tax on $89,650:
$5,183.75 + [25% x ($89,650 - $37,650)] $ 18,184
Tax credit for British taxes paid* (18,184)
Net tax $ -0-
* Because Boris’ entire U.S. tax is due to British income, his maximum
tax credit is the $18,184 of U.S. taxes.
35. Zoie has worked for Humple Manufacturing for 16 years. Humple has a pension
plan that matches employee contributions by up to 4% of an employee’s salary.
Zoie, age 60, is ready to retire. She has contributed $20,000 to the plan. Under
Humple’s pension plan, Zoie will receive $1,000 per month until she dies.
Assume that Zoie is expected to live 25 more years. She wants to know the tax
consequences of each pension payment that she would receive.
a. Assume Humple’s plan is a qualified pension plan.
Because no tax was paid on any amounts paid into the plan or the earnings
from the plan, all payments received are included in Zoie’s gross income.
As payments were made into the plan and income was earned, the income
was deferred. When Zoie begins receiving payments from the plan, she
must recognize all of the income that was deferred. Thus, Zoie will have
$1,000 per month of gross income from each payment.
b. Assume Humple’s pension plan is not a qualified plan. Zoie has paid tax on all
contributions into and earned by the plan.
Because Zoie has paid tax on all the contributions and earnings of the
pension plan, the $1,000 she receives each month from the pension plan
is not taxable.
36. Erwin works for Close Corporation for 24 years. Close has a qualified,
noncontributory pension plan that pays employees with more than 5 years of
service $100 per month per year of service when they reach age 65. Erwin turns
65 in February of this year and retires in June. Payments from Close's plan
begin in July. In preparing for his retirement, Erwin had purchased an annuity
15 years ago for $26,000. The annuity pays $775 per month for life beginning
at age 65. Erwin begins receiving the annuity payments in March. How much
gross income does Erwin have from the receipt of the payments from Close and
the annuity in the current year?
The payments from Close Corporation's qualified pension plan are fully
taxable. In a qualified plan, contributions to the plan and earnings on
assets in the plan are not subject to tax as they are made or earned.
Therefore, all payments become taxable when they are paid out at
retirement. Erwin will have $14,400 ($100 x 24 = $2,400 per month x 6
months in the current year) of income from the pension plan.
Erwin is not taxed on the portion of each annuity payment that is
considered to be a return of his $20,000 investment. Under the simplified
method, the recipient uses the IRS annuity table -- which represents the
individual’s life expectancy in months-- to determine the number of
months the individual is expected to receive the annuity. To determine the
monthly amount that can be excluded, the recipient divides their
investment in the annuity by the number of months the annuity is expected
to be received (i.e., the table number). Using the table, Erwin is expected
to receive 260 monthly payments from the annuity. As a result, $100 of
each payment ($26,000 ÷ 260) is excluded from income
Erwin must include $675 ($775 - $100) of each payment in gross income.
During the current year, he receives 10 payments, resulting in gross
income of $6,750 ($675 x 10). Erwin’s gross income for the year is $21,150
($14,400 + $6,750).
37. Bear Company provides all its employees with a $10,000 group term life
insurance policy. Elk Company does not provide any life insurance but pays
$10,000 to survivors of employees who die. Jackie, an employee of Bear
Company, and her sister-in-law, Rosetta, an employee of Elk Company, both die
during the current year. Their husbands, Bo and Carl, do not understand the tax
effects of the $10,000 payments they receive. Write a letter to Bo and Carl
explaining the tax effects of the $10,000 payments each receives.
Payments received from life insurance policies are excluded from the
gross income of the recipient. Death benefit payments are fully taxable.
In this case, the $10,000 insurance payments received by Bo is excluded
from gross income. The $10,000 death benefit payment received by Carl
is included in gross income. Even though both employers are attempting
to provide for employees' families upon the death of an employee, the tax
law favors the use of life insurance through its exclusion from gross
income.
38. Horace is an employee of Ace Electric Co. Ace provides all employees with
group term life insurance equal to twice their annual salary. How much gross
income does Horace have under each of the following assumptions?
The first $50,000 of premiums paid on group-term life insurance are
excluded from gross income. The premiums paid on coverage in excess
of $50,000 must be included in gross income using the IRS premium table
- Table 4-1, which gives the cost of life insurance premiums per $1,000 by
age of the taxpayer.
a. Horace is 26 and earns $16,000 per year.

Horace's coverage is $32,000 (2 x $16,000) and all premiums paid are
excluded from gross income under the $50,000 exclusion rule.
b. Horace is 26 and earns $42,000 per year.

The coverage is $84,000 and the premiums on $34,000 ($84,000 - $50,000)
must be included in gross income. For a 26 year old, the amount of gross
income is $24.48 (34 x $.72).
c. Horace is 63 and earns $42,000 per year.

The coverage is $84,000 and the premiums on $34,000 ($84,000 - $50,000)
must be included in gross income. For a 63 year old, the amount of gross
income is $269.28 (34 x $7.92).
d. Horace is 46 and earns $90,000 per year.

The coverage is $180,000 and the premiums on $130,000 ($180,000 -
$50,000) must be included in gross income. For a 46 year old, the amount
of gross income is $234 (130 x $1.80).
39. Abe is an employee of Haddock, Inc. Haddock provides basic health and
accident insurance to all its employees through a contract with Minor Accident
Insurance Company. Because the Minor policy does not cover 100% of medical
costs, Haddock provides all executive officers with a self-insured plan to pay any
medical costs not covered by Minor's policy. Abe is eligible for both plans.
During the current year, premiums on the Minor policy for Abe were $1,450. Abe
is reimbursed for $1,900 of his medical costs from the self-insured plan.
a. What are the tax consequences to Abe of the payments made by Haddock?
Because all employee's are covered by the policy, the premiums paid on
the Minor policy are excludible. Self-insured medical reimbursement plans
are also excludible if they do not discriminate in favor of highly
compensated employees. In this case, it would appear that only highly
compensated employees (executive officers) receive benefits from the
plan and Abe would, therefore, be taxed on the $1,900 of reimbursements
received from the plan.
b. What difference would it make if all employees were covered under both plans?
Because all employees are covered by both plans, the premiums paid on
the Minor policy and the reimbursements from the self-insured plan are
excludible from Abe's gross income.
40. Faldo, Inc., provides medical coverage to employees through a self-insured plan.
Nick, the president of Faldo, receives $3,400 in medical expense
reimbursements from the plan during the current year. Discuss the tax
consequences to Nick under the following circumstances:
a. All employees are fully covered by the plan.
Payments made to employees from self-insured medical reimbursement
plans are excluded from the employee's income if the plan does not
discriminate in favor of highly compensated employees. Because all
employees are covered by the plan, it is non-discriminatory and Nick
excludes the $3,400 in payments from his gross income.
b. All employees are covered by the plan. However, only Faldo's executive officers
are fully reimbursed for all expenses. All other employees are limited to a
maximum reimbursement of $1,000 per year.
Even though all employees are covered by the plan, the limitation on
medical expense reimbursements of employees who are not executive
officers is discriminatory. Because all employees are entitled to a $1,000
reimbursement, only payments made to executive officers in excess of
$1,000 are discriminatory and therefore, not eligible for exclusion. Nick
must include the $2,400 ($3,400 - $1,000) excess reimbursement in his
gross income. Note: Employees who are not executive officers can
exclude the reimbursements they receive.
41. Hamid’s employer provides a high-deductible health plan ($1,300 deductible)

and contributes $500 to each employee’s Health Savings Account. Hamid
makes the maximum allowable contribution to his HSA. During the year, he
spends $300 on qualified medical expenses and the HSA earns $18. What is the
effect of Hamid’s participation in the HSA on his adjusted gross income?
Hamid’s adjusted gross income is reduced by $2,850 ($3,350 - $500).

Hamid is not taxed on either the $500 contribution his employer makes to
the HSA, the $18 in earnings on the account, or the $300 he receives from
the account for qualified medical expenses. The maximum, aggregate
contribution to an HSA for a single taxpayer is $3,350 (2016 maximum).
Because his employer contributes $500 to the account, Hamid’s maximum
contribution is $2,850 ($3,350 maximum - $500 employer contribution).
Hamid deducts his $2,850 HSA contribution for adjusted gross income.
42. Tia is married and is employed by Carrera Auto Parts. In 2016, Carrera
established high-deductible health insurance for all its employees. The plan
has a $2,600 deductible for married taxpayers. Carrera also contributes 5% of
each employee's salary to a Health Savings Account. Tia's salary is $30,000
in 2016 and $32,000 in 2017. Tia makes the maximum allowable contribution
to her HSA in 2016 and 2017. She received $600 from the HSA for her 2016
medical expenses. In 2017, she spends $1,400 on medical expenses from her
HSA. The MSA earns $28 in 2016 and $46 in 2017. What is the effect of the
HSA transactions on Tia's adjusted gross income? How much does Tia have
in her HSA account at the end of 2017?
Contributions made to an HSA by an employer and earnings on amounts

in an HSA are not taxable to the employee. Reimbursements for medical
expenses are also excluded from income. Employees can deduct
contributions to their HSA for adjusted gross income. The maximum
aggregate contribution to an HSA for a married couple is $6,750 (2016).
Carrera contributes $1,500 in 2016 and $1,600 in 2017. Tia can contribute
$5,250 ($6,750 maximum contribution - $1,500 employer contribution) in
2016 and $5,150 ($6,750 maximum - $1,600 employer contribution) in 2017.
Therefore, her adjusted gross income is reduced by $5,250 in 2016 and
$5,150 in 2017. Unused amounts paid into an HSA are carried over for use
in succeeding years.
At the end of 2017, Tia has $11,574 in her HSA account:
2016 employer contribution - $30,000 x 5% $ 1,500
2016 employee contribution 5,250
2016 medical expenses paid (600)
2016 earnings 28
Balance at end of 2016 $ 6,178
2017 employer contribution - $32,000 x 5% 1,600
2017 employee contribution 5,150
2017 medical expenses (1,400)
2017 earnings 46
Balance at end of 2017 $ 11,574
43. Adam works during the summer as a fire watcher for the Oregon forest service.
As such he spends 3 weeks in the woods in a forest service watchtower and
then gets a week off. Because of the remoteness of the location, groceries are
flown in by helicopter to Adam each week. Does Adam have any taxable income
from this arrangement? Explain.
Because the lodging is provided on the employer's premises, is for the
convenience of the employer, and is required as a condition of
employment, the value of the free lodging is excluded. However, the value
of the groceries is not excludable. Only "meals" provided on the
employer's premises can be excluded. Groceries have been held to not
constitute "meals" and therefore, are taxable. Instructors Note: This is an
example of the strict interpretation that is applied to exclusions. That is,
the statute specifically allows the exclusion of meals. Therefore, only
meals in the ordinary sense of the word are excluded from gross income.
44. Don is the production manager for Corporate Manufacturing Facilities (CMF).
CMF works three production shifts per day. Because Don is so integral to
operations, the company requires him to live in housing that CMF owns so he
can be available for any emergencies that arise throughout the day. The housing
is located four blocks from the CMF plant. Is Don taxed on the value of the
housing? Explain.
Yes, Don is taxed on the fair market value of the rental housing. In similar
circumstances, the courts have held that the lodging is not eligible for
exclusion because it is not provided on the employer's business premises.
This is an example of the strict interpretation that is applied to exclusions.
That is, the statute specifically allows an exclusion for lodging provided
"on the employer's premises". Because the housing in this case is four
blocks from the plant, it is not on CMF's business premises and therefore,
not eligible for exclusion. See Dole v. Comm., 43 T.C. 697 aff'd., 351 F.2d
308 (1st Cir. 1965)
45. Determine whether the taxpayer has received taxable income in each of the
following situations. Explain why any amount(s) may be excluded:
a. Jim is an employee of Fast Tax Prep, Inc. All employees of Fast Tax Prep are
eligible for a 50% discount on the preparation of their income tax return. Jim's
tax return preparation would normally have cost $300, but he paid only $150
because of the discount.
Because the discount is available to all employees, it qualifies for
exclusion. However, the exclusion for discounts on services is limited to
20%. Thus, only $60 ($300 x 20%) of the $150 discount is excluded from
gross income. The additional $90 discount is included in Jim's gross
income.
b. Mabel is a lawyer for a large law firm, Winken, Blinken, and Nod. Winken pays
Mabel's annual license renewal fee of $400 and her $300 annual dues to the
American Lawyers' Association. Mabel also takes advantage of Winken's
educational assistance plan and receives payment of the $6,000 cost of taking
two night school courses in consumer law.
The payment of Mabel's licensing fees and association membership by
Winken is excluded as a working condition fringe. That is, Mabel would
have been able to deduct these costs as an employee business expense
had she paid for them herself. Employees can exclude up to $5,250 of
reimbursements from qualified educational assistance plans that
reimburse an employee for the cost of coursework. Mabel must include
$750 ($6,000 - $5,250) in gross income. However, depending on her
adjusted gross income she can deduct the cost either as a deduction for
adjusted gross income or as a miscellaneous itemized deduction (see
Chapter 6). Alternatively, she might be able take a Lifetime Learning Tax
credit on the $750 she reported as income (see Chapter 8).
c. Lori Company runs a nursery near its offices. Employees are allowed to leave
their children at the nursery free of charge during working hours. Nonemployees
may also use the facility at a cost of $300 per month per child. Dolph is an
employee of Lori with 2 children who stay at Lori's facility while Dolph is at work.
The value of employer-provided day care is excluded up to a maximum of
$5,000. In this case, the value received is $7,200 ($300 x 2 x 12) and
Dolph is taxed on the $2,200 ($7,200 - $5,000) excess.
d. At the sporting goods store where Melissa works, her employer lets all
employees to buy goods at a 40% discount. Melissa purchases for $300
camping and fishing supplies that retail for $500. The goods had cost her
employer $250.
This is a qualified employee discount and is not taxable to Melissa. The
discount is less than the employer's gross profit percentage (50%) and
therefore, is not included in Melissa's gross income.
46. Courtney is an employee of Freemont Company. An average of three times a

