Question & Answer

Larry purchased an annuity from an insurance company that promises to pay him $1,500 per month for the rest of his life.  Larry paid $170,820 for the annuity.  Larry is in good health, and he is 72 years old.  Larry received the first annuity payment of $1,500 this month.  Use the expected number of payments in Exhibit 5-1 for this problem.

a.       How much of the first payment should Larry include in gross income?

b.       If Larry lives more than 15 years after purchasing the annuity, how much of each additional payment should he include in gross income?

c.       What are the tax consequences if Larry dies just after he receives the 100^th payment?

Anne purchased an annuity from an insurance company that promised to pay her $20,000 per year for the next 10years.  Anne paid $145,000 for the annuity, and in exchange she will receive $200,000 over the term of the annuity. 

          a.  How much of the first $20,000 payment should Anne include in gross income?

b.  How much income will Anne recognize over the term of the annuity?

{Research} Ralph owns a building that he is trying to lease.  Ralph is a calendar-year, cash method taxpayer and is trying to evaluate the tax consequences of three different lease arrangements.  Under lease 1, the building rents for $500 per month, payable on the first of the next month, and the tenant must make a $500 security deposit that is refunded at the end of the lease.  Under lease 2, the building rents for $5,500 per year, payable at the time the lease is signed, but no security deposit is required.  Under lease 3, the building rents for $500 per month, payable at the beginning of each month, and the tenant must pay a security deposit of $1,000 that is to be applied toward the rent for the last two months of the lease. 

a.       What amounts are included in Ralph’s gross income this year if a tenant signs lease 1 on December 1 and makes timely payments under that lease? 

b.       What amounts are included in Ralph’s gross income this year if the tenant signs lease 2 on December 31 and makes timely payments under that lease?  

c.       What amounts are included in Ralph’s gross income this year if the tenant signs lease 3 on November 30 and makes timely payments under that lease? 

a.       Elmer should include in gross income the $1,200 gross pay he received for the three days he was not required to work but still received compensation.

b.       Amax employees should include the value of the furniture ($250) in gross income.

Clyde is a cash method taxpayer who reports on a calendar-year basis.  This year Paylate Corporation has decided to pay Clyde a year-end bonus of $1,000.  Determine the amount Clyde should include in his gross income this year under the following circumstances:

a.       Paylate Corporation wrote the check and put it in his office mail slot on December 30 of this year, but Clyde did not bother to stop by the office to pick it up until after year-end.

b.       Paylate Corporation mistakenly wrote the check for $100.  Clyde received the remaining $900 after year-end.

c.       Paylate Corporation mailed the check to Clyde before the end of the year, (and it was delivered before year-end). Although Clyde expected the bonus payment, he decided not to collect his mail until after year-end.

d.       Clyde picked up the check in December, but the check could not be cashed immediately because it was postdated January 10.

L. A. and Paula file as married taxpayers.  In August of this year they received a $5,200 refund of state income taxes that they paid last year.  How much of the refund, if any, must L. A. and Paula include in gross income under the following independent scenarios?  Assume the standard deduction last year was $12,600.

a.       Last year L. A. and Paula had itemized deductions of $10,200, and they chose to claim the standard deduction. 

b.       Last year L. A. and Paula claimed itemized deductions of $23,200.  Their itemized deductions included state income taxes paid of $7,500.

c.       Last year L. A. and Paula claimed itemized deductions of $15,400.  Their itemized deductions included state income taxes paid of $10,500.

Answer:

Louis files as a single taxpayer.  In April of this year he received a $900 refund of state income taxes that he paid last year.  How much of the refund, if any, must Louis include in gross income under the following independent scenarios?  Assume the standard deduction last year was $6,300.

a.       Last year Louis claimed itemized deductions of $6,550.  Louis’s itemized deductions included state income taxes paid of $1,750.

b.       Last year Louis had itemized deductions of $4,800 and he chose to claim the standard deduction.  Louis’s itemized deductions included state income taxes paid of $1,750.

c.       Last year Louis claimed itemized deductions of $7,740.  Louis’s itemized deductions included state income taxes paid of $2,750.

{Research} Last year Acme paid Ralph $15,000 to install a new air-conditioning unit at its headquarters building.  The air conditioner did not function properly, and this year Acme requested that Ralph return the payment.  Because Ralph could not repair one critical part in the unit, he refunded the cost of the repair, $5,000, to Acme.

a.       Is Ralph required to include the $15,000 payment he received last year in his gross income from last year?

b.       What are the tax implications of the repayment if Ralph was in the 35 percent tax bracket when he received the $15,000 payment from Acme, but was in the 28 percent tax bracket when he refunded $5,000 to Acme?

c.       How would you answer part b. if Ralph refunded $2,500 to Acme and not $5,000?

