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business
federal taxation

Questions and Answers of Federal Taxation

On January 5, 2017 Rita left the United States for Germany, where she had accepted an appointment as vice president of foreign operations. Her employer, USA Corporation, told her the assignment would
For each of the following cases, indicate the amount of the foreign-earned income exclusion. (Disregard the effect of exemptions for certain allowances under Sec. 912.)a. Sam, a U.S. citizen, is an
After a brief illness, Bill died. Bill’s employer paid $20,000 to his widow. The corporation sent along a letter with the check indicating that $5,000 represented payment for Bill’s accrued
Jet Corporation is involved in the purchase and rental of several large apartment complexes. Questions have been raised about the treatment of several items pertaining to Jet Corporation and its
Al flies for AAA Airlines. AAA provides its employees with several fringe benefits. Al and his family are allowed to fly on a space-available basis on AAA Airline. Tickets used by Al and his family
Joe is the beneficiary of a life insurance policy taken out by his father several years ago. Joe’s father dies, and Joe has the option of receiving the $100,000 face value of the policy in cash or
Data Corporation has four employees and provides group term life insurance coverage for all four employees. Coverage is nondiscriminatory and is as follows:EmployeeAgeKey EmployeeCoverageActual
Ursula is employed by USA Corporation. USA Corporation provides medical and health, disability, and group term life insurance coverage for its employees. Premiums attributable to Ursula were as
Determine which of the following payments for sickness and injury must be included in the taxpayer’s gross income.a. Pat was injured in an automobile accident. The other driver’s insurance
Otto is a biology professor at State University. The university gave Otto a sabbatical leave to study the surface of the flatworm. During the year he received a salary of $50,000, which is less than
For each of the following, indicate the amount that must be included in the taxpayer’s gross income:a. Larry was given a $1,500 tuition scholarship to attend Eastern Law School. In addition,
For each of the following, indicate whether the amount is taxable:a. Peggy won $4,000 in the state lottery.b. Jane won a $500 prize for her entry in a poetry contest.c. Linda was awarded $2,000 when
Hank carries a $100,000 insurance policy on his life. Premiums paid over the years total $8,000. Dividends on the policy have totaled $6,000. Hank has left the dividends on the policy with the
Sue is age 73 and has a great deal of difficulty living independently as she suffers from severe rheumatoid arthritis. She is covered by a $400,000 life insurance policy, and her children are named
Ed is the beneficiary of a $20,000 insurance policy on the life of his mother. Because Ed needs funds, he sells the policy to his sister, Amy, for $6,000. Amy subsequently pays premiums of $9,000.a.
Don is the beneficiary of a $50,000 insurance policy on the life of his mother, Anna. To date, Anna has paid premiums of $16,000. What amount of gross income must be reported in each of the following
Which of the following would be includable in gross income?a. Alice appeared on a TV quiz show and received a prize of $5,000.b. Bart received $500 from his employer because he developed an idea that
In which of the following situations would the taxpayer realize taxable income?a. A mechanic performs work on his own automobile. The mechanic would have charged a customer $400 for doing the same
Jerry works in the human resources department of Ajax Corporation. One of his responsibilities is to interview prospective employees. Two or three days each week, Jerry takes a prospective employee
Troy Department Stores offers employees discounts on merchandise carried in the store. Newly hired employees receive a 10% discount. The discount rate increases 1% each year until employees have 20
Mildred worked as a maid for 27 years in the home of Larry and Kay. When she retired, they presented her with a check for $25,000, indicating that it was a way of showing their appreciation for her
Both high-income and low-income employees are covered by cafeteria plans. Under such plans, all employees may select from a list of non-taxable fringe benefits or they may elect to receive cash in
Both high-income and low-income employees are covered by cafeteria plans. Under such plans, all employees may select from a list of non-taxable fringe benefits or they may elect to receive cash in
Why are cafeteria plans helpful in the design of an employee benefit plan that provides nontaxable fringe benefits?
Are partners and proprietors at a disadvantage with respect to fringe benefits? Explain.
Bankrupt and insolvent taxpayers do not recognize income if debt is discharged. They must, however, reduce specified tax attributes. What is involved?
a. Under what conditions is the discharge of indebtedness not taxable?b. If a father forgives a daughter’s debt to him, is she required to include such amount in her gross income?
a. Why is it important to distinguish debt cancellation from a gift, bequest, or renegotiation of a purchase price?b. What happens to the basis of an asset if the taxpayer renegotiates its purchase
Are taxpayers who claim the foreign-earned income exclusion entitled to deduct expenses incurred in producing that income? Explain.
What types of income qualify for the foreign-earned income exclusion?
Are income distributions from a qualified state tuition program taxable?