week, she works out during her lunch hour at a health club provided by
Freemont. Discuss the taxability of Freemont’s provision of the health club in
the following situations.
a. The health club is owned by Freemont and is located on its business premises.
All employees and their dependents are allowed to use the facility. The cost of
joining a comparable facility is $60 per month.
Employees can exclude the value of using an employer's athletic facility if
the facility is on the employer's premises and substantially all of the use
of the facility is by employees and their families. These conditions are met
and Courtney does not have any income from the use of health club.
b. The health club is located in Freemont’s office building, but is owned by Manzer
Fitness World. Freemont pays the $60 per month health club dues.
Because the health club is not owned by Freemont Co., Courtney cannot
exclude the value of the health club dues. Courtney must include the $720
($60 x 12) of health club dues paid by Freemont in her gross income.
c. Freemont is in the health club business. The health club is used primarily by
customers, although several employees, including Courtney, use it, too.
Courtney cannot exclude the value of the health club dues under the
provision for use of an employer's athletic facility because the primary use
of the facility is by customers, not employees. However, if free use of the
health club is available to all of Freemont's employees, it is excluded as a
no-additional cost service. If all employees are not allowed to use the
health club, then Courtney must include the $720 ($60 x 12) of health club
dues in her gross income.
47. Dow, 42, is a manager for Winter Company. In addition to his $90,000 salary,
he receives the following benefits from Winter during the current year:
Winter pays all its employees' health and accident insurance. Premiums paid
by Winter for Dow's health insurance are $1,800.
Winter provides all employees with group term life insurance coverage equal to
their annual salary. Premiums on Dow's $90,000 in coverage are $900.
Winter has a flexible benefits plan in which employees may participate to pay
any costs not reimbursed by their health insurance. Dow has $2,550 withheld
from his salary under the plan. His actual unreimbursed medical costs are
$3,430. Winter pays Dow the $2,500 paid into the plan during the year.
All management-level Winter employees are entitled to employer-provided
parking. The cost of Dow's parking in a downtown garage is $4,800 for the year.
Winter pays Dow's $150 monthly membership fee in a health club located in the
building in which Dow works. Dow uses the club during his lunch time and on
weekends.
Compute Dow's gross income for the current year.
Dow's gross income is $91,038:
Winter's company salary $ 90,000

Health and accident insurance premiums - excluded -0-
Group term life - premiums on $50,000 of coverage excluded
Excess premiums - $40,000 (40 x $1.20 from Table 4-1) 48
Payments into flexible benefits plan (2,550)
Free parking - $4,800 - (12 x $255)* 1,740
Health club membership fee - $150 x 12 1,800
Total gross income $ 91,038
* Employer-provided parking of up to $255 per month is excluded as a
working condition fringe.
48. Becky, 45, is a senior vice president for South Publishing Co. During the current
year, her salary is $125,000 and she receives a $25,000 bonus. South matches
employee contributions to its qualified pension plan up to 10% of an employee's
annual salary before bonuses. Becky contributes the maximum to the plan. She
also receives the following benefits from South during the year:
• South has a cafeteria plan that allows all employees to select tax-free
benefits or the cash equivalent on 5% of their annual salary before any
bonus or pension plan payments. Becky uses the plan to purchase health
and accident insurance for her daughter at a cost of $1,600, group term life
insurance coverage of $200,000 at a cost of $1,300, and child care at a cost
of $2,800. She takes the remaining $550 in cash.
• All executive officers' medical expenses are covered by a self-insured
medical reimbursement plan. Becky is fully reimbursed for her $600 in
medical expenses.
• South pays the employee's share of Social Security taxes on all executive
employees' regular salaries.
• Executive officers are provided with covered parking at company
headquarters. All other employees must pay for their own parking. Becky's
free parking is worth $4,500 this year.
• Becky belongs to several professional organizations. South pays Becky's
dues of $850. In addition, South pays the dues for all executive officers at
one social club. South also pays Becky's $3,600 country club membership.
• The executive officers eat lunch in a private dining room at company
headquarters. The purpose of the dining room is to encourage the officers
to interact in an informal setting. They often discuss business but are not
required to follow an agenda. The value of the meals Becky ate in the dining
room this year is estimated at $1,900.
Compute Becky's gross income from South Publishing for the current year.
Becky's gross income is $155,020:
Salary $125,000
Less: Pension plan payments ($125,000 x 10%) (12,500)
Add: Bonus 25,000
Cash from cafeteria plan 550
Medical reimbursements 600
Group term insurance {($200 - $50) x $1.80] 270
Social Security paid by employer
[($118,500 x 6.2%) + ($125,000 x 1.45%)] 9,160
Employer provided parking [$4,500 - ($255 x 12)] 1,440
Dues to professional organizations -0-
Country club membership paid by employer 3,600
Meals in company dining room 1,900
Gross Income $155,020
49. Janet, 43, is an employee of Primus University. Her annual salary is $44,000.
Primus provides all employees with health and accident insurance (Janet's
policy cost $1,800) and group term life insurance at twice their annual salary
rounded up to the nearest $10,000 ($90,000 of coverage for Janet). In addition,
Primus pays the first $1,000 of each employee's Social Security contribution.
The university has a qualified pension and a flexible benefits plan. Janet had
$4,000 of her salary withheld and paid (and Primus matches the payment) into
the pension plan. She also elects to have $1,300 of her salary paid into the
flexible benefits plan. Because her medical costs were lower than expected,
Janet gets back only $1,250 of the $1,300 she paid into the plan. What is Janet's
gross income for the current year?
Janet's gross income is $39,748:
Salary $ 44,000
Health and accident insurance - excluded -0-
Group term life insurance - premiums on $50,000 excluded
Excess premiums $40,000 (40 x $1.20 from Table 4-1) 48
Payment of Social Security tax by employer 1,000
Payments made to qualified pension plan (4,000)
Payments into flexible benefits plan (1,300)
Gross income $ 39,748
The payment of $1,000 of Janet's Social Security tax is a payment of an
expense by another that is intended to be compensation. Therefore, it is
included in Janet's gross income as compensation.
Payments made by an employee into a qualified pension plan are not
subject to tax (they are deferred until withdrawn from the plan) and reduce
the employee's gross salary. Similarly, payments made by an employer
into an employee's qualified pension plan are deferred until they are
withdrawn.
Payments into a flexible benefits plan are treated as reductions of salary.
The full amount paid into the plan is a reduction of Janet's gross income.
The $50 ($1,300 paid-in - $1,250 expenses paid from the plan) becomes
the property of the plan and Janet no longer can benefit from the $50.
Therefore, she does not adjust the reduction in her salary for the $50.
50. Theresa is an employee of Hubbard Corporation with an annual salary of

$60,000. Hubbard has a cafeteria plan that lets all employees select a total of
10% of their annual salary from a menu of nontaxable fringe benefits. Theresa
selects medical insurance that costs the company $4,200, and $50,000 worth of
group-term life insurance that costs the company $1,000, and takes the
remainder in cash. What is the effect of Hubbard's cafeteria plan on Theresa's
gross income?
Theresa is not taxed on the value of the nontaxable fringe benefits she
takes using the cafeteria plan. However, she is taxed on the $800 [($60,000
x 10%) - $4,200 - $1,000] cash she takes in lieu of nontaxable fringe
benefits.
51. Determine the taxability of the damages received in each of the following
situations:
a. Helio Corporation sues Wrongo Corporation, charging that Wrongo made false
statements about one of Helio's products. Helio claims that the statements
injured its business reputation with its customers. The court awards Helio
$2,000,000 in damages.
Helio must include the $2,000,000 in damages in gross income. The
exclusion for damages is based on personal physical injuries to the
taxpayer. Because a corporation is an artificial entity, it cannot suffer a
personal injury and must include any damages it receives in gross income.
b. Lien is injured when a chair on a ski lift she is riding on comes loose and crashes
to the ground. Lien sues the ski resort and receives $12,000 in full payment of
her medical expenses, $4,000 for pain and suffering, and $6,500 for income lost
while she recovers from the accident. The company that manufactured the ski
lift also pays Lien $50,000 in punitive damages.
Lien has gross income of $50,000. Payments received for personal
physical injury or sickness are excluded from income. Loss of income
payments are included in income unless they are paid as a result of a
personal physical injury. Because the $6,500 loss of income payment is
made on account of personal injury, it qualifies for exclusion. Punitive
damages are included in gross income. Therefore, the $50,000 payment to
Lien is included in her gross income. The $12,000 she receives for medical
expenses and the $4,000 of pain and suffering payments are payments for
a personal physical injury, and are excludable.
c. A major broadcasting company reports that Dr. Henry Mueller was engaged in
Medicare fraud. The doctor is incensed and sues the company for libel. The court
rules that the report was made with reckless disregard for the truth and awards
Mueller $20,000 for the humiliation he suffered because of the allegation,
$200,000 for loss of his business reputation, and $150,000 in punitive damages.
Dr. Mueller has gross income of $370,000. The $20,000 payment for
humiliation is not a personal physical injury and is included in gross
income. The $150,000 punitive damage payment and $200,000 for loss of
business reputation are also included in gross income.
52. May was injured when a forklift tipped over on her while she was moving stock
in the company warehouse. Because of her injuries, she could not work for three
weeks. Her employer paid her $400, which was half her normal wages for the
three-week period. She also received $600 in workers' compensation for the
injury. May is required to include the $400 she received from her employer in
her gross income but excludes the $600 workers compensation payment.
Discuss why the payments are taxed differently.
The payments received from her employer are substitutes for her income
and must be included in gross income. Workers' compensation payments
are payments to make the person whole again after the injury (a recovery
of capital) and are excluded from gross income.
53. Bill was severely injured when he was hit by a car while jogging. He spent one
month in the hospital and missed three months of work because of the injuries.
Total medical costs were $60,000. Bill received the following payments as a
result of the accident:
• His employer-provided accident insurance reimbursed him for $48,000 of the
medical costs and provided him with $3,800 in sick pay while he was out of
work.
• A private medical insurance policy purchased by Bill paid him $12,000 for
medical costs.
• His employer gave Bill $6,000 to help him get through his rehabilitation
period.
• A separate disability policy that Bill had purchased paid him $4,000.
How much gross income does Bill have as a result of the payments received for
the accident?
Bill has gross income of $9,800 from the $3,800 of sick pay from his
employer and the $6,000 the employer gave him to get through his
rehabilitation period.
The medical reimbursement payments received are not taxable. The
payments from the employer's policy are less than the actual medical
costs and therefore, excluded from gross income. The payments received
from the plan Bill purchased are always excluded from gross income.
The disability policy payment is also excluded from gross income because
the policy was purchased by Bill.
54. Determine the tax treatment of the payments received in each of the following
cases:
a. Anastasia is covered by her employer's medical insurance policy. During the
current year, the policy reimburses her for $960 of the $1,200 in medical costs
she incurred.
Payments received for medical expenses from an employer-provided
insurance policy are excluded from income. The exclusion is limited to the
actual medical costs incurred. Because the reimbursement is less than
actual costs, Anastasia excludes the $960 reimbursement.
b. Alfredo, who is self-employed, is injured in a snowmobile accident. The

