Question 1

Assuming a taxpayer qualifies for the exclusion treatment, the interest income on educational savings bonds:

Accepted Answer

A) Is gross income to the person who purchased the bond in the year the interest is earned. 
B) Is gross income to the student in the year the interest is earned. 
C) Is included in the student's gross income in the year the savings bonds are sold or redeemed to pay educational expenses. 
D) Is not included in anyone's gross income if the proceeds are used to pay college tuition. 
E) None of the above. 
A) Is gross income to the person who purchased the bond in the year the interest is earned. 
B) Is gross income to the student in the year the interest is earned. 
C) Is included in the student's gross income in the year the savings bonds are sold or redeemed to pay educational expenses. 
D) Is not included in anyone's gross income if the proceeds are used to pay college tuition. 
E) None of the above.

Question 2

Generally, a U.S.citizen is required to include in gross income the salary and wages earned while working in a foreign country even if the foreign country taxes the income.

Accepted Answer

A) True 
 B)False

Question 3

Christie sued her former employer for a back injury she suffered on the job in 2011.As a result of the injury, she was partially disabled.In 2012, she received $240,000 for her loss of future income, $160,000 in punitive damages because of the employer's flagrant disregard for the employee's safety, and $15,000 for medical expenses. The medical expenses were deducted on her 2011 return, reducing her taxable income by $12,000. Christie's 2012 gross income from the above is:

Accepted Answer

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

Question 4

The CEO of Cirtronics Inc., discovered that the company's competitor had adopted a cafeteria plan for its employees. The CEO is concerned about retaining his talented employees and would like you to provide a brief explanation as to why a cafeteria plan may be attractive to the company's employees.

Accepted Answer

Cafeteria plans are beneficial where emp

Question 5

Under the Swan Company's cafeteria plan, all full-time employees are allowed to select any combination of the benefits below, but the total received by the employee cannot exceed $8,000 a year.   Which of the following statements is true?

Accepted Answer

A) Sam, a full-time employee, selects choices II and III and $2,000 cash.His gross income must include the $2,000. 
B) Paul, a full-time employee, elects to receive $8,000 cash because his wife's employer provided these same insurance benefits for him.Paul is not required to include the $8,000 in gross income. 
C) Sue, a full-time employee, elects to receive choices I, II and $3,200 for III.Sue is required to include $3,200 in gross income. 
D) All of the above. 
E) None of the above. 
A) Sam, a full-time employee, selects choices II and III and $2,000 cash.His gross income must include the $2,000. 
B) Paul, a full-time employee, elects to receive $8,000 cash because his wife's employer provided these same insurance benefits for him.Paul is not required to include the $8,000 in gross income. 
C) Sue, a full-time employee, elects to receive choices I, II and $3,200 for III.Sue is required to include $3,200 in gross income. 
D) All of the above. 
E) None of the above.

Question 6

Denny was neither bankrupt nor insolvent but was short of cash and could not make the mortgage payments on his personal residence in 2012. The bank that held the mortgage agreed to reduce the principal on the debt from $100,000 to $80,000 so that Denny's monthly mortgage payments could be reduced to a manageable amount. Denny also had a vacation home with a mortgage whose payments were beyond his means.The mortgage holder on the vacation home agreed to reduce the mortgage from $60,000 to $50,000.The value of the personal residence was $80,000 and the value of the vacation home was $45,000 at the dates of the debt reduction.

Accepted Answer

A) Denny is not required to recognize any income as a result of the reduction in the principal of the mortgages. 
B) Denny is required to recognize $5,000 income from the reduction in the mortgage on the vacation home, but has no gross income from the reduction in the mortgage principal on his personal residence. 
C) Denny is required to recognize $10,000 income from the reduction in the mortgage on the vacation home, but nothing for the reduction in the mortgage on his personal residence. 
D) Denny is required to recognize $10,000 income from the reduction in the mortgage on the vacation home and $20,000 income for the reduction in the mortgage on his personal residence. 
E) None of the above. 
A) Denny is not required to recognize any income as a result of the reduction in the principal of the mortgages. 
B) Denny is required to recognize $5,000 income from the reduction in the mortgage on the vacation home, but has no gross income from the reduction in the mortgage principal on his personal residence. 
C) Denny is required to recognize $10,000 income from the reduction in the mortgage on the vacation home, but nothing for the reduction in the mortgage on his personal residence. 
D) Denny is required to recognize $10,000 income from the reduction in the mortgage on the vacation home and $20,000 income for the reduction in the mortgage on his personal residence. 
E) None of the above.