If an employee takes a customer to lunch and discusses business, can the employee deduct 50% of the meal for both the customer and himself? Explain.
Are the same fringe benefits that are available to employees also available to self-employed individuals?
The president and vice president of USA Corporation receive benefits that are unavailable to other employees. These benefits include free parking, payment of monthly expenses in a local club,
What conditions must be met if an employee is to exclude meals and lodging furnished by an employer?
a. What are the seven major types of fringe benefits covered by Sec. 132?b. What tax advantage is offered relative to such benefits?c. Are such benefits available to employees only or may the
Special rules are applicable in situations where group term life insurance coverage exceeds $50,000. How are key employees treated?
Answer the following questions relative to employer- financed medical and health, disability, and life insurance plans.a. May employers deduct premiums paid on employee insurance?b. Do employees have
Is the personal injury exclusion found in Sec. 104 limited to physical injury? Explain.
What special rules are applicable to non-degree candidates who receive scholarships?
a. Define the term scholarship as it is used in Sec. 117.b. If a scholarship covers room and board, is it excludable?c. If an employer provides a scholarship to an employee who is on leave of
Which of the requirements for the Sec. 74 awards exclusion most severely limits its use? Does the exclusion benefit taxpayers more if they itemize their deductions or use the standard deduction?
What conditions must be met for an award to qualify for an exclusion under Sec. 74?
What is the tax significance of the face amount of a life insurance policy?
a. What role does intent play in determining whether a transfer is a gift and therefore not subject to the income tax?b. Are tips received by employees from customers ex-cludable from gross income as
a. If a gift of property is made, who is taxed on income produced by the property?b. How can inter-family gifts reduce a family’s total tax liability?
Most exclusions exist for one of two reasons. What are those reasons? Give examples of exclusions that exist for each.
What was the issue in the tax case Eisner v. Macomber? Why is the case important?
There is no specific statutory exclusion for welfare benefits. Nevertheless, the IRS has ruled that such benefits are not taxable. Is this within the authority of the IRS?
Two commonly-recognized measures of the fairness of an income tax structure are “horizontal equity” and “vertical equity.”a. Discuss what is meant by horizontal equity and vertical
What is meant by the terms administrative exclusion and judicial exclusion?
William owns a building that is leased to Lester’s Machine Shop. Lester requests that William rewire the building for new equipment Lester plans to purchase. The wiring would cost about $4,000, but
Lee and Jane have been your firm’s clients for most of the twenty years they have been married. Recently Lee came to you and said that he and Jane are obtaining a divorce, and he wants you to help
John and Mary have two small children and are looking for ways to help fund the children’s college education. They have heard that Series EE bonds are a tax-favored way of saving and have requested
Jim and Linda are your tax clients. They were divorced two years ago, and the divorce decree stated that Jim was to make monthly payments to Linda. The court designated $300 per month as
Assume that it is December 31, and that Jake is considering making a $1,000 charitable contribution. Jake currently is in the 39.6% tax bracket, but expects that his tax bracket will be 28% next
Kamal is starting a new business which will operate as an S corporation. This means that income earned by the corporation will be reported by shareholders even if they do not receive distributions.
Gary earned $57,000 as an executive. Gary, who is single, supported his half sister, who lives in a nursing home. Gary received the following interest: $400 on City of Los Angeles bonds, $200 on a
Matt and Sandy reside in a community property state. Matt left home in April 2017 because of disputes with his wife, Sandy. Subsequently, Matt earned $15,000. Before leaving home in April, Matt
Ken and Lynn paid $5,000 to purchase Series EE bonds in the name of their 11-year-old son. The son has no other income, and they are in the 28% tax bracket. The taxable interest this year will be
Bart and Kesha, who are in the 39.6% tax bracket, are interested in reducing their taxes. They are currently considering several alternatives. For each, indicate how much tax, if any, they would
USA Corporation hired Jesse to install a computer system for the company and paid him $8,000 for the work. USA soon realized that there were problems with the system and asked Jesse to refund the
What amount, if any, must be included in gross income by the following taxpayers?a. Ann received $2,000 from her insurance company when her automobile which cost $3,000 was stolen.b. Barry received
Amir, who is single, retired from his job this year. He received a salary of $25,000 for the portion of the year that he worked, tax-exempt interest of $3,000, and dividends from domestic
Bob is a single individual and received a salary of $27,000 before he retired in October of this year. After he retired, he received Social Security benefits of $3,000 during the year.a. What amount,
Lucia is a 69-year-old single individual who receives a taxable pension of $10,000 per year and Social Security benefits of $7,000. Lucia is considering the possibility of selling stock she has owned