insurance he purchased covers $3,200 of the $3,900 in medical costs related to
the accident. It also pays him $2,000 to cover the income he loses during his
recuperation.
All payments received from medical insurance policies purchased by the
taxpayer are excluded from income. Because Alfredo purchased the
policy, he excludes all amounts received from the policy (even the $2,000
loss of income payment).
c. Libby is injured when a company truck backs over her at a warehouse. The
company pays her $2,200 in medical expenses from its self-insured medical
reimbursement plan. (All employees are covered by the plan.) During her
recuperation, the company pays her normal $1,300 salary. In addition, she
receives $600 from an insurance policy the company purchased to cover its
liability to injured employees.
Libby has gross income of $1,900 ($1,300 + $600). Payments received
from a non-discriminatory self-insured medical reimbursement plan are
excluded from income. The $1,300 in salary she receives is not a payment
related to the personal physical injury (she would have received it without
the injury). Payments for medical expenses, loss of limbs, disfigurement,
etc. received from employer-provided medical policies are excluded. The
payment from the employer's liability policy does not meet these criteria
and cannot be excluded from gross income.
d. Shortly after beginning work for El Dorado Corporation, Manny is injured when
a lathe he is operating breaks his leg. Because he has not worked for the
company long enough to qualify for employee medical insurance coverage, the
company pays his $800 medical bill.
Manny has $800 of gross income. The payment is not made from an
employer-provided insurance policy or from a non-discriminatory medical
reimbursement plan.
55. Determine Rona's gross income from the following items she receives during the
current year:
Interest on savings account $ 300
Dividends on Microsoft stock 200
Interest on Guam development bonds 2,000
Dividend on life insurance policy
(The company is a mutual life insurance
company, and the dividend is a return of
part of the premiums she paid on the policy.) 200
In addition, Rona owns 1,000 shares of Cochran Corporation common stock.
Cochran has a dividend reinvestment plan through which stockholders can
receive a stock dividend equal to 4% of their holdings in lieu of a cash dividend
of equal value. Rona takes the 40 shares of stock, which are worth $3 per share.
Rona has gross income of $620 [$300 + $200 + $120 (40 x $3)]. The
interest on the Guam development bonds is excluded because Guam is a
possession of the United States. The $200 received from the life insurance
policy is a return of capital investment (the premium paid) and is not
taxable. Because the dividend reinvestment plan has a cash option, Rona
must include the fair market value of the 40 dividend shares in her gross
income.
Note: The $200 in dividends from the Microsoft stock is taxed as a net
long-term capital gain at a tax rate of 15% (the rate would be 0% if her
marginal tax rate is either 10% or 15%, 20% if her marginal tax rate is
39.6%).
56. Horatio owns Utah general purpose bonds with a face value of $50,000 that he
purchased last year for $52,000. During the current year, Horatio receives
$2,400 in interest on the bonds. In December, Horatio sells the bonds for
$48,000. What is the effect of the bond transactions on Horatio’s gross income
for the current year?
Interest received on debt obligations of U.S. state and local governments
and U. S. possessions is excluded from gross income. Thus, Horatio does
not have to include the $2,400 in interest he received on the bonds in gross
income. However, any gains or losses from dealing in the bonds are
subject to taxation. In this case, Horatio has a loss of $4,000 ($48,000 -
$52,000) from the sale of the bonds. The $4,000 loss is a capital loss that
Horatio will net against other capital gains and losses occurring during the
year. If Horatio has no other capital gains and losses, he can deduct $3,000
of the loss for adjusted gross income. The remaining $1,000 is carried
forward to the following year.
57. Determine the amount of gross income Elbert must recognize in each of the
following situations:
a. In October, Elbert sells city of Norfolk bonds with a face value of $6,000 for
$5,800. Elbert had purchased the bonds 2 years ago for $5,200, and had
received $450 in interest on the bonds before he sold them.
Interest received on municipal bonds is excluded from income. Elbert is
not taxed on the $450 in interest he receives on the bonds. However, the
exclusion is for interest received on such bonds, not for gains (or losses)
in buying and selling the bonds. Elbert must include the $600 ($5,800 -
$5,200) gain on the sale of the sale of the bonds in his gross income as a
long-term capital gain.
b. Elbert owns 1,000 shares of Tortoise, Inc., common stock for which he had paid
$8,000 several years ago. Tortoise declares and distributes a 20% stock
dividend during the current year. On December 31, Tortoise common stock is
selling for $10 per share.
Elbert is not in receipt of income from the receipt of a stock dividend. His
wealth has not increased as a result of the receipt and it has not been
realized through an arms-length transaction. Stock dividends are
specifically excluded from gross income unless a cash option exists.
c. In December, Elbert sells city of Quebec bonds with a face value of $7,600 for
$7,200. Elbert had purchased the bonds in January for $7,700, and received
$950 in interest on the bonds before he sold them.
Elbert must include the $950 bond interest received in his gross income.
Only interest on obligations of state and local governments of the United
States and its possessions are excluded from income. Elbert will also
include the $500 ($7,200 - $7,700) loss on the sale of the bonds in his
income calculation as a short-term capital loss.
58. Maysa is considering making an investment in municipal bonds yielding 4%.

What would the yield on a taxable bond have to be to provide a higher after-tax
return than the municipal bond if Maysa is in a 33% marginal tax rate bracket?
The taxable bond will have to have a yield greater than 6.48% to provide a
higher after-tax yield. This is determined by setting the tax-free rate equal
to the after-tax rate, x, and solving for x:
.04 = x - .33x
.04 = .67x
.04 = .67x
.67 .67
.0648 = x
59. Return to the facts of problem 58. Assume that Maysa bought $5,000 par value
of Rondo Corporation bonds for $4,500. The bonds pay 8% interest annually.
Three years later, the price of the bonds has increased to $6,200. Maysa can
purchase municipal bonds yielding 5.5%. Should she sell the Rondo
Corporation bonds and buy the municipal bonds?
Maysa receives $400 ($5,000 x 8%) of taxable interest on the bonds. Her
tax on the bond interest is $132 ($400 x 33%), leaving her $268 after-tax.
This is a 5.96% after-tax return (on original cost) which is greater than the
5.5% after-tax return on the municipal bond.
However, If she sells the bonds Maysa will have the $6,200 proceeds less
the capital gains tax to invest. Selling the bonds results in a long-term
capital gain of $1,700 and she will pay a tax of $255 ($1,700 x 15%) on the
gain. This will leave her $5,945 ($6,200 - $255) to reinvest. If she
purchases the municipal bonds, she will receive $327 ($5,945 x 5.5%) in
after-tax interest. Therefore, selling the Rondo Corporation bonds will
allow her to invest the unrealized gain she has made on the bonds and
result in her having $59 ($327 - $268) more after-tax income than she
currently receives.
60. Vito is having financial difficulties. Among other debts, he owes More Bank
$300,000. Rather than lend Vito more money to help him out, More Bank agrees
to reduce his debt to $200,000.
Discharges of debt generally constitute taxable income. However, if the
taxpayer is insolvent (liabilities exceed assets) before the discharge, no
income is recognized if the taxpayer remains insolvent after the discharge.
However, if the discharge makes the taxpayer solvent, income must be
recognized to the extent of the taxpayer's solvency (a measure of
wherewithal-to-pay) after the discharge.
a. How much gross income must Vito recognize if his assets total $600,000 and
his liabilities are $400,000 before the forgiveness of debt?
Because Vito is solvent before the forgiveness of debt, the full $100,000
(300,000 - $200,000) debt reduction is included in his gross income.
b. Assume the same facts as in part a, except that Vito's liabilities are $800,000
before the forgiveness of debt.
In this case, Vito is insolvent before ($600,000 - $800,000) and after
[$600,000 - ($800,000 - $100,000) = ($100,000)] the discharge. Therefore,
he is not taxed on the $100,000 forgiveness of debt.
c. Assume the same facts as in part a, except that Vito's total liabilities are
$625,000 before the forgiveness of debt.
Vito is insolvent before the forgiveness ($600,000 - $625,000) and solvent
[$600,000 - ($625,000 - $100,000) = $75,000] after the forgiveness. He
must recognize $75,000 of the forgiveness as gross income, the extent to
which he is solvent after the discharge.
61. Determine the amount of income that must be recognized in each discharge of
indebtedness situation that follows.
a. Marvin owes Central State Bank $80,000. The bank agrees to reduce the debt
to $60,000. Prior to the debt reduction, Marvin’s assets total $350,000 and his
liabilities are $330,000.
Because Marvin is solvent ($350,000 - $330,000 = $20,000) before the debt
discharge, he taxed on the $20,000 discharge of debt.
b. Assume the same facts as in part a, except that Marvin’s liabilities are $400,000
before the forgiveness of debt.
Because Marvin is insolvent before the discharge and the discharge does
not make him solvent, Marvin can exclude the $20,000 discharge of debt.
c. Assume the same facts as in part a, except that the debt is a mortgage on his
principal residence.
Because the debt is qualified principal residence indebtedness, Marvin can

exclude the $20,000 discharge of debt. However, Marvin must reduce the
basis of his residence by the $20,000 amount excluded.
62. Helena has assets of $130,000 and liabilities of $160,000. One of her debts is
for $120,000. Discuss the tax consequences of the reduction of this debt in each
of the following circumstances:
a. The debt was incurred by Helena for medical school expenses. She borrowed
$120,000 from her grandfather, who agreed to reduce the debt to $80,000,
because Helena had done so well in school.
The reduction in the debt by her grandfather would be considered a gift.
As such, Helena would not be taxed on the forgiveness.
b. The debt was incurred to buy property used in Helena's business. To help
Helena get back on her feet, the bank that loaned her the money agreed to
reduce the debt to $80,000.
Because Helena is insolvent before the debt reduction ($130,000 -
$160,000) and solvent after the debt reduction $130,000 - [$160,000 -
($120,000 - $80,000)] = $10,000, Helena must recognize the forgiveness
of debt to the extent that she is solvent after the debt reduction, $10,000.
c. The debt was incurred to buy equipment used in Helena's business. Because
the equipment did not perform as advertised by the manufacturer, the
manufacturer, who had financed the purchase, agreed to reduce the debt to
$80,000.
This would not be a forgiveness of debt because the reduction of the debt
was due to nonperformance of the equipment. Therefore, the reduction of
the debt is an adjustment of the selling price of the equipment. Helena will
have to reduce her basis in the equipment by the $40,000 reduction in the
selling price. This is an application of the substance over form doctrine
that taxes transactions according to their economic substance (a
reduction in selling price), rather than their form (a reduction of debt).
63. Fran and Tom purchase a home in 2010 for $1,500,000. To finance the
purchase, they borrow $1,450,000 from Buttars Mortgage Brokers. In 2011 they
borrow an additional $100,000 from Buttars, secured by the residence, to add a
game room. They become unemployed in 2013 and are unable to make the
payments on the mortgages. In 2014, they sell the home for $1,200,000. The
balances on the debts are $1,480,000 and $95,000, respectively. Buttars agrees
to cancel the remaining debt on the mortgage. How much income do Tom and
Fran have from Buttars cancellation of the remaining debt on their home?
Taxpayers can exclude discharges of up to 2 million of qualified principal

