Question

 

1. Jimmy has fallen on hard times recently. Last year he borrowed $250,000 and added an additional $50,000 of his own funds to purchase $300,000 of undeveloped real estate. This year the value of the real estate dropped dramatically and Jimmy’s lender agreed to reduce the loan amount to $230,000. The real estate is worth $200,000 and Jimmy has $46,000 in other assets but no other liabilities. What is the amount Jimmy must include in gross income?

2. Fred currently earns $9,000 per month. Fred has been offered the chance to transfer for three to five years to an overseas affiliate. His employer is willing to pay Fred $10,500 per month if he accepts the assignment. Assume that the maximum foreign earned income exclusion for next year is $107,600. How much U.S. gross income will Fred report if he accepts the assignment abroad on January 1 of next year and works overseas for the entire year?

3.  Hal was awarded a $16,000 scholarship to attend State Hotel School. All scholarship students must work 20 hours per week at the school residency during the term. How much is the taxpayer required to include in gross income?

4.  Terry was ill for three months and missed work during this period. During his illness Terry received $5,000 in sick pay from a disability insurance policy. Terry has disability insurance provided by his employer as a nontaxable fringe benefit. Terry’s employer paid $2,800 in disability premiums for Terry this year. What amount is included in Terry’s gross income?

5.  Janus sued Tiny Toys for personal injuries from swallowing a toy. Janus was paid $30,000 for medical costs and $260,000 for punitive damages. What amounts are included in gross income for the following taxpayers?

6.  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                                                                     $ 93,000
     Contributions to qualified pension plan                                       10,200
     Qualified health insurance premiums                                            8,400
     Year-end bonus                                                                           15,000
     Annual director’s fee                                                                   10,000
     Group-term life insurance premiums (face=$40,000)                    750
     Whole life insurance premiums (face=$100,000)                         1,420
     Disability insurance premiums (no special elections)             4,350

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

Answer 1

1.$16,000
Jimmy recognizes $16,000 of income. The loan reduction generates $20,000 of income from discharge of indebtedness, and Jimmy is insolvent before the cancellation of indebtedness (assets of $246,000 versus liabilities of $250,000) but he is solvent by $16,000 after the cancellation of debt ($246,000 assets and $230,000 of debt).

2. (12 X 10,500) - 107,600 = $18400

3. The $16,000 scholarship is included in gross income because the terms of the scholarship require Hal to perform services.

4. $5000

5.$260,000

6. $119,420

		Included in gross income
Salary payments	$	93,000
Contributions to qualified pension plan		0
Qualified health insurance premiums		0
Year-end bonus		15,000
Annual director’s fee		10,000
Group-term life insurance premiums (face = $40,000)		0
Whole life insurance premiums (face = $100,000)		1,420
Disability insurance premiums (no special elections)		0
Gross Income		$119,420

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