Question 7

Sarah's employer pays the hospitalization insurance premiums for a policy that covers all employees and retired former employees. After Sarah retires, the hospital insurance premiums paid for her by her employer can be excluded from her gross income.

Accepted Answer

A) True 
 B)False

Question 8

Louise works in a foreign branch of her employer's business.She earned $5,000 per month throughout the relevant period.

Accepted Answer

A) If Louise worked in the foreign branch from May 1, 2011 until October 31, 2012, she may exclude $40,000 from gross income in 2011 and exclude $50,000 in 2012. 
B) If Louise worked in the foreign branch from May 1, 2011 until October 31, 2012, she cannot exclude anything from gross income because she was not present in the country for 330 days in either year. 
C) If Louise began work in the foreign country on May 1, 2011, she must work through November 30, 2012 in order to exclude $55,000 from gross income in 2012 but none in 2011. 
D) Louise will not be allowed to exclude any foreign earned income because she made less than $95,100. 
E) None of the above. 
A) If Louise worked in the foreign branch from May 1, 2011 until October 31, 2012, she may exclude $40,000 from gross income in 2011 and exclude $50,000 in 2012. 
B) If Louise worked in the foreign branch from May 1, 2011 until October 31, 2012, she cannot exclude anything from gross income because she was not present in the country for 330 days in either year. 
C) If Louise began work in the foreign country on May 1, 2011, she must work through November 30, 2012 in order to exclude $55,000 from gross income in 2012 but none in 2011. 
D) Louise will not be allowed to exclude any foreign earned income because she made less than $95,100. 
E) None of the above.

Question 9

Emily is in the 35% marginal tax bracket.She can purchase a York County school bond yielding 5% interest, but she is interested in earning a higher return for comparable risk.

Accepted Answer

A) If she buys a corporate bond that pays 8% interest, her after-tax rate of return will be greater than if she purchased the York County school bond. 
B) If she buys a U.S.government bond paying 6%, her after-tax rate of return will be less than if she purchased the York County school bond. 
C) If she buys a common stock paying 6% dividend, her after-tax rate of return will be higher than if she purchased the York County school bond. 
D) All of the above are correct. 
E) None of the above are correct. 
A) If she buys a corporate bond that pays 8% interest, her after-tax rate of return will be greater than if she purchased the York County school bond. 
B) If she buys a U.S.government bond paying 6%, her after-tax rate of return will be less than if she purchased the York County school bond. 
C) If she buys a common stock paying 6% dividend, her after-tax rate of return will be higher than if she purchased the York County school bond. 
D) All of the above are correct. 
E) None of the above are correct.

Question 10

A U.S.citizen worked in a foreign country for the period July 1, 2011 through August 1, 2012.Her salary was $10,000 per month.Also, in 2011 she received $5,000 in dividends from foreign corporations (not qualified dividends).No dividends were received in 2012.Which of the following is correct?

Accepted Answer

A) The taxpayer can exclude $60,000 from U.S.gross income for 2011 because the total salary earned in the foreign country in 2011 was less than the annual foreign earned income exclusion, but the dividends of $5,000 must be included in gross income. 
B) The taxpayer can exclude a portion of the compensation income from U.S.gross income in 2011 and 2012, but must include the dividend income of $5,000 in gross income. 
C) The taxpayer can exclude from U.S.gross income $60,000 salary in 2011, but in 2011 the taxpayer will exceed the twelve month limitation and, therefore, all of the 2012 compensation must be included in gross income.All of the dividends must be included in 2011 gross income. 
D) The taxpayer can exclude a portion of the salary from U.S.gross income in 2011 and 2012, and all of the dividend income. 
E) None of the above. 
A) The taxpayer can exclude $60,000 from U.S.gross income for 2011 because the total salary earned in the foreign country in 2011 was less than the annual foreign earned income exclusion, but the dividends of $5,000 must be included in gross income. 
B) The taxpayer can exclude a portion of the compensation income from U.S.gross income in 2011 and 2012, but must include the dividend income of $5,000 in gross income. 
C) The taxpayer can exclude from U.S.gross income $60,000 salary in 2011, but in 2011 the taxpayer will exceed the twelve month limitation and, therefore, all of the 2012 compensation must be included in gross income.All of the dividends must be included in 2011 gross income. 
D) The taxpayer can exclude a portion of the salary from U.S.gross income in 2011 and 2012, and all of the dividend income. 
E) None of the above.