residence indebtedness. The exclusion applies to restructures of
acquisition debt, loss of a principal residence in a foreclosure, or short
sales of a principal residence. A short sale of a principal residence is a
sale in which the sales proceeds are insufficient to pay off the mortgage
debt and the lender forgives the balance of the mortgage.
Both debts qualify as principal residence indebtedness because they were
used to acquire or substantially improve their principal residence. This is
a short sale of a principal residence, so Fran and Tom can exclude the
$375,000 [$1,200,000 – ($1,480,000 + $95,000)] of debt that Buttars
cancelled on the sale.
Instructors Note: The exclusion for principal residence indebtedness has
been extended to Dec. 31, 2016.
64. Paulsons Partnership owns a building that it has rented out to Corner Grocery
Store for the last 10 years. Corner went out of business and returns the property
to Paulsons. Corner had made improvements to the store costing $30,000
during the 10-year lease period. The partnership had paid $60,000 for the
building, which is now worth $200,000. Does Paulsons have any gross income
from the ending of the lease? Discuss when Paulsons will recognize any income
from the building.
Paulsons Partnership does not have any income from the return of the
property. The value of improvements made to property by a lessee are
specifically excluded from gross income until they are realized through an
arm's-length transaction. Similarly, the increase in the value of the
building has not been realized and would not be included in gross income
when the property is returned. Any income from the improvements made
by the lessee and the increase in the value of the property will be
recognized when a realization of the value occurs (i.e., it is sold or
otherwise disposed of in a taxable transaction). It will be realized in the
form of a gain (i.e., the difference between the amount realized on the sale
and the adjusted basis of the property).
65. Jonas owns a building that he leases to Dipper, Inc., for $5,000 per month. The
owner of Dipper has been complaining about the condition of the restrooms and
has proposed making improvements that will cost $24,000. Dipper's owner is
willing to pay to have the improvements made if Jonas will reduce the monthly
rent on the building to $4,000 for one year. Write a letter to Jonas explaining the
tax effects for Jonas of the proposal by Dipper's owner.
Improvements made by a lessee to property are not income to the lessor
until the lessor realizes the value of the improvements (i.e., the property is
sold or otherwise disposed of in a taxable transaction). However, if the
improvements are made in lieu of rental payments, the improvements must
be included in the gross income of the lessor as rental income.
In this case, the improvements attributable to the $1,000 ($5,000 lease
agreement - $4,000 proposed rent for one year) monthly rent reduction
will have to be included in Jonas gross income because they are made in
lieu of the normal rental payment. Jonas will have $12,000 (12 x $1,000)
of rental income under the proposal. The remaining cost of the
improvements to the property will not be recognized until Jonas realizes
the value of the improvements through sale or other taxable disposition of
the property. The $12,000 rental reduction improvements are capitalized
and included in Jonas’ basis in the building.
ISSUE IDENTIFICATION PROBLEMS

In each of the following problems, identify the tax issue(s) posed by the facts
presented. Determine the possible tax consequences of each issue that you
identify.
66. A tornado extensively damaged the community in which Bodine Company had its
primary manufacturing facilities. Bodine gives $1,000 to each household that
suffered damage from the tornado to help residents while repairs are being made.
Some (but not all) of the payments are made to Bodine employees.
The issue to be resolved is whether the payments made to Bodine
employees are gifts (excluded) or are a form of compensation. To be a gift,
the payment must be made with a "detached and disinterested generosity"
that is out of "affection, respect, admiration, charity, or like impulses." In
making this determination, the courts have held that it is the intention of
the transferor that is the controlling factor in determining whether or not a
payment is a gift. The facts would indicate that the payments to Bodine
employees do constitute gifts. Because Bodine gave $1,000 to all
households that suffered damage, the payments show detachment
(payments to individuals that are not its employees) and charitable intent
(helping out the community).
67. Kermit receives a $1,000, 6% bond of General Foods, Inc., from his uncle Ed as
a graduation present. The bond pays interest on June 30 and December 31.
Kermit receives the bond on May 1.
The issue is to determine who is taxed on the interest payments. The
receipt of the bond is not taxable because gifts are excluded from gross
income. However, any subsequent earnings on gift property are not part
of the gift and are subject to taxation. Even though Kermit owns the bond
on June 30 and receives the interest payment, he only recognizes the
interest that was earned during the time he held the bond. Under the
assignment of income doctrine, the owner of property is taxed on the
income from the property. Ed owned the bond until May 1 and must
recognize the $20 [($1,000 x 6% x (4  12)] of interest earned during this
period. Kermit recognizes the remaining $40 of interest on the June 30
payment and the $60 December 31 payment in his gross income.
68. Hersh inherits $50,000 from his grandfather. He receives the money on January
1 and immediately invests $25,000 in General Motors bonds that pay 8% annual
interest and $25,000 in Lane County highway improvement bonds with a 6%
annual interest rate.
The issue to be resolved is the taxation of the amounts invested in the
bonds. The receipt of the $50,000 inheritance is excluded from gross
income. However, any subsequent earnings on the inherited property are
not part of the inheritance and thus, not excluded from tax. The interest
on the General Motors Bonds is taxable and Hersh must include the $2,000
($25,000 x 8%) of interest in his gross income in the year he receives the
interest. The Lane County bonds are municipal bonds, the interest on
which is excluded from tax. Therefore, the $1,500 ($25,000 x 6%) of
interest Hersh receives on the bonds is excluded from gross income.
69. Than's grandmother dies and leaves him jewelry worth $40,000. In addition, he
is the beneficiary of a $100,000 life insurance policy that his grandmother had
bought before she retired.
The issue is whether Than is taxed on the amounts received from his
grandmother. The receipt of the jewelry is not taxable because inherited
property is excluded from income. Similarly, the $100,000 life insurance
proceeds are not taxed because life insurance proceeds are excluded from
income.
70. Binh met Anika 10 years ago at a cocktail party. Anika was a wealthy investor
with extensive holdings in the oil and gas industry. Binh was a real estate agent
earning about $35,000 a year. Several months later, Binh proposed marriage
and Anika accepted. Just before the wedding, Anika told Binh that she had a
"mental hangup" about marriage, and Binh agreed to live with her without being
married. In return, Anika promised to leave Binh her entire estate. In the ensuing
years, they had an intimate, marriage-like relationship, attending social,
business, and family functions together. Anika died in 2013. No will was found
immediately. A few months after Anika's death, her sister found a one-page
paper signed by Anika. The paper left Anika's entire estate to her brothers and
sisters and named her sister as executor of the estate. Binh sued Anika's estate
and won a judgment of $2 million for services rendered to Anika during their
relationship. The estate appealed the decision, which was affirmed as to liability
but reversed and remanded for a new trial on the amount of the judgment. Binh
and the estate subsequently worked out an agreement in which the estate paid
Binh $1.2 million to settle his claim.
The issue to be resolved is whether the $1.2 million is an excludible
inheritance or is taxable compensation. The substance over form doctrine
requires that transactions be taxed according to their true intention. Thus,
a key to resolving this problem is whether Anika intended to leave Binh
any part of her estate. Because Binh was specifically left out of Anika's
will, on form there is no indication of any intention to bequest part of her
estate to Binh. Because Binh sued to receive the claim on Anika's estate,
the taxability of the $1.2 million depends on the nature of the claim Binh
asserted and the actual basis of the recovery. If the settlement award is a
substitute for income, then the payment is taxable. Although not clear
from the facts, it appears that the basis of the settlement award was for
services rendered to Anika and therefore, compensatory in nature.
However, if the basis for the settlement was that Binh had provided
"husbandly services" for Anika, then the payment is not compensatory in
nature, and can be excluded.
Instructor's Note: This problem is based on the facts of Green v. Comm.,
846 F.2d 870 (2nd Cir. 1988). It is an excellent demonstration of how the
legal interpretation or theory can affect the tax treatment of a transaction.
71. Ariel has worked for Sander Corporation for 30 years. Sander has a pension plan
in which it matches employee contributions by up to 5% of the employee's salary.
Ariel retires during the current year when she is 66 years old. Her pension plan
contains payments and earnings of $300,000, half of which are attributable to
payments made by Ariel and half attributable to payments made by Sander. Under
the plan, Ariel is to receive $2,000 per month until she dies.
The issue is the amount of each $2,000 payment that is included in gross
income. If Sander’s pension plan is a qualified plan, no tax has been paid
on any of the amounts paid into the plan or the earnings on the plan. As
payments were made into the plan and income was earned by the plan, the
income was deferred. Therefore, all payments received are included in
Ariel's gross income if the plan is a qualified plan. When Ariel begins
receiving the amounts from the plan, she must recognize all of the income
that has been deferred.
If the plan is not qualified, Ariel has paid tax on the amounts paid into and
earned by the plan. Therefore, the receipts should not be taxed again. The
payments are in the form of an annuity and only amounts received which
have not been previously included in her gross income are subject to tax.
The simplified method is used to determine how much of each annuity
payment is excluded from tax:
$300,000  210 (Table 3-1) = $1,429 Excluded
$2,000 - $1,429 = $ 571 Taxable
Instructor’s Note: The solution assumes that Ariel is single.
72. Ikleberry is a self-employed fisherman. He buys a health insurance policy by

donating 1,000 salmon filets to the Nordisk Insurance Companyís annual
Christmas party. During the year, Ikleberry receives $321 in reimbursements
from the plan.
The issue is whether Ikleberry should recognize $321 as disguised
compensation for his services or exclude the money as a reimbursement
on his health insurance policy. If Nordisk Insurance Company was
Ikleberry’s employer in this transaction, Ikleberry could exclude the health
insurance reimbursement. Thus, the best answer is to exclude the
reimbursement on the health insurance. Ikleberry should recognize
income from the salmon equal to the cost of the insurance policy.
73. Salina is an apartment manager and is paid $6,000 per year. The owner of the
apartments offered her the option of a $300-per-month living allowance or the
use of an apartment rent-free. Salina chose to live in the apartment, which
normally rents for $400 per month.
The issue is whether Salina is taxed on the receipt of the rent-free
apartment and if so, how much income would she recognize. The use of
the apartment rent-free is compensation. Employer provided lodging is
excludible if it is on the employer’s premises, for the convenience of the
employer, and is required as a condition of employment. Because the use
of the apartment is not a job requirement, Salina is taxed on her free use
of it. Under the cash-equivalent approach, Salina must include the $400
per month fair rental value of the apartment in her gross income.
74. Taki was injured in an airplane crash. He sues the airline and receives $4,400
for his pain and suffering, $3,300 for lost wages while he recuperated from his
injuries, and $7,000 in punitive damages. He also uses $1,000 from his Medical
Savings Account to pay for medical expenses related to the crash. Taki had
deposited $1,400 in the account during the year.
The issues to be resolved are the taxability of each of the payments Taki
receives. Payments received for personal physical injury or sickness are
excluded from gross income. Loss of income payments are included in
gross income unless they are paid as a result of personal physical injury.
Punitive damages are always included in gross income. Takiís
reimbursement from his medical savings account is not included in gross
income. In this case, all the payments except the $7,000 punitive damages
are excluded from Taki’s income. Taki has $7,000 of gross income.
75. Sonya purchases a house for $65,000. The seller had listed the house for sale
at $80,000 but got into financial trouble and had to accept Sonya's $65,000 offer
to avoid bankruptcy.
The issue is whether Sonya has any income from the purchase of the
house below its listed price. A bargain purchase is taxable if the seller is
trying to compensate the buyer through a reduced purchase price. In this
case, there is no business relationship between Sonya and the seller.
Therefore, the reduction in the sales price is not compensatory in nature
and Sonya does not have any income from the purchase of the house.
76. Bud borrows $20,000 from a friend. Before he can repay any of the loan, the
friend dies. His friend's will provides that any amounts owed to him are to be
forgiven upon his death.
The issued to be resolved is whether this is a discharge of indebtedness
that is taxable, or an inheritance that would be excluded from income.
Because the claim on the debt is included in the friend's estate and subject
to estate tax, the relief from the claim would, in effect, be a distribution of
the claim to Bud. Thus, it would be excluded as an inheritance, not a
taxable discharge of debt.
77. Perry Corporation leases a building to Jimison Corporation for $10,000 per
month. The terms of the lease provide that any improvements to the building
will revert to Perry upon termination of the lease. During the current year,
Jimison adds a wing to the building at a cost of $50,000.
The issue is whether Perry Corporation must recognize the $50,000
improvement to its building as income when the improvement is made.
Improvements made by a lessee to property are not income to the lessor
until the lessor realizes the value of the improvements (i.e., the property is
sold or otherwise disposed of in a taxable transaction). Therefore, Perry
does not recognize the $50,000 as income when the improvement is made.
78. TAX SIMULATION In April, a tornado damages the house owned by Delbert and
Debbie. The damaged residence required extensive repairs, making it
necessary for Delbert and Debbie to move into a motel and eat their meals in
restaurants. During the repair period they incur $1,200 for lodging at a motel,
$800 for meals (their normal grocery costs would have been $220), and $150
for laundry services (Delbert usually does the laundry, but the $150 includes $40
in dry cleaning costs they would have incurred if they hadn’t moved out of their
residence). Included in the cost of the meals is $250 for lunches they normally
would have incurred. They continue to make the $785 mortgage payment on
their residence but their home utility expenses are only $80 (they normally would
have paid $240 for utilities if they had occupied the residence). Their insurance
company reimburses them $2,150 for the living expenses they incur while their
residence is being repaired.
Required: Determine the income tax treatment of the receipt of the $2,150 from
the insurance company. Search a tax research database and find the relevant
authority (ies) that forms the basis for your answer. Your answer should include
the exact text of the authority (ies) and an explanation of the application of the
authority to Delbert and Debbie’s facts. If there is any uncertainty about the
validity of your answer, indicate the cause for the uncertainty.
Sec. 123(a) allows the exclusion of amounts received from insurance that
are paid for living expenses of an individual (and members of the
individual’s household) that result from the loss of use or occupancy of a
principal residence due to damage caused by fire, storm, or other casualty.
Sec 123(a) GENERAL RULE.—In the case of an individual whose principal

