FEDERAL INCOME TAX PACE UNIVERSITY
SCHOOL OF LAW BRIDGET CRAWFORD
2015 QUESTIONS AND CORRECT ANSWERS
A+ STUDY GUIDE
De Minimis Fringes - §132(a)(4) - CORRECT ANSWER-Gross income
shall not include any fringe benefits which qualifies as de minimis fringe.
§132(e)(1): Definition of De minimis fringe: any property or service the
value of which is (after taking into account the frequency with which similar
fringes are provided by the employers to the employer's employers) so
small so as to make accounting for it unreasonable or administratively
impracticable.
Example: Coffee from the company coffee machine = not income.
Employee Achievement Awards - §74(c) - CORRECT ANSWER-Gross
income shall not include the value of an employee achievement award (as
defined below)) received by the Taxpayer if the cost to the employer of the
employee achievement award does not exceed the amount allowable as a
deduction to the employer for the cost of the employee achievement award.
§274(j) Employment achievement defined: Must be tangible (like a plaque;
not cash) in recognition of length of service or achievement.
Policy: We want to encourage companies to do this.
,Hypo: Oprah gave audience free Pontiac, worth over $25K. Pontiac donated
cars to show. Taxable? - CORRECT ANSWER-Taxable. Not possible to say
that Oprah felt love in her heart for everyone in the audience. Also, Pontiac
gave cars for advertisement.
Life Insurance: IRC §101(a)(1): - CORRECT ANSWER-Gross income does
NOT include amounts received (whether in a single sum or otherwise)
under a life insurance contract, if such amounts are paid by reason of the
death of the insured.
Life Insurance is not income, so it is tax free (like gifts).
Issues to Watch for With Life Insurance - CORRECT ANSWER-(a)(1):
Amount must be paid by reason of the death of the insured.
(a)(2): If the life insurance contract gets sold, part of the proceeds will be
taxable and part will be tax-free.
(c): Interest on invested life insurance benefits is taxable.
(d) If the beneficiary could have taken a lump sum, but asked the insurance
company to hold on to it and dribble payments out, part of each payment is
tax-free and part is taxable.
,(g)(1): 100% tax free --> Treatment of certain accelerated death benefits
(terminally/chronically ill) are not recognized as income because treated as
if they are paid by reason of the death of the insured.
(g)(2): 100 Tax Free --> When terminally ill person sells to a viatical
settlement provider, provider can exclude amount paid under life insurance
contract from taxes.
Hypo: John buys $100,000 of life insurance at age 25 for a single premium
of $20,000. He dies at age 75. The proceeds are payable to his wife, Mary.
How are those proceeds taxed? - CORRECT ANSWER-No income under
§101(a)(1) because gross income does not include amounts received from
life insurance contracts if paid by reason of the death of the insured.
Hypo: John buys $100,000 of life insurance at age 25 for a single premium
of $20,000. At age 35, John, experiencing financial difficulties, sells the
policy to Adam for $25,000. Adam immediately changes the beneficiary on
the policy to himself. How is ADAM taxed when he receives the $100,000
insurance proceeds upon John's death. How is JOHN taxed on the sale of
the policy at age 35? - CORRECT ANSWER-John has $5K of income from
selling policy ($25K - 20K)
Adam is taxed on $75,000 ($100,000 - $25,000), not taxed on the price he
paid for the policy because of §101(a)(2).
Basis of Property Acquired by Gift: §1015(a) - CORRECT ANSWER-If the
property was acquired by gift after Dec 31, 1920, the basis shall be the same
as it would be in the hands of the donor or the last preceding owner by
whom it was acquired by gift.
, Donee takes Donor's basis.
Taft v. Bowers - CORRECT ANSWER-Facts: A buys stock for $1,000.
Gives it to B when the FMV is $2,000. B sells it for $5,000. B claims that he
has a basis of $2,000 (FMV), so that he will get taxed on a lower gain of
only $3,000.
Issue: How much gain does B Have?ear, gross income does NOT include):
(1) Amounts received under workmen's compensation for personal injuries
or sickness;
(2) any damages (other than punitive damages) received (whether by suit
agreement and whether as lump sums or periodic payments) on account of
personal physical injuries/sickness.
Are actual medical expenses (psychiatrist, doctor bills for treatment of
emotional injury) excludable from gross income? - CORRECT ANSWER-
Yes, because the money is being used to make plaintiff whole.
Gross income always includes.... - CORRECT ANSWER-Punitive Damages
Hypo: Sue owns ski resort, she received $100 on account of a broken leg.
Result? - CORRECT ANSWER-$100 is excludable from gross income
because received on account of PPHI. But if she got $300 for punitive and
$100 for PPHI, only $100 is excludable.
