Exam 5: Gross Income: Exclusions

On January 1,2000,Yellow corporation issued 6% 25-year bonds at par and used the $10,000,000 proceeds to finance the construction of a new plant.On January 1,2010,the company acquired the bonds on the open market for $9,500,000.Assuming that Yellow Corporation is neither bankrupt nor insolvent,the acquisition and retirement of the bonds results in which of the following:

Martha participated in a qualified tuition program for the benefit of her son.She invested $5,000 in the fund.Four years later her son withdrew $7,500,the entire balance in the program,to pay his college tuition.

Adam repairs power lines for the Egret Utilities Company.He is generally working on a power line during the lunch hour.He must eat when and where he can and still get his work done.He usually purchases something at a convenience store and eats in his truck.Egret reimburses Adam for the cost of his meals.

Fresh Bakery often has unsold donuts at the end of the day.The bakery allows employees to take the leftovers home.The employees are not required to recognize gross income because the bakery does not incur any additional cost.

Albert had a terminal illness which required almost constant nursing care for the remaining two years of his estimated life,according to his doctor.Albert had a life insurance policy with a face amount of $100,000.Albert had paid $10,000 of premiums on the policy.The insurance company has offered to pay him $75,000 to cancel the policy,although its cash surrender value was only $60,000.Albert accepted the $75,000.Albert used $5,000 to pay his medical expenses.Albert made a miraculous recovery and lived another 20 years.As a result of cashing in the policy:

Bob had a terminal illness and realized that he "can't take it with him." Therefore,he cashed in his insurance policy and received $100,000.He had paid $40,000 in premiums on the policy.He used the money to fulfill his lifelong ambitions of going to the Super Bowl and driving an expensive sports car. Was Bob's behavior consistent with the Congressional intent in providing the tax exemption he was permitted to use?

Flora Company owed $100,000 to the National Bank.Flora borrowed the funds to purchase land from another party.The land serves as security for the loan.

Ed died while employed by Violet Company.His wife collected $50,000 on a group-term life insurance policy that Violet provided its employees,and $5,000 of accrued salary Ed had earned prior to his death.Ed's wife is not required to recognize any income from the receipt of the $55,000.

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

Sungho is married,files a joint return,and expects to be in the 35% marginal tax bracket for the foreseeable future.All of his income is from salary and all of it is used to maintain the household.He has a paid-up life insurance policy with a cash surrender value of $50,000.He paid $20,000 of premiums on the policy.His gain from cashing in the life insurance policy would be ordinary income.If he retains the policy,the insurance company will pay him $2,500 (5%)interest each year.Sungho thinks he can earn a higher return if he cashes in the policy and invests the proceeds.

Iris collected $100,000 on her deceased husband's life insurance policy.The policy was purchased by the husband's employer under a group policy.Iris's husband had included $5,000 in gross income from the group term life insurance premiums during the years he worked for the employer.She elected to collect the policy in 10 equal annual payments of $12,500 each.

Generally,a U.S.citizen is not required to include in gross income the salary and wages earned while working in a foreign country if the foreign country taxes the income.

The employees of Mauve Accounting Services are permitted to use the copy machine for personal purposes,provided the privilege is not abused.Ed is the president of a civic organization and uses the copier to make several copies of the organization's agenda for its meetings.The copies made during the year would have cost $125 at a local office supply.

George is employed by the Quality Appliance Company.All the full time employees are allowed to purchase appliances at the company's cost plus 5%.The employee also is given,at no cost,a 1-year service contract on all the goods purchased from the company.George purchased a refrigerator for $420.The company's normal selling price for the refrigerator is $800.George also received a service contract,at no charge,that had a value of $120.During the year,George was required to have his refrigerator serviced once.The cost of the call would have been $50 if he had not had the service contract.Is George required to recognize any income from the purchase of the refrigerator and the receipt of the service contract?

Section 119 excludes the value of meals from the employee's gross income:

Sharon's automobile slid into a ditch.A stranger pulled her out.Sharon offered to pay $25,but the stranger refused.Sharon slipped the $25 in the stranger's truck when he was not looking.

Gold Company was experiencing financial difficulties,but was not bankrupt or insolvent.The National Bank,which held a mortgage on other real estate owned by Gold,reduced the principal from $110,000 to $85,000.The bank had made the loan to Gold when it purchased the real estate from Silver,Inc.Pink,Inc. ,the holder of a mortgage on Gold's building,agreed to accept $40,000 in full payment of the $55,000 due.Pink had sold the building to Gold for $150,000 that was to be paid in installments over 8 years.As a result of the above,Gold must:

Doug and Pattie received the following interest income in the current year: Greenbacks Bank also gave Doug and Pattie a cellular phone (worth $100)for opening the savings account.What amount of interest income should they report on their joint income tax return?

The plant union is negotiating with the Eagle Company,which is on the verge of bankruptcy.Eagle has offered to pay for the employees' hospitalization insurance in exchange for a wage reduction.The employees each currently pay premiums of $4,000 a year for their insurance.

In his will,John named his nephew Steve as executor of the estate.Steve is to receive a fee of $12,000 for serving as executor.When John died,Steve performed the executorial services and received the fee.Steve can exclude the $12,000 from gross income as an inheritance from his uncle's estate.