In an exchange of services, income has been received in the amount of the value of services received (gross income includes the receipt of services as well as money and goods).  Hence, Jim is taxed on the $275 of car repair services. 

b.       The issue is whether the \"credit\" represents a valuable right.  Because the right could be redeemed for property worth $150, then under constructive receipt Jim should recognize income of $150. 

c.       If a barter credit can only be redeemed for future services, then the taxpayer could argue that no realization has yet occurred.  But, it would be included in his gross income next year when the credit becomes a valuable right.

In an exchange of services, income has been received in the amount of the value of services received (gross income includes the receipt of services as well as money and goods).  Hence, Jim is taxed on the $275 of car repair services. 

b.       The issue is whether the \"credit\" represents a valuable right.  Because the right could be redeemed for property worth $150, then under constructive receipt Jim should recognize income of $150. 

c.       If a barter credit can only be redeemed for future services, then the taxpayer could argue that no realization has yet occurred.  But, it would be included in his gross income next year when the credit becomes a valuable right.

Hermione must include the value of the nugget in her gross income.  The value of the nugget is realized income because gold is marketable in a nugget form and easily valued.  The authorities (Reg § 1.61-14(a).; Rev. Rul. 61, 1953-1 C.B. 17) refer to the finder of a “treasure trove” and hold that there is gross income (to the extent of the ascertainable value in U.S. currency) in the tax year in which the property is reduced to the taxpayer’s undisputed possession. 

{Research} For the following independent cases, determine whether economic income is present and, if so, whether it must be included in gross income.  Identify a tax authority that supports your analysis. Hermione discovered a gold nugget (valued at $10,000) on her land. 

b.       Jay embezzled $20,000 from his employer and has not yet been apprehended.

c.       Keisha found $1,000 inside an old dresser.  She purchased the dresser at a discount furniture store at the end of last year and found the money after the beginning of the new year.  No one has claimed the money.

{Research} XYZ declared a $1 per share dividend on August 15.  The date of record for the dividend was September 1 (the stock began selling ex-dividend on September 2).  The dividend was paid on September 10.  Ellis is a cash-method taxpayer.  Determine if he must include the dividends in gross income under the following independent circumstances

[Research} Devon owns 1,000 shares of stock worth $10,000.  This year he received 200 additional shares of this stock from a stock dividend.  His 1,200 shares are now worth $12,500.  Must Devon include the dividend paid in stock in income?

For the following independent cases, determine whether economic income is present and, if so, whether it must be included in gross income (that is, is it realized and recognized for tax purposes?). 

Tom was just hired by Acme Corporation and has decided to purchase disability insurance.  This insurance promises to pay him weekly benefits to replace his salary should he be unable to work because of disability.  Disability insurance is also available through Acme as part of its compensation plan.  Acme pays these premiums as a nontaxable fringe benefit, but the plan promises to pay about 10 percent less in benefits.  If Tom elects to have Acme pay the premiums, then his compensation will be reduced by an equivalent amount.  Should tax considerations play a role in Tom’s choice to buy disability insurance through Acme or on his own?  Explain. 

Jim was injured in an accident and his surgeon botched the medical procedure.  Jim recovered $5,000 from the doctors for pain and suffering and $2,000 for emotional distress.  Determine the taxability of these payments and briefly explain to Jim the apparent rationale for including or excluding these payments from gross income.

How are state-sponsored 529 educational savings plans taxed if investment returns are used for educational purposes? Are the returns taxed differently if they are not ultimately used to pay for education costs?

Describe the kinds of insurance premiums an employer can pay on behalf of an employee without triggering includible compensation to the employee.

Explain why taxpayers are allowed to exclude gifts and inheritances from gross income even though these payments are realized and clearly provide taxpayers with the wherewithal to pay

Explain how state and local governments benefit from the provisions that allow taxpayers to exclude interest on state and local bonds from their gross income.

The Fed intervened heavily during the 2008 credit crisis. Write a short essay explaining whether you believe the Fed’s intervention improved conditions in financial markets or made conditions worse. 

Explain how the Fed’s “quantitative easing” strategies differed from its traditional strategy of buying short-term Treasury securities. (LO3)

What was TALF, and why did the Fed create it? (LO3)

Why did the Fed purchase long-term Treasury securities in 2010, and how did this strategy differ from the Fed’s usual operations? (LO2, LO3)

Why and how did the Fed intervene in the commercial paper market during the 2008 credit crisis? (LO3)