residence is damaged or destroyed by fire, storm, or other casualty, or
who is denied access to his principal residence by governmental
authorities because of the occurrence or threat of occurrence of such
a casualty, gross income does not include amounts received by such
individual under an insurance contract which are paid to compensate
or reimburse such individual for living expenses incurred for himself
and members of his household resulting from the loss of use or
occupancy of such residence.
Although Delbert and Debbie qualify for this exclusion, Sec. 123(b) limits
the exclusion to the excess of actual living expenses over the normal living
expenses that would have been incurred during the period of time the
principal residence is not occupied.
Sec. 123(b) Limitation.—Subsection (a) shall apply to amounts

received by the taxpayer for living expenses incurred during any
period only to the extent the amounts received do not exceed the
amount by which—
123(b)(1) the actual living expenses incurred during such period for
himself and members of his household resulting from the loss of use
or occupancy of their residence, exceed
123(b)(2) the normal living expenses which would have been incurred
for himself and members of his household during such period.
Reg. Sec. 1.123-1(a)(2) expands on Sec. 123(b) by stating that the exclusion
is limited to the reimbursement of “reasonable” and “necessary” expenses
that maintain their normal standard of living during the loss period.
(2) This exclusion applies to amounts received as reimbursement or
compensation for the reasonable and necessary increase in living
expenses incurred by the insured and members of his household to
maintain their customary standard of living during the loss period.
Reg. Sec. 1.123-1(b)(1) states that, in general, the excludable is for excess
expenses actually incurred due to the casualty for rent, transportation,
food, utilities, and miscellaneous services.
Generally, the excludable amount represents such excess expenses

actually incurred by reason of a casualty, or threat thereof, for renting
suitable housing and for extraordinary expenses for transportation,
food, utilities, and miscellaneous services during the period of repair
or replacement of the damaged principal residence or denial of access
by governmental authority.
Reg. Sec. 1.123-1(b)(2) states that for expenses (eg., food and
transportation) that are normally incurred, only the increase in the expense
is considered to be an actual living expense.
To the extent that the loss of use or occupancy of the principal

residence results merely in an increase in the amount expended for
items of living expenses normally incurred, such as food and
transportation, only the increase in such costs shall be considered as
actual living expenses in computing the limitation.
In determining normal living expenses, Reg. Sec. 1.123-1(b)(3) requires
normal living expenses that are not incurred (or are reduced) due to
casualty to be counted at the decreased amount.
(3) Normal living expenses not incurred.—Normal living expenses

consist of the same categories of expenses comprising actual living
expenses which would have been incurred but are not incurred as a
result of the casualty or threat thereof. If the loss of use of the
residence results in a decrease in the amount normally expended for
a living expense item during the loss period, the item of normal living
expense is considered not to have been incurred to the extent of the
decrease for purposes of computing the limitation.
Reg. Sec. 1.123-1(b)(4) provides an example and method of computing the

excludable amount by comparing actual costs incurred to normal costs
that are not incurred. Based on this calculation format, Delbert and Debbie
can exclude $1,480 of the $2,150 and must include the remaining $670 in
their gross income.
Normal not Increase

Actual Incurred (decrease)
Lodging $1,200 $ -0- $1,200
Meals 800 220 580
Lunches -0- 250 (250)
Laundry 150 40 110
Utilities 80 240 (160)
Total $2,230 $ 750 $1,480
Note that the mortgage payment is not considered in the calculation.

Although not evident from reading the code or the regulation, Example 1
in Reg. Sec. 1.123-1(b)(4) indicates that a mortgage payment results from
a contractual obligation that has no causal relationship to the casualty and
therefore, is not considered to be an actual living expense that results from
the loss of use of the residence.
An alternative way to calculate the exclusion is to compare the excess of
each payment over the normal living expenses not incurred as a result of
the casualty. The excess lodging cost is $1,040 ($1,200 - $240 + $80),
excess meals total $330 ($800 - $250), and excess laundry costs are $110
($150 - $40). The sum of the excess costs gives the $1,480 ($1,040 + $330
+ $110) exclusion amount.
79. INTERNET ASSIGNMENT The Small Business Job Protection Act of 1996
limited the exclusion for damages received to nonpunitive damages received on
account of a personal physical injury or physical sickness. The new law
specifically disqualifies emotional distress as a physical injury or physical
sickness. Accompanying each new tax law is a committee report that provides
an explanation of the new law. Use the Internet to find the joint conference
committee report that discusses this law change and determine what Congress
includes in its definition of emotional distress.
A good place to start the research is to visit a page with “cool” tax links.
For example, see the page created by Professor Dennis Schmidt at
www.taxsites.com. From there you will click on a succession of links to
Federal Tax Law. Then, under Congressional Information click on Thomas
Legislative Information. At this point you are at the webpage for the U.S.
Congress. Click on Committee Reports and then click on 104th Congress
(1995-1996). Using the search engine provided type in “physical injury”.
Your search should provide you with the Small Business Job Protection
Act. At this point, you need to scroll down until you reach Code Section
104 which discusses the new law and how it specifically disqualifies
emotional distress as a physical injury or physical sickness.
INSTRUCTOR'S NOTE: Information on the Internet is developing at a rapid

pace. Therefore, this solution may become outdated. We suggest that you
do the assignment prior to assigning it to your students. This will allow
you to provide students with any additional information they may need to
complete the assignment.
80. INTERNET ASSIGNMENT In the U.S. tax system, employers can provide a
wide array of nontaxable fringe benefits to employees. Excluding fringe benefits
from taxation is one method of encouraging employers to provide such benefits
to their employees. Australia takes a different approach to the tax treatment of
fringe benefits. Go to the Australian government web site
(http://www.ato.gov.au) and locate the government publication that deals with
fringe benefits. Explain the Australian tax treatment of fringe benefits. Choose
two of the fringe benefits listed in the publication and compare their treatment
with the U.S. tax system treatment.
Australia imposes a fringe benefits tax on employers for fringe benefits
provided by employers to employees. The publication describing the tax
can be found at: http://www.ato.gov.au/business
The menu on the left-hand side contains links to tax topics one of which is
fringe benefits. The publication indicates that "The term benefit is broadly
defined and includes any right (including any property right), privilege,
service, or facility. The publication goes on to state that:
"As a rule of thumb, the following question may be of assistance in
deciding if the benefit is provided in respect of employment. Would the
benefit have been provided if the recipient had not been an employee?"
Thirteen specific benefits are discussed in the publication:
1. Car fringe benefits
2. Loan fringe benefits
3. Debt waiver fringe benefits
4. Expense payment fringe benefits
5. Housing fringe benefits
6. Board (meal) fringe benefits
7. Airline transportation fringe benefits
8. Living away from home allowance fringe benefits
9. Entertainment provided by a tax-exempt organization
10. Meal entertainment fringe benefits
11. Car parking fringe benefits
12. Property fringe benefits
13. Residual fringe benefits
INSTRUCTOR’S NOTE: Information on the Internet is developing at a rapid

pace. Therefore, this solution may become outdated. We suggest that you
do the assignment prior to assigning it to your students. This will allow
you to provide students with any additional information they may need to
complete the assignment.
81. RESEARCH PROBLEM Oliver and James are equal owners of OJ Company.
During the current year, when OJ company is insolvent by $100,000, a creditor
reduces one of OJ's debts by $50,000. For the year, OJ incurs a $20,000
operating loss. Oliver and James are both solvent. Oliver's basis in OJ is
$30,000; James's basis is $40,000. Determine the effect of OJ's debt discharge
and net operating loss on Oliver and James assuming that
Sec. 108(a) provides the general exception for the exclusion of debt
discharges for insolvent taxpayers. Because OJ Company is insolvent
before and after the discharge, the $50,000 qualifies for exclusion under
the general rule. The question to be resolved is whether the determination
of solvency is done at the entity level or the owner level for conduit entities.
a. OJ is organized as a partnership.
Sec. 108(d)(6) requires the insolvency exclusions provisions to be applied
at the partner level, not at the partnership level. Therefore, a solvent
partner must include his share of the partnership's debt cancellation in
income even though the partnership is insolvent. Because both partners
are solvent, each partner must include $25,000 of debt cancellation income
in their gross income (increasing their bases). See Herbert Gershkowitz,
83 TC 984 (1987). Each partner will also recognize a $10,000 operating loss
from the partnership (reducing their bases).
b. OJ is organized as an S corporation.
Sec. 108(d)(7) requires the insolvency exclusions to be applied at the S
corporation level, not at the shareholder level. Because OJ Company is
$100,000 insolvent, the $50,000 debt discharge is excluded from income.
Sec. 108(b)(1) requires the S corporation to reduce its tax attributes by
$50,000. The current year operating loss is passed through to the
shareholders, reducing each owner's basis by $10,000, leaving Oliver with
a $20,000 basis and James with a $30,000 basis. Because each shareholder
has basis remaining, the entire attribute reduction is taken at the S
corporation level and the shareholder's bases are unaffected.
82. RESEARCH PROBLEM Reggie receives a 2-year scholarship to Big University.

