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Chapter 5 Gross Income: Exclusions
Research Problems
Research Problem 1. Murray reported to the Environmental Protection Agency that his employer was illegally dumping chemicals into a river. His charges were true, and Murray’s employer was fined. In retaliation, Murray’s employer fired him and made deliberate efforts to prevent Murray from obtaining other employment. Murray sued the employer, claiming that his reputation had been damaged. Murray won his lawsuit and received an award for “damages to his personal and professional reputation and for his mental suffering.” Now he would like to know whether the award is taxable. He argues that he was awarded damages as a recovery of his human capital and that a recovery of capital is not income. Therefore, the Federal government does not have the power to tax the award.
Research Problem 2. Your client, John Butler, is an avid Houston Astros fan. Last
March at the Astros’ home opener, as a result of a random drawing of those in attendance at the game, John won 300 Shipley Do-Nut coupons. Each coupon entitled him to a cup of coffee and a free doughnut or a dozen doughnut holes.
John used some of the coupons (approximately 20), but he found that eating so many doughnuts directly conflicted with his goal of losing weight. The unused coupons expired on January 1, 2016. Thus, John was surprised when he received a Form
1099 in February 2016 that valued his prize at $900. John would like to know whether the value of the doughnut coupons should be included in income and asks you to research his question. If you conclude that their value should be included in income, John also would like to know if he can reduce his gross income by including in income only the value of the coupons that he used. He has the unused coupons as documentation that neither he nor anyone else used them.
Research Problem 3. Aubrey Brown is a decorated veteran of the Vietnam War. As a result of his exposure to Agent Orange during the war, Aubrey developed lung cancer and is unable to work. He received $12,000 of Social Security disability payments in the current year. He reasons that the payments should be excluded from his gross income because the payments are compensation for the physical injury he suffered as a result of his service in the armed forces. Is Aubrey correct? Explain.
Research Problem 4. Employers often use the Internet as a means of attracting applications from potential employees. Locate an Internet site offering employment opportunities, ideally one provided by a well-known corporation. How does the employer promote its fringe benefit and cafeteria plan packages? Compare and contrast several such sites.
Research Problem 5. One income exclusion that some states allow that the federal government does not is for lottery winnings. Does your state have an exclusion for lottery winnings? If so, how does it work? Why do you think a state might allow winnings from its own state lottery to be excluded from state income taxes?
Roger CPA Review Questions
1. In 2014 Randall suffered bodily injury while at work. On his 2014 tax return, Randall deducted related medical expenses of $10,000 and $5,000 in 2015. In 2016, Randall won a workers’ compensation claim and prevailed in an injury lawsuit, both in connection with the 2014 injury. Randall received the following in 2016 as settlement:
Punitive damages $150,000
Workers’ compensation 50,000
Reimbursement for medical expenses 25,000
Compensation for emotional distress caused by the injury 15,000
What amount of the settlement should be excluded from Randall’s 2016 gross income?
a. $ 75,000
b. $ 60,000
c. $ 90,000
d. $165,000
2. The following pertain to Joyce in 2016:
Medical insurance premiums paid by employer $4,800
Teacher of the Year Award, in the form of gift cards redeemable at local businesses 500
Jewelry box, received from employer for 25 years of service (FMV) 100
2016 holiday bonus awarded in December 2016, to be paid in
January 2017 250
Internet
Activity
Use the tax resources of the Internet to address the following questions. Do not restrict your search to the Web, but include a review of newsgroups and general reference materials, practitioner sites and resources, primary sources of the tax law, chat rooms and discussion groups, and other opportunities.
What total amount from the above may be excluded from Joyce’s 2016 gross income?
a. $5,650
b. $350
c. $5,150
d. $850
3. Pierce, a married individual, received the following in 2016:
Workers’ compensation award $25,000
W–2 income 20,000
Unemployment compensation 4,800
Damages awarded for emotional distress experienced as a result of workplace bodily injury 10,000
Considering only the above, what is Pierce’s 2016 gross income?
a. $49,800
b. $34,800
c. $30,000
d. $24,800
4. Norbert works in a beauty salon. He receives a 50% employee discount for salon services. In 2016, he used his discount to buy $1,000 of services with a fair market value of $2,000. As a result of these bargain purchases, how much should Norbert include in 2016 gross income?
a. $1,000
b. $600
c. $2,000
d. $0
5. Cole, a 48-year-old married individual, received the following in 2016:
S corporation stock dividends $5,000
Interest earned on federal Treasury bills 1,000
Interest earned on municipal bonds 2,500
Interest earned on state income tax refund 50
Interest earned on Series EE savings bonds, used to help pay for room and board for dependent in college 1,500
Common stock property dividend (FMV) 3,000
In addition, Cole spent $500 on lottery scratch-off cards in 2016. All of the cards were losers except for one, from which Cole won $1,000.
Given these facts, what total amount from the above should be included in gross income on Cole’s 2016 tax return?
a. $ 4,550
b. $ 6,550
c. $11,050
d. $11,550
6. Manish is a student who began working part-time as a restaurant waiter in October of 2016. He earned the following tips in 2016, with each month’s tips reported in a schedule submitted to the restaurant’s management by the tenth of the following month:
October $400
November 215
December 150
In addition, Manish received a scholarship in 2016 which provided $5,000 for tuition, $5,000 for room and board, $1,000 for travel to study abroad, and $1,000 for books.
What total amount from the above should be included in Manish’s 2016 gross income?
a. $5,765
b. $5,615
c. $6,615
d. $6,765