SCHOOL OF LAW BRIDGET CRAWFORD
2015 QUESTIONS AND CORRECT ANSWERS
A+ STUDY GUIDE
De Minimis Fringes - §132(a)(4) - CORRECT ANSWER-Gross income
shall not include any fringe benefits which qualifies as de minimis fringe.
§132(e)(1): Definition of De minimis fringe: any property or service the
value of which is (after taking into account the frequency with which similar
fringes are provided by the employers to the employer's employers) so
small so as to make accounting for it unreasonable or administratively
impracticable.
Example: Coffee from the company coffee machine = not income.
Employee Achievement Awards - §74(c) - CORRECT ANSWER-Gross
income shall not include the value of an employee achievement award (as
defined below)) received by the Taxpayer if the cost to the employer of the
employee achievement award does not exceed the amount allowable as a
deduction to the employer for the cost of the employee achievement award.
§274(j) Employment achievement defined: Must be tangible (like a plaque;
not cash) in recognition of length of service or achievement.
Policy: We want to encourage companies to do this.
,Hypo: Oprah gave audience free Pontiac, worth over $25K. Pontiac donated
cars to show. Taxable? - CORRECT ANSWER-Taxable. Not possible to say
that Oprah felt love in her heart for everyone in the audience. Also, Pontiac
gave cars for advertisement.
Life Insurance: IRC §101(a)(1): - CORRECT ANSWER-Gross income does
NOT include amounts received (whether in a single sum or otherwise)
under a life insurance contract, if such amounts are paid by reason of the
death of the insured.
Life Insurance is not income, so it is tax free (like gifts).
Issues to Watch for With Life Insurance - CORRECT ANSWER-(a)(1):
Amount must be paid by reason of the death of the insured.
(a)(2): If the life insurance contract gets sold, part of the proceeds will be
taxable and part will be tax-free.
(c): Interest on invested life insurance benefits is taxable.
(d) If the beneficiary could have taken a lump sum, but asked the insurance
company to hold on to it and dribble payments out, part of each payment is
tax-free and part is taxable.
,(g)(1): 100% tax free --> Treatment of certain accelerated death benefits
(terminally/chronically ill) are not recognized as income because treated as
if they are paid by reason of the death of the insured.
(g)(2): 100 Tax Free --> When terminally ill person sells to a viatical
settlement provider, provider can exclude amount paid under life insurance
contract from taxes.
Hypo: John buys $100,000 of life insurance at age 25 for a single premium
of $20,000. He dies at age 75. The proceeds are payable to his wife, Mary.
How are those proceeds taxed? - CORRECT ANSWER-No income under
§101(a)(1) because gross income does not include amounts received from
life insurance contracts if paid by reason of the death of the insured.
Hypo: John buys $100,000 of life insurance at age 25 for a single premium
of $20,000. At age 35, John, experiencing financial difficulties, sells the
policy to Adam for $25,000. Adam immediately changes the beneficiary on
the policy to himself. How is ADAM taxed when he receives the $100,000
insurance proceeds upon John's death. How is JOHN taxed on the sale of
the policy at age 35? - CORRECT ANSWER-John has $5K of income from
selling policy ($25K - 20K)
Adam is taxed on $75,000 ($100,000 - $25,000), not taxed on the price he
paid for the policy because of §101(a)(2).
Basis of Property Acquired by Gift: §1015(a) - CORRECT ANSWER-If the
property was acquired by gift after Dec 31, 1920, the basis shall be the same
as it would be in the hands of the donor or the last preceding owner by
whom it was acquired by gift.
, Donee takes Donor's basis.
Taft v. Bowers - CORRECT ANSWER-Facts: A buys stock for $1,000.
Gives it to B when the FMV is $2,000. B sells it for $5,000. B claims that he
has a basis of $2,000 (FMV), so that he will get taxed on a lower gain of
only $3,000.
Issue: How much gain does B Have?ear, gross income does NOT include):
(1) Amounts received under workmen's compensation for personal injuries
or sickness;
(2) any damages (other than punitive damages) received (whether by suit
agreement and whether as lump sums or periodic payments) on account of
personal physical injuries/sickness.
Are actual medical expenses (psychiatrist, doctor bills for treatment of
emotional injury) excludable from gross income? - CORRECT ANSWER-
Yes, because the money is being used to make plaintiff whole.
Gross income always includes.... - CORRECT ANSWER-Punitive Damages
Hypo: Sue owns ski resort, she received $100 on account of a broken leg.
Result? - CORRECT ANSWER-$100 is excludable from gross income
because received on account of PPHI. But if she got $300 for punitive and
$100 for PPHI, only $100 is excludable.