The scholarship stipulates that, to improve his teaching skills, he must spend his
first year teaching at an affiliated school. He will be paid his scholarship by the
affiliated school based on the level of pay for the teaching duties he is assigned.
Upon completion of the first year, Reggie will return to Big University and work
on the research required to obtain his degree. During the second year, he will
receive his scholarship from Big University. Is Reggie's scholarship taxable?
Sec. 117(a) provides the general rule that qualified scholarships are
excluded from income. Sec. 117(c) states that amounts received that
represent a payment for teaching, research, or other services are not
excluded. Rev. Rul. 73-368, 1973-2 CB 27 indicates that when a doctoral
candidate had to teach during the first year of a scholarship to receive a
second year, the first year's stipend is included in gross income. However,
the second year was excluded because no services were being rendered
while working on dissertation research. Reggie will be taxed on the amount
he receives while teaching at the affiliated school and will exclude the
amount received in the second year when he returns to Big University to
work on his research.
83. TAX FORM PROBLEM Christina Ruiz provides you with the following
information regarding her investment income.
Interest received:
Cavendar State Bank checking account $ 43
Federal Employee’s Credit Union 881
City of Singapore bonds 990
New Jersey Urban Development bonds 382
Dividends received:
Ford Motor Company $ 120
New Core preferred stock 220
Northwestern Publishing Inc. 400
In addition, Northwestern Publishing Inc., issued a 5% stock dividend on August

15. Christina received 25 dividend shares, which were trading at $23 per share
on August 15. Prepare Christina’s Schedule B. Her Social Security number is
568-33-2541. Forms and instructions can be downloaded from the IRS web site
(http://www.irs.gov).
Instructor’s Note: The solution to the tax form problem is included
separately in file SM_Ch_04_Problem_83.pdf located on the companion
website www.cengagebrain.com.
84. INTEGRATIVE TAX RETURN PROBLEM This is the second part of a six part
problem that will allow you to prepare the 2015 tax return for Laurie and Lynn
Norris. As with the previous parts, this part of the problem will ask you to prepare
a portion of their tax return. You should complete the appropriate portion of each
form or schedule indicated in the instructions. The following basic information is
provided for preparing their 2015 tax return:
• Lynn’s brother Joey dies in January. Lynn receives Joey’s 2012 Corvette (fair
market value $32,000), 200 shares of Goober Corporation stock (fair market
value $2,000), and his brothers home (fair market value $125,000) in
settlement of the estate.
• Lynn receives a $100 dividend on the Goober stock in June. In October,

Goober declared a 25% stock dividend when the stock is selling for $15. Lynn
receives 50 additional shares of stock in November. Lynn sells the 50
dividend shares on December 10 for $700.
• On December 22, Lynn sells Joey’s home for $128,000.
• Laurie works for Fox Corporation as a drilling superintendent. Her annual
salary is $96,000. In 2015, she receives a $12,000 bonus. Fox withholds
$16,200 of her salary and bonus for federal taxes. Laurie receives the
following employment related benefits during 2015:
Fox provides all employees with medical insurance (Laurie’s insurance cost
$8,600) and group-term life insurance at twice their annual salary up to a
maximum coverage of $200,000 (Laurie’s premiums cost $560).
Fox has a qualified pension plan that covers all employees. Under the plan,
Fox matches contributions to the plan up to 5% of the employee’s annual
salary. Laurie makes the maximum allowable contribution, which is matched
by Fox.
Laurie pays $2,000 into the company’s flexible benefits plan. Laurie spends
$2,200 on medical and dental expenses not covered by insurance. She
receives $2,000 from the flexible benefits plan for these expenses.
• Lynn is injured when a motorist hits him while he is riding his bicycle. Lynn
sues the driver and receives $3,500 for his medical expenses, $2,000 for pain
and suffering, and $1,000 in punitive damages.
Required: Based on the information provided above, only fill out the appropriate
portions of Form 1040, Form 1040 Schedule B, and Form 1040 Schedule D.
Instructor’s Note: The solution to the tax form problem is included

separately in files SM_Ch_04_Problem_84A.pdf,
SM_Ch_04_Problem_84B.pdf, SM_Ch_03_Problem_84C.pdf and
SM_Ch_03_Problem_84D.pdf, located on the companion website,
http://www.cengagebrain.com
Discussion: Lynn is not taxed on the value of the property he received from
his brother’s estate. However, he must include the $100 dividend in his
gross income and is taxed on the sale of the stock and Joey’s home.
Because the dividend is not taxed, Lynn’s basis in the shares of Goober
stock is $8 ($2,000 ÷ 250) per share.
Laurie’s income from Fox Corporation is $101,353.36 (reported on the

return as $101,353):
Salary $ 96,000
Bonus 12,000
Group-term life insurance
($96 x 2 – $50) = $142 x $1.08 153.36
Pension contribution - $96,000 x 5% (4,800)
Flexible benefits payment (2,000)
Income from Fox Corporation $101,353.36
Laurie is not taxed on the medical insurance paid by Fox. She is taxed on
the group-term life insurance in excess of $50,000. Laurie’s income is
reduced by her pension contribution (she is not taxed on her employer’s
contribution) and the $2,000 she pays into the flexible benefits plan.
Lynn is not taxed on amounts received for medical expenses and his pain
and suffering from the personal physical injury. However, he must include
the $1,000 punitive damage in his gross income.
INTEGRATIVE PROBLEMS
85. Compute Edna's gross income, adjusted gross income, taxable income and her
income tax liability. Edna has no dependents.
Edna's gross income is $47,017, her adjusted gross income is $44,017, her
taxable income is $33,667 and her income tax liability is $4,586:
Gross income:
Salary $ 40,000
Less: Qualified pension plan payments - ($40,000 x 8%) (3,200)
Salary net of pension contribution $ 36,800
Group-term life insurance - [(90 - 50) x $7.92] 317
Annuity - $1,500 - [($9,100  260) x 12] 1,080
State tax refund 200
Interest on money market account - [$26,000 x 4% x (6  12)] 520
Land rent 8,000
Interest on Kao bond - [$5,000 x 8% x (3  12)] 100
Deductions for adjusted gross income:
Capital loss deduction (3,000)
Adjusted gross income $ 44,017
Deductions from adjusted gross income:
Standard deduction (6,300)
Taxable income $ 33,667
Tax on $33,667 for a single taxpayer (from tax rate schedule)
$ 927.50 + [15% x ($33,667 - $9,275)] = $ 4,586
Notes:
Payments made by Edna into a qualified pension plan are reductions of
her salary income. She is not taxed on the amounts paid into the plan on
her behalf by her employer. The amounts paid into the plan by Edna and
her employer and the earnings on the plan assets are not taxed until Edna
withdraws the money from the plan.
The value of the medical insurance premiums paid by her employer is
excluded from gross income. Similarly, the payments Edna receives for
her medical expenses from her employer's plan and from the plan she
purchased are excluded.
Premiums paid on up to $50,000 of group-term life insurance are excluded
from gross income. The premiums on the $40,000 of insurance in excess
of $50,000 are taxable per the IRS table.
Only $1,080 of the $1,500 in annuity payments Edna received are taxable.
The remaining $420 is excluded as a return of investment. The amount of
the exclusion is calculated using the simplified annuity method.
Because Edna itemized her deductions in 2015, the receipt of the state
income tax refund in 2016 must be included in her 2016 gross income
under the tax benefit rule.
Interest on the Puerto Rico bonds is excluded because Puerto Rico is a
territory of the United States and qualifies for the municipal bond interest
exclusion.
The interest on the $26,000 proceeds from the sale of the stock is taxable.
The receipt of the farm land is inherited property that is excluded from tax.
Any subsequent earnings on the property (i.e., rental income) must be
included in gross income.
Even though Edna did not receive any interest on the Kao bonds given to
her granddaughter, she is still taxed on the interest earned up to the date
of the gift. The interest she earned, but did not receive is an additional gift
to her granddaughter.
Edna is not taxed on the value of the watch received from Rhododendron.
Awards of tangible, personal property to employees based on length of
service or for safety achievements are excluded from income. The
maximum amount of the exclusion is $400 unless the award is made from
a qualified plan.
The sale of the stock results in a $6,000 ($20,000 - $26,000) long-term
capital loss. The sale of the land results in a $2,000 ($19,000 - $17,000)
long-term capital gain. The capital gains and losses are netted together,
resulting in a $4,000 ($6,000 - $2,000) net long-term capital loss. Capital
loss deductions for individuals are deductions for adjusted gross income
and are limited to $3,000 per year. The remaining $1,000 of loss that is not
deductible is carried forward to next year for deduction.
The interest received on the State of Oregon bonds purchased with the
proceeds from the sale of the land is excluded.
Because her itemized deductions ($4,300) are less than the $6,300
standard deduction for 2016, Edna would use the standard deduction.
86. Calculate Carmin's adjusted gross income on her 2016 tax return. Then do one
(or both) of the following, according to your professor's instructions:
a. Include a brief explanation of how you determined each item that affected
adjusted gross income and any items you excluded from gross income. Your
solution to the problem should contain a list of each item included in gross
income and its amount, with the explanations attached.
b. Write a letter to Carmin explaining how you determined each item that affected
adjusted gross income and any items you excluded from gross income. You
should include a list of each item included in gross income and its amount.
Carmin's adjusted gross income is $75,186:
Gross Income
Salary $80,000
Less: Pension plan contribution (6,400)
Flexible benefits contribution (2,500) $71,100
Medical insurance paid by ASCI -0-
Reimbursements from ASCI medical insurance -0-
Reimbursements from flexible benefits plan -0-
Group-term life insurance [(150 - 50) x $.96] 96
Whole-life insurance policy 490
Educational assistance payments -0-
Employer-provided parking [($290 - $255) x 12] 420
Engineer's license paid by ASCI -0-
Professional association dues paid by ASCI -0-
Health club dues paid by ASCI 900
Sweepstakes prize ($5,000  10) 500
Social Security benefit payment 510
Inherited stock -0-
Inherited house -0-
General Dynamic cash dividend 300
City of Toronto bond interest 1,600
State of Nebraska bond interest -0-
New Jersey economic development bond interest -0-
Income from Grubstake Mining stock
[(1,000  100,000) x $200,000 2,000
Medical costs paid by store owner -0-
Pain and suffering payments -0-
Disability pay from ASCI 1,200
Gross income $79,116
Deductions for Adjusted Gross Income
Net rental loss (1,660)
Alimony paid ($100 x 12) (1,200)
Short-term capital loss (1,070)
Adjusted Gross Income $75,186
Explanation of items affecting adjusted gross income:

