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1. Most exclusions exist for one of two reasons. What are
those reasons? Give examples of exclusions that exist for each.
2.
a. lf a gift of propert y is made, who is taxed on income
produced by the propert y?
b. How can interfamil y gifts reduce a family’s total tax
liability?

1.
a. What role does intent play in determining whether a
transfer is a gift and therefore not subject to the income tax?
b. Are tips received by employees from customers excludable
from gross income as gifts? Explain.
2. What is the tax significance of the face amount of a life
insurance policy?

Answer the following questions relative to employer-financed
medical and health, disability, and life insurance plans.
a. Ma y employers deduct premiums paid on employee
insurance?
b. Do employees have to include such premiums in gross
income?
c. Are benefits paid ro the employee included in the
employee’s gross income?

1.
a. What are the seven major types of fringe benefits covered
by Sec. 132?
b. What tax advantage is offered relative ro such benefits?
c. Are such benefits available to employees only or may the
benefits also be offered ro spouses, dependents, and retirees? d. ls
discrimination prohibited relative to Sec. 132 benefits?
e. What is the tax impact on the employer and employees if
an employer’s plan is discriminatory?
2. What conditions must be met if an employee is to exclude
meals and lodging furnished by an employer?

a. Under what conditions is the discharge of indebtedness
not taxable?
b. If a father forgives a daughter’s debt to him, is she
required to include such amount in her gross income?

Both high-income and low-income employees are covered by
cafeteria plans. Under such plans, all employees may select from a list of
nontaxable fringe benefits or they may elect to receive cash in lieu of these
benefits.
a. Which group of employees is more likely to choose
nontaxable fringe benefits in lieu of cash? Explain.
b. Is this result desirable from a social or economic point
of view? Explain.

Luke, who retired this year, lives in a four-plex owned by
Julie. Luke’s income decreased when he retired, and he now has difficulty
paying his rent. Julie offered to reduce Luke’s rent if he would agree to mow
the lawn, wash windows, and pro vide other maintenance services. Luke accepted,
and Julie reduced the monthly rental from $650 to $300. What are the tax issues
that should be considered by Luke and Julie?

Self-Help Income. In which of the following situations would
the taxpayer realize taxable income?
a. A mechanic performs work on his own automobile. The
mechanic would have charged a customer $400 for doing the same work.
b. A mechanic repairs his neighbor’s personal automobile. In
exchange, the neighbor, an accountant, agrees to prepare the mechanic ‘s tax
return. The services performed are each worth $200.
c. A mechanic repairs his daughter’s automobile without any
charge.

Transfer of Life Insurance. Ed is the beneficiary of a
$20,000 insurance policy on the life of his mother. Because Ed needs funds, he
sells the policy to his sister, Amy, for $6,000. Amy subsequently pays premiums
of $9,000.
a. How much income must Amy report if she collects the face
value of the policy upon the death of her mother?
b. Would Amy have to report any income if her brother had
given her the policy? Assume the only payment she made was $9,000 for the
premiums.

Settlement of Life Insurance Policy. Sue is age 73 and has a
great deal of difficulty living independently as she suffers from severe
rheumatoid arthritis. She is covered by a $400,000 life insurance policy, and
her children are named as her beneficiaries. Because of her health, Sue decides
to live in a nursing home, but she does not have enough income to pay her
nursing home bills which are expected to total $42,000 per year. The insurance
company offers disabled individuals the option of either a reduced settlement
on their policies or an annuity. Given Sue’s age and health she has the option
of receiving $3,200 per month or a lump sum payment of $225,000. To date, Sue
has paid $80,000 in premiums on the policy.
a. How much income must Sue report if she chooses the lump
sum settlement?
b. How much income must Sue report if she elects the
annuity?
c. How much income would Sue have to report if her nursing
home bills amounted to only $36,000 per year?