Question

Charlie was hired by Ajax this year as a corporate executive and a member of the board of directors. During the current year, Charlie received the following payments or benefits paid on his behalf.

Salary payments	$	95,500
Contributions to qualified pension plan		14,600
Qualified health insurance premiums		10,700
Year-end bonus		15,200
Annual director’s fee		14,700
Group-term life insurance premiums (face value $40,000)		765
Whole life insurance premiums (face value $100,000)		2,340
Disability insurance premiums (no special elections)		4,750

a. Charlie uses the cash method and calendar year for tax purposes. Calculate Charlie’s gross income for the current year.

Gross income

b. Suppose that Ajax agrees to pay Charlie an additional $110,000 once Charlie completes five years of employment. Will this agreement alter Charlie’s gross income this year relative to your part (a) answer?

Yes

No

c. Suppose that in exchange for his promise to remain with the firm for the next four years, Ajax paid Charlie four years of director’s fees in advance. Will this arrangement alter Charlie’s gross income this year relative to your part (a) answer?

• Yes

• No

d. Assume that in lieu of a year-end bonus Ajax transferred 1,050 shares of Bell stock to Charlie as compensation.  Further assume that the stock was listed at $59 per share and Charlie would sell the shares by year-end, at which time he expected the price to be $68 per share. What would be the value of compensation and gain on sale which would be included in Charlie’s gross income?

Value of compensation

gain on sale

    
e. Suppose that in lieu of a year-end bonus Ajax made Charlie’s house payments (a total of $30,600). What would be the value of house payments which would be included in Charlie’s gross income?

Income

Answer 1

a.)

	Includible
Salary payments	$95,500
Contributions to qualified pension plan	0
Qualified health insurance premiums	0
Year-end bonus	$15,200
Annual director’s fee	$14,700
Group-term life insurance premiums (face=$40,000)	0
Whole life insurance premiums (face=$100,000)	$2,340
Disability insurance premiums	0
Gross Income	$127,740

Note :- The pension plan contributions, health insurance premium, group-term life insurance premium, and disability insurance premiums are excluded from Gross Income.

b.)

No

The promise to make future payments is not taxable income to a cash-basis taxpayer. Income will be recognized once payment is made. This is a future payment therefore,  it not included in Gross income.

c.)

Yes

This payment will increase Charlie’s gross income because a cash-basis taxpayer is taxed on income when received regardless of whether the income is earned.

d.)

i) Value of compensation:

Value of compensation = Transferred share to Charlie × Listed stock per share

Value of compensation = 1050 shares × $59 par share = $ 61,950

ii) Gain on sale:

Charlie would report and gain on the sale that would be included in Charlie's gross income.

Gain on sale = 1050 × ($68 - $59) = $ 9,450

Gain on sale $9,450 would be included in Charlie's gross income.

e.)

Charlie would report the value of the house payments ($30,600) as income.