Question 11

John told his nephew, Steve, "if you maintain my house when I cannot, I will leave the house to you when I die.Steve maintained the house and when John died Steve inherited the house.The value of the residence must be included in Steve's gross income.

Accepted Answer

A) True 
 B)False

Question 12

Roger is in the 35% marginal tax bracket. Roger's employer has created a flexible spending account for medical and dental expenses that are not covered by the company's health insurance plan.Roger had his salary reduced by $1,200 during the year for contributions to the flexible spending plan.However, Roger incurred only $1,100 in actual expenses for which he was reimbursed.Under the plan, he must forfeit the $100 unused amount.His after-tax cost of overfunding the plan is $65.

Accepted Answer

A) True 
 B)False

Question 13

Ridge is the manager of a motel.As a condition of his employment, Ridge is required to live in a room on the premises so that he would be there in case of emergencies.Ridge considered this a fringe benefit, since he would otherwise be required to pay $800 per month rent.The room that Ridge occupied normally rented for $70 per night, or $2,100 per month.On the average, 90% of the motel rooms were occupied.As a result of this rent-free use of a room, Ridge is required to include in gross income.

Accepted Answer

A) $0. 
B) $800 per month. 
C) $2,100 per month. 
D) $1,890 ($2,100 ´ .90). 
E) None of the above. 
A) $0. 
B) $800 per month. 
C) $2,100 per month. 
D) $1,890 ($2,100 ´ .90). 
E) None of the above.

Question 14

Members of a research team must include in gross income the value of their lodging furnished at the research base located at the South Pole.

Accepted Answer

A) True 
 B)False

Question 15

Gary cashed in an insurance policy on his life. He needed the funds to pay for his terminally ill wife's medical expenses.He had paid $12,000 in premiums and he collected $30,000 from the insurance company.Gary is not required to include the gain of $18,000 ($30,000 - $12,000) in gross income.

Accepted Answer

A) True 
 B)False

Question 16

Flora Company owed $95,000, a debt incurred to purchase land that serves as security for the debt.

Accepted Answer

A) If Flora had borrowed the funds from a bank, the bank accepts $85,000 in full payment of the debt, and Flora is solvent after the transfer, Flora does not recognize income, but the company must reduce the cost of the land by $10,000. 
B) If Flora had borrowed the funds from a bank, and the bank accepts $85,000 in full payment of the debt, when the value of the property is $80,000, Flora can deduct a loss. 
C) If Flora transfers to the bank other property, with a basis of $90,000 and a fair market value of $95,000, in full payment of the debt, Flora can recognize a $5,000 loss. 
D) If the $95,000 is owed to the person who sold the property to Flora, and the creditor accepts $85,000 in full payment for the debt, Flora does not recognize gain but must reduce its basis in the land. 
E) None of the above. 
A) If Flora had borrowed the funds from a bank, the bank accepts $85,000 in full payment of the debt, and Flora is solvent after the transfer, Flora does not recognize income, but the company must reduce the cost of the land by $10,000. 
B) If Flora had borrowed the funds from a bank, and the bank accepts $85,000 in full payment of the debt, when the value of the property is $80,000, Flora can deduct a loss. 
C) If Flora transfers to the bank other property, with a basis of $90,000 and a fair market value of $95,000, in full payment of the debt, Flora can recognize a $5,000 loss. 
D) If the $95,000 is owed to the person who sold the property to Flora, and the creditor accepts $85,000 in full payment for the debt, Flora does not recognize gain but must reduce its basis in the land. 
E) None of the above.

Question 17

Sam was unemployed for the first two months of 2011.During that time, he received $4,000 of state unemployment benefits. He worked for the next six months and earned $14,000. In September, he was injured on the job and collected $5,000 of workers' compensation benefits.Sam's Federal gross income from the above is $18,000 ($4,000 + $14,000).

Accepted Answer

A) True 
 B)False

Question 18

What are the tax problems associated with payments received by a wife from her deceased husband's employer? (Assume the wife renders no services to the employer.)

Accepted Answer

An amount paid in respect of compensatio

Question 19

Tommy, a senior at State College, receives free room and board as full compensation for working as a resident advisor at the university dormitory.The regular housing contract is $2,000 a year in total, $1,200 for lodging and $800 for meals in the dormitory.Tommy had the option of receiving the meals or $800 in cash.Tommy accepted the meals.What is Tommy's gross income from working as a resident advisor?