Carmin's $80,000 salary is reduced by her payments to the pension plan
and the flexible benefits plan. She is not taxed on the payments ASCI
makes into the pension plan on her behalf. The amounts paid into the
pension plan by Carmin and ASCI and the earnings on the plan assets are
not taxed until Carmin receives payments from the plan.
Premiums on $50,000 of group-term life insurance are excluded from
income. Premiums on coverage in excess of $50,000 are included in gross
income per the IRS table. Carmin is 34 years old. The IRS table premium
cost for a 34 year old is $.96 per thousand dollars of coverage per year.
Carmin must include $96 [(150 - 50) x $.96] as the cost of coverage on
her $100,000 of coverage in excess of $50,000.
Premiums paid by an employer on whole-life insurance policies are taxable
compensation to the employee.
Employees can exclude up to $255 per month of employer-provided
parking. Because the value of Carmin’s employer-provided parking is $290
per month, she must include $35 per month of the parking benefit as
income. The parking benefit increases Carmin’s gross income by $420
($35 x 12).
The payment of Carmin's $900 health club dues is not an excludable fringe
benefit. Employees are only allowed to exclude the value of employer
provided athletic facilities if the facilities are owned by the employer, are
on the employer's premises, and the primary use of the facility is by
employees and their dependents.
Prizes and awards are taxable. Because the award is paid out over 10
years, Carmin includes the prize in income as it is received (she is not in
constructive receipt of future payments because they are not available for
her use). Carmin includes the $500 ($5,000  10) payment she receives in
gross income.
Carmin must include $510 of the $600 Social Security benefit payment she
received in gross income. Her adjusted gross income without the Social
Security payment is $74,676 ($75,186 - $510). Carmin's modified adjusted
gross income is $74,976 [$74,676 + (50% x $600)]. This is in excess of
$34,000 and she is subject to the second-tier inclusion rule. She must
include in gross income the lesser of:
1. $600 x 85% $ 510
or
2. a. 85% ($74,976 - $34,000) $34,830
plus
b. The lesser of:
1. $300 ($600 x 50%)
2. $4,000 300 $ 35,130
The dividends received on the General Dynamic stock and the interest on
the City of Toronto bonds are included in gross income. Only interest
received from State and Local bonds (and possessions of the United
States) are excluded from income. Canadian bond interest does not
qualify for exclusion.
Because Grubstake Mining Development is an S corporation, Carmin must
include her share of Grubstake's income in her gross income. Her share of
the income is $2,000 [(1,000  100,000) x $200,000]. The dividends
received from Grubstake are not income, they are returns of her capital
investment in Grubstake.
The disability pay Carmin receives from ASCI is included in gross income.
Payments from an employer-provided policy for disability (sick pay) are
not excluded from income.
Alimony paid is deductible for adjusted gross income. Alimony payments
that are reduced based on a contingency related to a child are reduced to
the amount that will be paid after the contingency. Carmin's alimony
payment will be reduced to $100 per month when Julius reaches age 18.
Therefore, Carmin can only deduct $1,200 ($100 x 12) of the payments
made to Ray as alimony.
Carmin has $2,400 of rental income and $4,060 of rental expenses,
resulting in a net rental loss of $1,660. The first and last month's rental
payment ($800) is taxable when received. The $400 security deposit must
be returned at the end of the lease and is not taxable (she does not have a
claim of right to the deposit). She also receives $1,300 [($400 x 3) + $100]
in actual rental payments from the tenant that are taxable. Carmin must
also include the $300 rent reduction for the plumbing repairs in rental
income. She is allowed to deduct the $300 repair cost, the $2,680 in other
costs, and the $1,080 of depreciation in calculating her net rental income.
Carmin has a net short-term capital loss of $1,070 ($110 - $1,180) from the
sale of her two securities. She has a long-term gain of $110 [($1,900 - $80)
- $1,710] on the sale of her Nebraska bonds and a short-term capital loss
of $1,180 [($8,900 - $450) - $9,630] on the sale of her Cassill Corporation
stock.
Explanation of items excluded from gross income:
Premiums paid on non-discriminatory, employer-provided medical
insurance are excluded from gross income. Payments from employer-
provided plans for actual medical costs are also excluded. Payments
received from a flexible benefits plan are excluded from income.
The payment of Carmin's engineer license, professional association dues,
and professional magazine subscriptions are excludable working
condition fringes.
Employees can exclude up to $5,250 of educational costs paid by an
employer from a qualified educational assistance plan. Therefore, Carmin
can exclude the $2,300 paid by ASCI from her gross income.
The value of the stock and the rental house she receives from her father's
estate is an excludable inheritance.
Interest on the State of Nebraska and New Jersey economic development
bonds is excludable municipal bond interest.
The medical costs and pain and suffering payments from the store owner
are payments related to a personal physical injury and are excluded from
income.
The 50 shares of stock that Carmen received as a stock dividend is
excluded from gross income.
DISCUSSION CASE
87. Germaine, 22, is a single individual with no dependents who recently graduated
from college and has job offers from two firms. Germaine likes both companies
equally well and has decided to base her decision on which company offers
more. Details of each job offer are as follows:
Company A --- annual salary of $44,000, employer-provided health and accident
insurance (employer cost: $2,400), group term life insurance coverage at twice
the annual salary (premiums for $88,000 worth of coverage are $460), employer
provided day-care facility (employer's cost per dependent is $150 per month),
and company-provided parking ($900 per year).
Company B --- annual salary of $46,000, a cafeteria plan under which
employees can choose benefits of up to 10% of annual salary or take the cash
equivalent. In addition, the company has a flexible benefits plan in which
employees may participate by setting aside up to 10% of annual salary per year
for payment of unreimbursed medical expenses.
Explain the tax effects of the two job offers and the income Germaine can expect
from each offer. Assume that she has no other income sources and that she
uses the standard deduction.
To determine the best offer, Germaine must determine the after-tax
benefits she receives under each plan. Benefits that she cannot use or
take advantage of, such as employer provided day care, should not be
considered as part of her compensation.
Company A:
Taxable Compensation:
Salary $ 44,000
Group term life insurance premiums on $38,000 23
Less: Standard deduction (6,300)
Taxable Income $ 33,673
Gross income from Company A $ 44,023
Tax on $33,673 - $927.50 + [15% x ($33,673 - $9,275) (4,587)
After-tax compensation $ 39,436
Nontaxable Compensation:
Health and accident insurance $ 2,400
Group-term life premiums on $50,000 ($460 - $23) 437
Free parking 900
Total after-tax compensation $ 43,173
Company B:
To determine the actual benefit from Company B's offer, how much of the
cafeteria plan benefits she might take in cash (and thus be taxed on) and
how much she will contribute into the flexible benefits plan must be
determined. However, a comparison of the maximum benefit available
under Company B's offer will serve as a starting point. That is, assume
that she does not take any cash from the cafeteria plan (all benefits are
nontaxable) and she contributes the maximum amount into the flexible
benefits plan, $2,550:
Taxable Compensation:
Salary $ 46,000
Less: flexible benefits plan payment (2,550)
Less: Standard deduction (6,300)
Taxable Income $ 33,100
Gross income from Company B $ 43,450
Tax on $33,100 - $927.50 + [15% x ($33,100 - $9,275) (4,501)
After-tax compensation $ 38,949
Nontaxable Compensation:
Cafeteria plan 4,600
Salary reduction plan 2,550
Total compensation after tax $ 46,099
If Germaine makes maximum use of the flexible benefit and cafeteria plans
offered by Company B, the maximum after-tax compensation of $46,099
from Company B is greater than the $43,173 after-tax compensation
offered by Company A. If Germaine elects to use a lower level of benefits,
her compensation will be reduced accordingly.
88. Marlo and Merlin's son, Alex, needs $20,000 to start a business. They have
$30,000 in securities that they can use to give him the capital he needs.
Pertinent information regarding the securities is given below:
Fair Purchase
Market Value Basis Date
Security A $10,000 $ 7,000 2/10/06
Security B $10,000 $ 5,000 2/14/03
Security C $10,000 $14,000 3/19/02
Marlo and Merlin are in the 28% marginal tax rate bracket; Alex is in the 15%
marginal tax rate bracket. Neither Marlo, Merlin nor Alex has any other capital
asset transactions during the year. Alex’s basis in any of the securities gifted to
him will be the lesser of his parents’ basis or the fair market value of the security.
Discuss the tax effects of alternate methods of transferring $20,000 to Alex, and
devise an optimal plan for making the transfer.
Marlo and Merlin can either sell two of the securities and give the proceeds
to Alex or they can gift the stock to Alex and have him sell it. Alex is taxed
at a lower rate (15%) on ordinary income and long-term capital gain income
(0%) than his parents. Thus, if Security A or B is used to fund the business,
it would generally be best to have Alex sell the shares. Marlo and Merlin
realize a greater tax benefit from realized losses than Alex. Thus, if
Security C is used, it would be better to have them sell the stock. Because
two securities are to be sold, the effect of the capital gain and loss netting
on the sale of the gain securities in conjunction with the sale of the loss
security must be considered.
A sale of Security A will produce a $3,000 ($10,000 - $7,000) short-term
capital gain. Security B will produce a $5,000 ($10,000 - $5,000) long-term
capital gain and Security C will produce a $4,000 ($10,000 - $5,000) long-
term capital loss. A sale of Security A and Security C will produce a $1,000
($3,000 - $4,000) net long-term capital loss. A sale of Security B and
Security C will produce a $1,000 ($5,000 - $4,000) net long-term capital
gain. Therefore, to minimize the tax effects of selling the stock, securities
A and C should be used to fund the business. Marlo and Merlin should sell
the securities and give the proceeds to Alex. This will allow them to deduct
the $1,000 net long-term capital loss, which produces $280 ($1,000 x 28%)
of tax savings.
TAX PLANNING CASE

89. Reggie wants to invest $10,000. His options are
a. Gibraltar Corporation bonds with an annual interest rate of 8%,
b. State of Hawaii bonds with an annual interest rate of 5%,.
c. Series EE savings bonds; a $10,000 investment will pay $14,300 in
5 years.
Assume that Reggie is a 28% marginal tax rate payer, the time-value of money
is 6%, and Reggie intends to hold any amounts invested for 5 years. Which
option will provide the greatest after-tax return ignoring state income tax
implications?
To determine the investment with the greatest return, the real after-tax
return must be calculated for each investment:
Option A - $800 of taxable interest each year for five years. At a 28%
marginal tax rate, Reggie will pay $224 ($800 x 28%) of tax each year,
reducing his after-tax return to $576. Each of the $576 receipts must be
discounted at 6%, resulting in a real after-tax return of $2,426:
Year 1 Year 2 Year 3 Year 4 Year 5 Total
After-tax return $ 576 $ 576 $ 576 $ 576 $ 576 $ 2,880
PV factor at 6% x .943 x .890 x .840 x .792 x .747
Real return $ 543 $ 513 $ 484 $ 456 $ 430 $ 2,426
Option B - $500 of tax-exempt interest each year for five years. Reggie will
pay no tax on the State of Hawaii bonds. The real after-tax rate of return
on the bonds at 6% is $2,107:
After-tax return $ 500 $ 500 $ 500 $ 500 $ 500 $ 2,500
Real return $ 472 $ 445 $ 420 $ 396 $ 374 $ 2,107
Option C - Reggie will recognize $4,300 ($14,300 - $10,000) of income at

maturity of the savings bonds. He will pay a tax of $1,204 ($4,300 x 28%)
at that time, resulting in an after-tax return of $3,096 ($4,300 - $1,204).
Because the income is not received for five years it must be discounted at
6% for comparison. This results in a present value of $2,313 ($3,096 x
.747).
Based on the real after-tax return, Option A ($2,426) is greater than Option
C ($2,313) which is greater than Option B ($2,107). Therefore, Reggie
should invest in the taxable bonds if his marginal tax rate will remain at
28% over the 5-year investment period.
Would your answer change if Reggie's marginal tax rate is 33%?

