456 MODULE 33 TAXES: INDIVIDUAL
over his investment in the policy [$200,000 - ($25,000 +
$40,000) = $135,000.
3. (b) The requirement is to determine the amount of
life insurance payments to be included in a widow's gross
income. Life insurance proceeds paid by reason of death are
excluded from income if paid in a lump sum or in install-
ments. If the payments are received in installments, the
principal amount of the policy divided by the number of
annual payments is excluded each year. Therefore, $1,200
of the $5,200 insurance payment is included in Penelope's
gross income.
Annual installment $ 5,200
Principal amount ($100,000.;. 25)
-4.000
Gross income $l.2QQ
I.B.S. Employee Benefits
4. (c) The requirement is to determine the correct
statement regarding a "cafeteria plan" maintained by an
employer. Cafeteria plans are employer-sponsored benefit
packages that offer employees a choice between taking cash
and receiving qualified benefits (e.g., accident and health
insurance, group-term life insurance, coverage under a de-
pendent care or group legal services program). Thus, em-
ployees "may select their own menu of benefits." If an em-
ployee chooses qualified benefits, they are excluded from
the employee's gross income to the extent allowed by law.
If an employee chooses cash, it is includible in the em-
ployee's gross income as compensation. Answer (a) is in-
correct because participation is restricted to employees only.
Answer (b) is incorrect because there is no minimum service
requirement that must be met before an employee can par-
ticipate in a plan. Answer (d) is incorrect because deferred
compensation plans other than 401(k) plans are not included
in the definition of a cafeteria plan.
5. (a) The requirement is to determine the amount of
group-term life insurance proceeds that must be included in
gross income by Autrey's widow. Life insurance proceeds
paid by reason of death are generally excluded from gross
income. Note that although only the cost of the first
$50,000 of group-term insurance coverage can be excluded
from gross income during the employee's life, the entire
amount of insurance proceeds paid by reason of death will
be excluded from the beneficiary'S income.
6. (d) The requirement is to determine the amount of
employee death payments to be included in gross income by
the widow and the son. The $5,000 employee death benefit
exclusion was repealed for decedents dying after August 20,
1996.
7. (b) The requirement is to determine the maximum
amount of tax-free group-term life insurance coverage that
can be provided to an employee by an employer. The cost
of the first $50,000 of group-term life insurance coverage
provided by an employer will be excluded from an em-
ployee's income.
8. (d) The requirement is to determine the amount to
be included in Hal's gross income for the current year. All
three amounts that Hal received as a result of his injury are
. .excluded from gross income. Benefits received as workers'
compensation and compensation for damages for physical
injuries are always excluded from gross income. Amounts
received from an employer's accident and health plan as
reimbursement for medical expenses are excluded so long as
the medical expenses are not deducted as itemized deduc-
tions.
9. (a) James Martin's gross income consists of
Salary $50,000
Bonus 10 000
$6Q.OOO
Medical insurance premiums paid by an employer are ex-
cluded from an employee's gross income. Additionally,
qualified moving expense reimbursements are an employee
fringe benefit and can be excluded from gross income. This
means that an employee can exclude an amount paid by an
employer as payment for (or reimbursement of) expenses
that would be deductible as moving expenses if directly paid
or incurred by the employee.
I.B.8. Gifts and Inheritances
10. (d) The requirement is to determine how much in-
come Hall should include in his 2009 tax return for the in-
heritance of stock which he received from his father's estate.
Since the definition of gross income excludes property re-
ceived as a gift, bequest, devise, or inheritance, Hall recog-
nizes no income upon receipt of the stock. Since the execu-
tor of his father's estate elected the alternate valuation date'
(August 1), and the stock was distributed to Hall before that
date (June 1), Hall's basis for the stock would be its $4,500
FMV on June 1. Since Hall also sold the stock on June 1 for
$4,500, Hall would have no gain or loss resulting from the
sale.
I.B.9. Stock Dividends
11. (b) The requirement is to determine the amount of
dividend income that should be reported by Gail Judd. The
$100 dividend on Gail's life insurance policy is treated as a
reduction of the cost of insurance (because total dividends
have not yet exceeded accumulated premiums paid) and is
excluded from gross income. Thus, Gail will report the
$300 dividend on common stock and the $500 dividend on
preferred stock, a total of $800 as divictknd income for 2009.
12. (b) The requirement is to determine the amount of
dividend income to be reported on Amy's 2009 return.
Dividends are included in income at earlier of actual or con-
structive receipt. When corporate dividends are paid by
mail, they are included in income for the year in which re-
ceived. Thus, the $875 dividend received 112/09 is included
in income for 2009. The $500 dividend on a life insurance
policy from a mutual insurance company is treated as a re-
duction of the cost of insurance and is excluded from gross
income.
13. (c) The requirement is to determine the amount of
dividends to be reported by the Mitchells on a joint return.
The amount of dividends would be ($400 + $50 + $300) =
$750. The $200 dividend on the life insurance policy is not
gross income, but is considered a reduction of the cost of the
policy. .
14. (d) The requirement is to determine Karen's basis in
the IO shares of preferred stock received as a stock dividend.
Generally, stock dividends are nontaxable, and a taxpayer's
basis for original stock is allocated to the dividend stock in
proportion to fair market values. However, any stock that is
distributed on preferred stock results in a taxable stock divi-
dend. The amount to be included in the shareholder's in-