1. Fred specified in his will that his nephew John should serve as executor of Fred’s estate. John received $10,000 for serving as executor. Can John exclude the $10,000 from his gross income? Explain.
2. LO.2 Leonard’s home was damaged by a fire. He also had to be absent from work for several days to make his home habitable. Leonard’s employer paid Leonard his regular salary, $2,500, while he was absent from work. In Leonard’s pay envelope was the following note from the employer: To help you in your time of need. Leonard’s fellow employees also took up a collection and gave him $900. Leonard spent over $4,000 repairing the fire damage.
Based on the preceding information, how much is Leonard required to include in his gross income?
3. LO.1, 2 Twenty college fraternity brothers each placed $2,500 in a mutual fund account.
They agreed that upon the death of a fraternity brother, his beneficiary would receive $20,000 that was to be paid from the mutual fund account. The beneficiary of the last remaining fraternity brother would receive the balance remaining in the account. The mutual fund did very well. Earl was the last to die, at age 92, and his beneficiary received $250,000. Can the $250,000 be excluded from the beneficiary’s gross income? Why or why not?
4. LO.2 Janice was a cash basis taxpayer. At the time of her death, she was owed $100,000 in accrued salary. Upon Janice’s death, the employer was required to pay Wayne, Janice’s brother, her accrued salary. Janice was a key employee, and her employer had purchased a $1,000,000 insurance policy on her life, with the proceeds payable to the employer. Her employer had paid $300,000 in premiums when it collected the face amount of the policy.
What amount must be included in the gross income of Janice, Wayne, and Janice’s employer?
5. LO.2 Dolly is a college student who works as a part-time server in a restaurant. Her usual tip is 20% of the price of the meal. A customer ordered a piece of pie and said that he would appreciate prompt service. Dolly abided with the customer’s request. The customer’s bill was $8, but the customer left a $100 bill on the table and did not ask for a receipt.
Dolly gave the cashier $8 and pocketed the $100 bill. Dolly concludes that the customer thought that he had left a $10 bill, although the customer did not return to correct the apparent mistake. The customer had commented about how much he appreciated Dolly’s prompt service. Dolly thinks that a $2 tip would be sufficient and that the other $98 is like “found money.” How much should Dolly include in her gross income?
6. LO.2 Carey is a waiter at a restaurant that pays a small hourly amount plus tips. Customers are not required to tip the waiter. Carey is especially attentive and friendly, and her tips average 25% of the restaurant charges. Is Carey required to include any of her tips in gross income when the customer has no legal obligation to make the payment?
Explain the basis for your conclusion.