The real after-tax return on Option A and Option C will have to be
recomputed using a 33% tax rate. The tax-exempt bonds in Option B are
unaffected by the marginal tax rate and continue to give a real after-tax
return of $2,107. This does not result in a different ordering: Option A
($2,257) is greater than Option C ($2,152) which is greater than Option B
($2,107). However, the advantage of the taxable bonds is greatly
diminished at the higher tax rate. Reggie should also consider the effect
of State income taxes on these investment options in making his decision.
Option A - $800 of taxable interest each year for five years. At a 33%
marginal tax rate, Reggie will pay $264 ($800 x 33%) of tax each year,
reducing his after-tax return to $536. Each of the $536 receipts must be
discounted at 6%, resulting in a real after-tax return of $2,257:
After-tax return $ 536 $ 536 $ 536 $ 536 $ 536 $ 2,680
Real return $ 505 $ 477 $ 450 $ 425 $ 400 $ 2,257
Option C - Reggie will recognize $4,300 ($14,300 - $10,000) of income at
maturity of the savings bonds. He will pay a tax of $1,419 ($4,300 x 33%)
at that time, resulting in an after-tax return of $2,881 ($4,300 - $1,419).
Because the income is not received for five years it must be discounted at
6% for comparison. This results in a present value of $2,152 ($2,881 x
.747).
90. Leyh's Outdoor Adventures, Inc., would like to begin providing life insurance
coverage for its employees. Three employees are officers; each earns $100,000
per year. The other three employees each earns $40,000 per year. Ricardo,
president of Leyh's, comes to you for advice on how to provide the coverage. He
provides three alternatives, each of which will cost Leyh's $15,000 per year (an
average of $2,500 per employee):
Option 1 -- Give each employee $2,500 to purchase coverage.
Option 2 -- Buy a group term life insurance policy under which each employee
would be covered for an amount equal to twice her or his annual salary.
Option 3 -- Buy a whole life insurance policy under which each employee
would receive $100,000 worth of coverage.
Ricardo asks you to evaluate these options and advise him on the tax
consequences of each. Write a letter to Ricardo explaining the tax effects of each
option. Include your recommendation of the option that provides the greatest
overall tax benefits.
Purchasing the group-term life insurance will provide the greatest overall
tax benefit. Under all three options, Leyh's will be able to deduct the
$15,000 cost. Therefore, the option that provides the maximum benefit
(insurance coverage) at the lowest tax cost is preferable. Because the
taxable income and ages of each employee are unknown, the options must
be evaluated over possible ranges of income and age.
Option 1 - Each employee will be subject to tax on the $2,500 received. The
tax cost for each employee will depend on his/her marginal tax rate. The
$100,000 officers will most likely be in a higher tax bracket than the $40,000
employees. The after-tax amount available for the employee to purchase
insurance for various marginal tax rates is:
Marginal tax rate 28% 25% 15%
Amount received $2,500 $2,500 $2,500
Tax paid (700) (625) (375)
Amount available for insurance $1,800 $1,875 $2,125
It is unlikely that, after paying taxes, the individual employees can
purchase insurance coverage equivalent to that under the other two
options. This option has the highest tax cost with the least benefit to
employees. The one advantage that this option offers is that employees
who do not wish to purchase insurance or who want a lower amount of
insurance than Leyh's offers under the other two options have the
flexibility to purchase according to their individual needs.
Option 2 - All the employees will be taxed on the premiums (per the IRS
table) for insurance coverage in excess of $50,000. Officers will include in
gross income the premiums on $150,000 [($100,000 x 2) - $50,000] of
coverage. The other employees will include in gross income the premiums
on $30,000 [($40,000 x 2) - $50,000] of coverage. The amount included
in gross income will depend on the age of the employees and the tax effect
will depend on their marginal tax rates. Employees under 25 will include
in gross income $.60 per year per thousand dollars of coverage.
Employees who are 45-49 years old will include $1.80 per year per
thousand dollars of coverage. Employees who are 60-64 years old will
include $7.92 per year per thousand dollars of coverage.
The range of possible tax effects for the officers is:
Under 25 Age 45-49 Age 60-64
Amount included in gross income $ 90 $ 270 $ 1,188
Tax cost at 28% marginal tax rate $ 25 $ 76 $ 333
The range of possible tax effects for the other employees is:
Under 25 Age 45-49 Age 60-64
Amount included in gross income $ 18 $ 54 $ 238
This option provides more insurance for each employee at a lower tax cost
than option 1.
Option 3 - The cost of the insurance coverage for each employee will be
included in the employee's gross income. The tax cost of the coverage
will depend on the cost of the policy and the employee's marginal tax rate.
The average cost of a policy is $2,500. This cost will vary by the
employee's age. For comparison sake, assume a range of insurance policy
costs from $2,000 to $3,500. The tax cost of each policy at various
marginal tax rates is:
Policy cost $2,000 $2,500 $3,000 $3,500
Tax cost at 28% marginal tax rate $ 560 $ 700 $ 840 $ 980
The $40,000 employees will get $20,000 more coverage, but at a much
greater tax cost than option 2. The officers will get $100,000 less coverage
at a much greater tax cost than option 2. The tax cost of this option is
roughly equivalent to option 1. However, the employees will receive more
insurance coverage under this option than they can individually obtain
under option 1.
ETHICS DISCUSSION CASE

91. You are a CPA working for a local firm and have been assigned the 2016 tax
return of Bobby Crosser. In going over the data that Bobby gave to the firm, you
are surprised to see that he has reported no dividend income or gains from the
sale of stock. You recently prepared the 2016 gift tax return of Bobby's aunt
Esther. In that return, Esther reported a gift of stock to Bobby on January 6,
2016. The stock had a fair market value of $50,000, and Esther's basis in the
stock (which became Bobby's basis) was $5,000. What are your obligations
under the Statements on Standards for Tax Services (which can be found at
www.cengagebrain.com)? In your discussion, state which standard(s) may
apply to this situation and what might result from applying the standard(s).
SSTS #3 and SSTS #1 apply to the CPA in this situation. SSTS #3 allows a
CPA to rely on information provided by a client, unless the CPA has reason
to believe that the information presented is incorrect, incomplete, or
inconsistent. In this case, because the CPA knows that Bobby received
the stock from his aunt early in the year, there is reason to believe that
some form of income should have been reported from the stock - either
dividends received or income from the sale of the stock. In such
situations, SSTS #3 advises the CPA to use the client's prior year returns
whenever feasible to resolve the situation. However, in this case the stock
was received during the current year and would not have affected Bobby's
prior year return.
SSTS #3 also advises the CPA to use information in the return of another
taxpayer when the information in the other return is relevant and the use
of the information would not violate any law or rule relating to
confidentiality. Therefore, if the CPA's firm prepares Aunt Esther's income
tax return, it should be examined to determine whether any dividend
income is reported from any shares of the stock she still holds. There are
several possible results from such an inquiry. First, Esther may have
reported dividend income from the stock. Second, there may be no
reporting of any dividend income from the stock; Esther may no longer
own any of the shares, the stock may have paid no dividends during the
year, or the income may have been improperly omitted.
If Esther reported dividend income from the stock during the year, the CPA
should discuss with Bobby why no income is being reported and explain
the implications of not properly reporting any income received from the
stock. Based on this discussion, the CPA will have to determine whether
he or she can prepare and sign Bobby's return. Under SSTS #1, a CPA
cannot prepare or sign a return if the CPA knows that a position taken on
the return does not have a realistic possibility of being sustained upon
audit. Therefore, if the discussion with Bobby reveals that he did in fact
have either dividend income or income from the sale of the stock, the CPA
would not be able to prepare or sign the return if Bobby insists on omitting
the income. Again, the CPA is obligated to explain the potential penalties
Bobby could incur if he fails to properly report the income.
If an examination of Esther's return does not reveal any income reported

from the stock, the CPA's obligations are less clear. Because there is still
a possibility that Bobby may have received dividend income or sold the
stock at a gain, the CPA should still discuss the matter with Bobby and
explain the implications of not properly reporting income from the stock.
Under SSTS #3, the CPA should encourage Bobby to provide any
underlying documents relating to transactions in the stock. If the CPA is
convinced that Bobby did not receive any income from the stock, then
there is no problem. However, if after consulting with Bobby, the CPA
believes that the information he or she received regarding the stock is still
incorrect or incomplete, the CPA will have to determine whether to prepare
and sign the return under SSTS #1. There is no hard and fast answer in
this situation. However, if the CPA has made the required client
notifications and discussed the implications of failure to report income,
the CPA would probably be deemed to have met his or her obligation under
SSTS #3 and could prepare and sign the return.
Instructors Note: If the stock is publicly traded, the CPA can consult a
financial service (e.g., Moody’s) and determine if a dividend (and the
amount) has been paid during the year.
Chapter 4
Check Figures
20. a. Savings $560 b. Savings $560

c. Tax Credit $200 d. Savings $142
21. Excludable Gift
22. Raisa $150 interest June 30; $450 interest Dec 31; Lenia $300 taxable
23. a. Rory $7,000 gross income; Tabitha $1,000 dividend

b. Rory taxed $5,500
24. $10,000 capital gain; $2,200 dividend income
25. $2,400 rental income
26. Exclude $100,000; include $20,000 of each payment in income
27. $7,000 income
28. $2,000 of income
29. a. Scholarship excluded b. Not a scholarship; income
30. a. No realized income b. Realized income $1,000 less basis

c. Compensation realized d. Insurance excluded
31. $6,600 gross income; daughter $4,000 income
32. $1,600 + $1,100 + $5,000 + $250,000 taxable; $120,000 excludable
33. Tax credit saves $1,203
34. Both options result in no tax liability
35. a. $1,000 per month income b. all excluded
36. $21,150 gross income
37. Life insurance proceeds excluded; death benefit payments taxable
38 a. No gross income b. Gross income $24.48

c. Gross income $269.28 d. Gross income $234
39. a. $1,900 gross income b. No gross income
40. a. Excluded from gross income b. $2,400 gross income
41. Adjusted gross income decreases $2,850
42. $11,574
43. Groceries taxable

4-70
44. Yes
45. a. $60 excluded; $90 included b. Licensing fees, membership excluded; $750 income
c. $2,200 gross income d. Fully excludable
46. a. No income
b. $720 gross income
c. all employees - excluded, if only some employees - $720 included
47. $91,038
48. $155,020
49. $39,748
50. $800 gross income
51. a. $2,000,000 gross income b. $50,000 gross income

c. $370,000 gross income
52. Employer payments- substitute income; Workers comp - recovery of capital
53. $9,800 gross income
54. a. Exclude $960 b. Exclude

c. $1,900 gross income d. $800 gross income
55. Gross income $620
56. Exclude $2,400 interest; $4,000 capital loss
57. a. $600 gain on sale b. No gross income

c. $950 gross income; $500 loss on sale
58. greater than 6.48%
59. Sell bonds - $57 more after-tax income
60. a. $100,000 gross income b. No gross income

c. $ 75,000 gross income
61. a. $10,000 gross income b. Exclude $30,000

c. Exclude $20,000
62. a. Gift-not taxed b. Recognize $10,000

c. No forgiveness; reduce basis by $40,000
63. a. $20,000 gross income b. Exclude $120,000; recognize $100,000

c. $30,000 gross income
64. No income from return of property
65. $1,000 gross income; $12,000 rental reduction capitalized
4-71

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CHAPTER 4

Concepts in Federal Taxation 2017 24th

Test bank: https://testbankpack.com/p/test-bank-for-concepts-

Solution Manual: https://testbankpack.com/p/solution-manual-

2 Exclusion versus deferral Unchanged

3 Gifts - effect on family income Unchanged

4 Life insurance proceeds exclusion Unchanged

5 Scholarships - excluded versus taxable Unchanged

6 Tax relief for foreign earned income Unchanged

7 Qualified pension plan payments Unchanged

8 Life insurance - group term versus whole life Unchanged

9 Medical insurance plans Unchanged

10 Health Savings Accounts Unchanged

11 Qualified employee discounts versus bargain purchases Unchanged

12 Cafeteria plan versus flexible benefit plans Unchanged

13 Worker's compensation versus employment compensation Unchanged

15 Punitive damages Unchanged

16 Loss of income payments Unchanged

17 Payments received from health and accident insurance policies Unchanged

18 Municipal bond interest Unchanged

19 Exclusion for stock dividends Unchanged

21-CT Gift versus payment of expenses Unchanged

22 Gift of bond Unchanged

23 Gift of stock with payment of dividends to another Unchanged

24 Inheritance with subsequent sale and reinvestment Unchanged

25 Inheritance with subsequent receipt Unchanged

26-COMM Life insurance received in installments Unchanged

27 Scholarships - definition and limitation Unchanged

28 Scholarships – extension of #27 Unchanged

29 Scholarship definition - two scenarios Unchanged

30 Exclusion scenarios - inheritance, gift, life insurance Unchanged

31 Death benefits Unchanged

32-COMM Payments to an employee's husband after death Unchanged

33 Foreign earned income - exclusion versus credit Unchanged

34-COMM Foreign earned income - exclusion versus credit Modified

35 Pension plan payments - qualified versus non-qualified plans Unchanged

36 Payments received from pensions versus annuities Unchanged

37-COMM Taxation of life insurance proceeds versus death benefits Unchanged

39 Medical reimbursement plans – effect of discrimination Unchanged

40 Medical reimbursement plans - effect of discrimination Unchanged

41 Health Savings Accounts Unchanged

42 Health Savings Accounts Unchanged

43-CT Meals and lodging exclusion - definition of a meal Unchanged

44 Lodging exclusion - definition of business premises Unchanged

45 Employee fringe benefits - four scenarios Unchanged

46 Provision of health club by employer - three scenarios Unchanged

47 Employee fringe benefits - calculation of gross income Modified

48 Employee fringe benefits - calculation of gross income Unchanged

49 Employee fringe benefits - calculation of gross income Unchanged

50 Flexible benefits plan Unchanged

51 Taxability of damage payments Unchanged

52 Payments for injuries Unchanged

53 Payments for injuries Unchanged

54 Taxability of various types of payments Unchanged

55 Gross income from investments Unchanged

56 Municipal bonds - interest received/loss on sale Unchanged

57 Gross income versus exclusions - three scenarios Unchanged

58 Municipal bonds - taxable bond equivalents Unchanged

59 Decision to sell investment and purchase tax exempt bonds Unchanged

60 Discharge of debt Unchanged

61 Discharge of debt - insolvency exception contrasted with principal Unchanged

62 Discharge of debt versus gifts and rebates Unchanged

63 Discharge of debt - insolvency exception contrasted with principal Unchanged

64 Improvements by lessee Unchanged