1. Lime Finance Company needs its customers to purchase a credit life insurance policy linked with the loans it makes. Lime is the beneficiary of the policy to extent of the remaining balance on the loan at the time of customer's death. In 2010, Lime wrote off as uncollectible a $5,000 account receivable from Wally, which added $1,500 of accrued interest. When Wally died in 2011, the life insurance policy was still in force, and Lime received $3,500. Is $3,500 of life insurance proceeds received by Lime included in its gross income?
2. Melba's employer gives a flexible spending plan for medical and dental expenses not covered by insurance. Melba contributed $1,500 during 2011, but by the end of December 2011, she still had $300 remaining in the account. Melba intended to acquire new eyeglasses, but was too busy through the holiday season. Is Melba necessary to forfeit the balance in her flexible spending account?
3. In 2011, Montgomery County practiced a budget surplus. The County is considering using a portion of the surplus to rebate part of real estate taxes paid by county real estate owners. What could be the income tax consequences to real estate owners of receiving the rebate in 2012?
4. Molly is a cash basis taxpayer. In 2011, she earned $6,500, which was less than the personal exemption and standard deduction. In January 2012, Molly's employer determined that he had miscalculated her December 2011 bonus and that she would have received an additional $1,000 of compensation in 2011. The employer paid Molly the $1,000 in 2012. If Molly had received the $1,000 in 2011, it could not have resulted in any tax liability because her gross income would still have been less than her standard deduction and personal exemption. In 2012, Molly had over $30,000 in taxable income. Does the tax benefit rule apply to Molly's situation? Describe.
5. Ed, an employee of Natural Color Company, suffered from a rare disease that was very expensive to treat. The local media ran various stories about Ed's problems, and the family received more than $10,000 in gifts from individuals to help pay the medical bills. Ed's employer provided medical insurance and hospital for its employees, but the policy did not cover Ed's illness. When it became apparent that Ed could not pay all of his medical expenses, the hospital canceled the $25,000 Ed owed at time of his death. After Ed's death, his former employer paid Ed's widow $12,000 in "her time of need." Ed's widow also collected $50,000 on a group term life insurance policy paid for by Ed's employer. What are Ed's and his wife's gross income?
6. What is taxpayer's gross income in each of the subsequent situations?
a) Darrin received a salary of $50,000 in 2011 from his company, Green Construction Associates, Inc. In July 2011, Green gave every employee $2,500 as a bonus for exceeding the monthly sales goals.
b) Megan received $10,000 from her boss to help her pay the college expenses of her daughter.
c) Blake received $15,000 from his deceased wife's company in "recognition of her 30 years of faithful service to the company."
d) Clint collected $50,000 as the beneficiary of a group term life insurance policy for which his deceased wife's employer had paid premiums.
7. Carin and Ray are partners in an accounting firm. The partners have entered into an arm's length agreement needing Ray to purchase Carin's partnership interest from Carin's estate if she dies before Ray. The price is set at 120% of the book value of Carin's partnership interest at time of her death. Ray purchased an insurance policy on Carin's life to fund this agreement. After Ray had paid $45,000 in premiums, Carin was killed in an automobile accident, and Ray collected $800,000 of life insurance proceeds. Ray used life insurance proceeds to buy Carin's partnership interest.
a) Explain what amount should Ray include in his gross income from receiving the life insurance proceeds?
b) The insurance company paid Ray $16,000 interest on the life insurance proceeds through the period Carin's estate was in administration. During this period, Ray had left the insurance proceeds with insurance company. Is this interest taxable?
c) When Ray paid $800,000 for Carin's partnership interest, priced as specified in agreement, the fair market value of Carin's interest was $1 million. How much should Ray include in his gross income from bargain purchase?
8. Leigh sued an overzealous bill collector and received the given settlement:
Damage to her automobile the collector attempted to repossess $ 3,300
Physical damage to her arm caused by the collector 15,000
Loss of income while her arm was healing 6,000
Punitive damages 80,000
a) Show what effect does the settlement have on Leigh's gross income?
b) Consider Leigh also collected $25,000 of damages for slander to her personal reputation caused by the bill collector misrepresenting facts to Leigh's employer and other creditors. Is this $25,000 included in Leigh's gross income?
9. The HON Corporation and UVW Union are negotiating contract terms. Suppose the union members are in the 28% marginal tax bracket and all benefits are given on a nondiscriminatory basis. Prepare a letter to the UVW Union members explaining the tax consequences of the options discussed below. The union's address is 905 Spruce Street, Washington, DC 20227.
a) The company could impose a $100 deductible on medical insurance benefits. Most employees incur more than $100 every year in medical expenses.
b) Employees could get an additional paid holiday with the equal annual income (the same pay but less work).
c) An employee who did not need health insurance (because employer's spouse works and receives family coverage) would be allowed to receive cash value of coverage.
10. Tonya, who lives in Virginia, inherited a $10,000 State of Virginia bond in 2011. Her marginal Federal tax rate is 35 percent, and her marginal state tax rate is 5%. The Virginia bond pays 4% interest, which is not subject to Virginia income tax. She will purchase a corporate bond of comparable risk that will yield 6% or a U.S. government bond that pays 5.6% interest. Tonya does not itemize her deductions and which investment will give the greatest after-tax yield?