Dan and Diana file a joint return. Dan earned $31,000 during the year before losing his job. Diana received Social Security benefits of $5,000.a. Determine the taxable portion of the Social Security
Beth retires when she turns 65. She begins receiving a monthly pension of $300 from her employer’s qualified retirement plan. While employed, Beth contributed $13,000 to the plan.a. Beth uses the
Tim retired during the current year at age 58. He purchased an annuity from American National Life Company for $40,000. The annuity pays Tim $500 per month for life.a. Compute Tim’s annual
Holly inherited $10,000 of City of Atlanta bonds in February. In March, she received interest of $500, and in April she sold the bonds at a $200 gain. Holly redeemed Series EE U.S. savings bonds that
Susan’s salary is $44,000 and she received dividends of $600. She received a statement from SJ partnership indicating that her share of the partnership’s income was $4,000. The partnership
Ed owns Oak Knoll Apartments. During the year, Fred, a tenant, moved to another state. Fred paid Ed $1,000 to cancel the two-year lease he had signed. Ed subsequently rented the unit to Wayne. Wayne
Stan rented an office building to Clay for $3,000 per month. On December 29, 2016, Stan received a deposit of $4,000 in addition to the first and last months’ rent. Occupancy began on January 2,
Which of the following would likely be a constructive dividend?a. An unreasonable salary paid to a shareholder.b. An unreasonable salary paid to the daughter of a shareholder.c. A sale of a
Brad owns a successful corporation that has substantial earnings and profits. During the year, the following payments were made by the corporation: a. Salary of $250,000 to Brad. Officers in
As a result of their divorce, Fred agrees to pay alimony to Tammy of $20,000 per year. The payments are to cease in the event of Fred’s or Tammy’s death or in the event of Tammy’s remarriage.
In 2013, Harry and Mary purchased Series EE bonds, and in 2017 redeemed the bonds, receiving $500 of interest and $1,500 of principal. Their income from other sources totaled $30,000. They paid
Carmen opens a retail store. Her sales during the first year are $600,000, of which $30,000 has not been collected at year-end. Her purchases are $400,000. She still owes $20,000 to her suppliers,
For each of the following items, indicate whether the individual taxpayer must include any amount in gross income.a. Employees of East-side Bookstore are given their birthdays off with pay.b.
Larry’s Art Gallery sells oil paintings, lithographs, and bronzes to collectors and corporations. Customers often come to Larry looking for special pieces. In order to meet customer needs, Larry
Lisa and her daughter Jane are equal shareholders in Lisa’s Flooring, Inc. Lisa founded the corporation and was the sole owner for over twenty years. The company is very successful and Lisa has
State Construction Company is owned equally by Andy, Bill, and Charlie. Andy works in the corporation full-time, and Bill and Charlie work elsewhere. Andy’s employment contract with State specifies
Jack and June are retired and receive $10,000 of social security benefits and taxable pensions totaling $25,000. They have been offered $20,000 for an automobile that they restored after they
Do you agree or disagree with the following statement: A taxpayer should not have to report income when debt is forgiven because the taxpayer receives nothing. Explain.
George, a wealthy investor, is uncertain whether he should invest in taxable or tax-exempt bonds. What tax and non-tax factors should he consider?
Taxpayers who deduct an expense one year but recover it the next year are required to include the recovered amount in gross income. The tax benefit rule provides relief if the original deduction did
a. Briefly explain the tax benefit rule.b. Is a taxpayer required to report the reimbursement of a medical expense by insurance as income if the reimbursement is received in the year following the
a. Are items of income not listed in Sec. 61 taxable? Explain.b. Because there is no specific exclusion for unrealized income, why is it not taxable?c. Can income be realized even when a cash method
Explain the importance of the distinction between alimony and a property settlement.
What is the significance of a constructive dividend?
On what basis did the Supreme Court in Eisner v. Macomber decide that stock dividends are non-taxable?
Explain the relationship between dividends and earnings and profits.
Corporations are taxed on the income they earn, and shareholders are taxed on the dividends they receive. What provisions in the tax law reduce this “double tax” burden?
a. Is the interest received from government obligations taxable? Explain.b. What impact does the fact that some bond interest is tax exempt have on interest rates?c. Is an investor always better off
Under what conditions is an accrual-basis taxpayer allowed to defer reporting advance payments received for services?
Under what conditions is an accrual-basis taxpayer allowed to defer reporting amounts received in the advance of the delivery of goods?
a. Explain the difference between the treatment of prepaid income under the tax law and under financial accounting.b. Why are the two treatments so different?c. What problem does this treatment
When is income considered to be earned by an accrual-basis taxpayer?
Explain three restrictions on the concept of constructive receipt.
Define the term constructive receipt. Explain its importance.

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