George is a U.S. citizen who is employed by Hawk Enterprises, a global company. Beginning on June 1, 2013, George began working in London. …..


George is a U.S. citizen who is employed by Hawk Enterprises, a global company.
Beginning on June 1, 2013, George began working in London. He worked there until
January 31, 2014, when he transferred to Paris. He worked in Paris the remainder of 2014. His salary for the first five months of 2013 was $100,000, and it was earned in the
United States. His salary for the remainder of 2013 was $175,000, and it was earned in
London. George’s 2014 salary from Hawk was $300,000, with part being earned in London and part being earned in Paris. What is George’s gross income in 2013 and 2014? (Assume that the 2014 indexed amount is the same as the 2013 indexed amount.)

50. LO.2, 3 Determine Hazel’s gross income from the following receipts for the year:
Gain on sale of Augusta County bonds $800
Interest on U.S. government savings bonds 400
Interest on state income tax refund 200
Interest on Augusta County bonds 700
Patronage dividend from Potato Growers Cooperative 350
The patronage dividend was received in March of the current year for amounts paid for her garden and lawn supplies.

51. LO.2 In January 2013, Ezra purchased 2,000 shares of Gold Utility Mutual Fund for $20,000. In June, Ezra received an additional 100 shares as a dividend, in lieu of receiving $1,000 in cash dividends. In December, the company declared a two-for-one stock split. Ezra received an additional 2,100 shares, but there was no option to receive cash.
At the time of the stock dividend in December and at the end of the year, the fund shares were trading for $11 per share. Also, at the end of the year, the fund offered to buy outstanding shares for $9. Ezra did not sell any shares during the year.
a. What is Ezra’s gross income from the 100 shares received in June?
b. What is Ezra’s gross income from the receipt of the 2,100 shares as a two-for-one stock split in December?
c. Should Ezra be required to recognize gross income in 2013 even though the fair market value of his investment at the end of the year was less than the fair market value at the beginning of the year? Explain.

52. LO.2 Tonya, who lives in Virginia, inherited a $100,000 State of Virginia bond in 2013.
Her marginal Federal tax rate is 35%, and her marginal state tax rate is 5%. The
Virginia bond pays 3.3% interest, which is not subject to Virginia income tax. She can purchase a corporate bond of comparable risk that will yield 5.2% or a U.S. government bond that pays 4.6% interest. Which investment will provide the greatest after-tax yield?

53. LO.2 Lynn Swartz’s husband died three years ago. Her parents have an income of over $200,000 a year and want to ensure that funds will be available for the education of Lynn’s 8-year-old son Eric. Lynn is currently earning $45,000 a year. Lynn’s parents have suggested that they start a savings account for Eric. They have calculated that if they invest $4,000 a year for the next 8 years, at the end of 10 years, sufficient funds will be available for Eric’s college expenses. Lynn realizes that the tax treatment of the investments could significantly affect the amount of funds available for Eric’s education.
She asked you to write a letter to her advising about options available to her parents and to her for Eric’s college education. Lynn’s address is 100 Myrtle Cove,
Fairfield, CT 06824.

54. LO.2 Starting in 2003, Chuck and Luane have been purchasing Series EE bonds in their name to use for the higher education of their daughter Susie, who currently is age

18. During the year, they cash in $12,000 of the bonds to use for freshman year tuition, fees, and room and board. Of this amount, $5,000 represents interest. