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Federal Taxation and Gross Income Exclusions

Teresa sued her former employer for age, rage and gender discrimination. She claimed $250,000 in damages for loss of income and $500,000 in punitive damages. She settled the claim for $600,000. As a result of the settlement Teresa must include in gross income:
a. 0$
b. $400,000 [$500,000/($250,000 + $500,000) x $600,000]
c. $500,000
d. $600,000
e. None of the above.

Malva collected $100,000 on her deceased husband's life insurance policy. The policy was purchased by the husband's employer under a group policy. Malva'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.
a. None of the payments must be included in Malva's gross income.
b. The first 8 payments are a return of her capital and thus Malva is not required to recognize any income from the policy until she receives the ninth payment.
c. For each $12,500 payment that Malva receives, she can exclude $10,000 ($100,000/$125,000 x $12,500) from gross income.
d. For each $12,500 that Malva receives, she can exclude from gross income $500 ($5,000/$125,000 x $12,500).
e. None of the above.

The employees of the Daily Times Newspaper are given a free newspaper each day. The annual subscripition fee for a newspaper is $270.
a. The employees can exclude the value of the newspaper from their gross income as no-no additional cost fringe benefit.
b. The employees can exclude the value of the newspaper from their gross income because the employees were not given an option of receiving cash.
c. An employee is required to include the value of the newspaper in gross income only if hte employee would otherwise have bought a newspaper.
d. The employees are not required to include the value of the newspaper in their gross income because the employer would have otherwise thrown away the newspapers.
e. None of the above.

Employers of the Family Bowling Alley allow their employees to bowl without charge after the employee's working hours and when there are adequate idle bowling lanes. Tom bowled 12 games durign teh month at no charge when the non-employee charge was $3.00 per game.
a. Tom must include $36 in gross income.
b. Tom must include in gross income the employer's marginal cost of providign the bowling lanes and equipment.
c. Tom is not required to include anything in gross income because this is a "no-additional-cost service" fringe benefit.
d. Tom is not required to include the $36 in gross income if the arrangement is for the convenience of the employer.
e. None of the above.

Solution Preview

Please see the attached file.

Federal Taxation and Gross Income Exclusions - Multiple Choice
Teresa sued her former employer for age, race and gender discrimination. She claimed $250,000 in damages for loss of income and $500,000 in punitive damages. She settled the claim for $600,000. As a result of the settlement Teresa must include in gross income:
a. 0$
b. $400,000 [$500,000/ ($250,000 + $500,000) x $600,000]
c. $500,000
d. $600,000 - (Correct) An award received for punitive damages must be treated as taxable income.
e. None of the above.

Malva collected $100,000 on her deceased husband's life insurance policy. The policy was purchased by the husband's employer under a group policy. Malva'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 ...

Solution Summary

This posting contains a formatted MS Excel spreadsheet which illustrates the impact of various financial transactions on federal taxation, as well as examples of items and transactions that can be excluded from taxation during the calculation of gross income.

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