Accepted Answer

A) $1,800, the entire value of the contract is compensation. 
B) $1,000, only the lodging contract must be included in gross income. 
C) $800, only the meal contract must be included in gross income. 
D) $0, the entire value of the contract is excluded from gross income. 
E) None of the above. 
A) $1,800, the entire value of the contract is compensation. 
B) $1,000, only the lodging contract must be included in gross income. 
C) $800, only the meal contract must be included in gross income. 
D) $0, the entire value of the contract is excluded from gross income. 
E) None of the above.

Question 20

Olaf was injured in an automobile accident and received $25,000 for his physical injury, $10,000 for his loss of income, and $50,000 punitive damages.As a result of the award, the amount Olaf must include in gross income is:

Accepted Answer

A) $10,000. 
B) $50,000. 
C) $60,000. 
D) $85,000. 
E) None of the above. 
A) $10,000. 
B) $50,000. 
C) $60,000. 
D) $85,000. 
E) None of the above.

Exam 5: Gross Income: Exclusions

Assuming a taxpayer qualifies for the exclusion treatment, the interest income on educational savings bonds:

Generally, a U.S.citizen is required to include in gross income the salary and wages earned while working in a foreign country even if the foreign country taxes the income.

The CEO of Cirtronics Inc., discovered that the company's competitor had adopted a cafeteria plan for its employees. The CEO is concerned about retaining his talented employees and would like you to provide a brief explanation as to why a cafeteria plan may be attractive to the company's employees.

Under the Swan Company's cafeteria plan, all full-time employees are allowed to select any combination of the benefits below, but the total received by the employee cannot exceed $8,000 a year. Which of the following statements is true?

Sarah's employer pays the hospitalization insurance premiums for a policy that covers all employees and retired former employees. After Sarah retires, the hospital insurance premiums paid for her by her employer can be excluded from her gross income.

Louise works in a foreign branch of her employer's business.She earned $5,000 per month throughout the relevant period.

Emily is in the 35% marginal tax bracket.She can purchase a York County school bond yielding 5% interest, but she is interested in earning a higher return for comparable risk.

A U.S.citizen worked in a foreign country for the period July 1, 2011 through August 1, 2012.Her salary was $10,000 per month.Also, in 2011 she received $5,000 in dividends from foreign corporations (not qualified dividends).No dividends were received in 2012.Which of the following is correct?

John told his nephew, Steve, "if you maintain my house when I cannot, I will leave the house to you when I die.Steve maintained the house and when John died Steve inherited the house.The value of the residence must be included in Steve's gross income.

Members of a research team must include in gross income the value of their lodging furnished at the research base located at the South Pole.

Gary cashed in an insurance policy on his life. He needed the funds to pay for his terminally ill wife's medical expenses.He had paid $12,000 in premiums and he collected $30,000 from the insurance company.Gary is not required to include the gain of $18,000 ($30,000 - $12,000) in gross income.

Flora Company owed $95,000, a debt incurred to purchase land that serves as security for the debt.

What are the tax problems associated with payments received by a wife from her deceased husband's employer? (Assume the wife renders no services to the employer.)

Olaf was injured in an automobile accident and received $25,000 for his physical injury, $10,000 for his loss of income, and $50,000 punitive damages.As a result of the award, the amount Olaf must include in gross income is:

An Introduction to Taxation and Understanding the Federal Tax Law

Working With the Tax Law

Computing the Tax

Gross Income: Concepts and Inclusions

Deductions and Losses: in General

Deductions and Losses: Certain Business Expenses and Losses

Depreciation, Cost Recovery, Amortization, and Depletion

Deductions: Employee and Self-Employed-Related Expenses

Deductions and Losses: Certain Itemized Deductions

Investor Losses

Tax Credits and Payments

Property Transactions: Determination of Gain or Loss, Basis Considerations, and Nontaxable Exchanges-Part 1

Property Transactions: Determination of Gain or Loss, Basis Considerations, and Nontaxable Exchanges-Part 2

Property Transactions: Capital Gains and Losses, 1231, Recapture Provisions

Alternative Minimum Tax

Accounting Periods and Methods

Corporations: Introduction and Operating Rules

Corporations: Organization and Capital Structure

Corporations: Distributions Not in Complete Liquidation

Corporations: Distributions in Complete Liquidation and an Overview of Reorganizations

Partnerships

S: Corporations

Exempt Entities

Multistate Corporate Taxation

Taxation of International Transactions

Tax Practice and Ethics

Income Taxation of Trusts and Estates

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