Exam 5: Gross Income: Exclusions

Amber Machinery Company purchased a building from Ted for $250,000 cash and a mortgage of $750,000.One year after the transaction,the mortgage had been reduced to $725,000 by principal payments by Amber,but it was apparent that Amber would not be able to continue to make the monthly payments on the mortgage.Ted reduced the amount owed by Amber to $600,000.This reduced the monthly payments to a level that Amber could pay.Amber must recognize $125,000 income from the reduction in the debt by Ted.

If a scholarship does not satisfy the requirements for a gift,the scholarship must be included in gross income.

Gull Corporation was undergoing reorganization under the bankruptcy laws.The shareholders,who had made loans of $200,000 to the corporation,agreed to accept additional stock with a value of $150,000 instead of repayment on the debt.The Old Line Insurance Company,which had a $300,000 mortgage on the building,agreed to reduce the principal to $250,000.A trade creditor with a receivable of $150,000 from the company agreed to accept $60,000 in full payment for the debt incurred to purchase goods that were still on hand.Finally,the company transferred some equipment with an adjusted basis of $50,000 in satisfaction of a liability for $60,000.Compute the corporation's gross income and other adjustments necessary as a result of the above transactions.

In 2010,Theresa was in an automobile accident and suffered physical injuries.The accident was caused by Ramon's negligence.In 2011,Theresa collected from his insurance company.She received $15,000 for loss of income,$25,000 punitive damages,and $8,000 for medical expenses which she had deducted on her 2010 tax return (the amount in excess of 7.5% of adjusted gross income).As a result of the above,Theresa's 2011 gross income is increased by $33,000.

When Betty was diagnosed as having a terminal illness,she sold her life insurance policy to Insurance Purchase,Inc. ,a company that is licensed to invest in these types of contracts.Betty sold the policy for $32,000 and Insurance Purchase,Inc. ,became the beneficiary.She had paid total premiums of $19,000.Betty died 8 months after the sale.Insurance Purchase,Inc. ,collected $50,000 on the policy.The company had paid additional premiums of $4,000 on the policy.Insurance Purchase,Inc. ,is required to recognize income from the above transactions,but Betty is not required to include her gain in gross income.

Melody works for a company with only 22 employees.Her employer contributed $2,000 to her health savings account (HSA),and the account earned $100 in interest during the year.Melody withdrew only $1,200 to pay medical expenses during the year.Melody is not required to recognize any gross income from the HSA for the year.

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.

Sarah's employer pays the hospitalization insurance premiums for a policy that covers all employees and their family members.Sarah can exclude from her gross income the premiums for herself and her family members.

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 $15,000 in premiums and he collected $30,000 from the insurance company.Gary is required to include the gain of $15,000 ($30,000 - $15,000)in gross income.

Swan Finance Company,an accrual method taxpayer,requires all of its customers to carry credit life insurance.If a customer dies,the company receives from the insurance company the balance due on the customer's loan.Ali,a customer,died owing the company $1,000.The balance due included $100 accrued interest that Swan had included in income.When Swan collects $1,000 from the insurance company,Swan:

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.

As an executive of Cherry,Inc. ,Ollie receives a fringe benefit in the form of annual tuition scholarships of $10,000 to each of his three children.The scholarships are paid by the company directly to each child's educational institution and are payable only if the student maintains a B average.

Cash received by an individual:

James,a cash basis taxpayer,received the following compensation and fringe benefits in 2010: His actual salary was $72,000.He received only $66,000 because his salary was garnished and the employer paid $6,000 on James's credit card debt he owed.The wage continuation insurance is available to all employees and pays the employee three-fourths of the regular salary if the employee is sick or disabled.The long-term care insurance is available to all employees and pays $150 per day towards a nursing home or similar facility.What is James's gross income from the above?

Heather is a full-time employee of the Drake Company and participates in the company's flexible spending plan that is available to all employees.Which of the following is correct?

Mother participated in a qualified state tuition program for the benefit of her son.She contributed $14,000.When the son entered college,the balance in the fund satisfied the tuition charge of $20,000.When the funds were withdrawn to pay the college tuition for her son,the son must include $6,000 in his gross income.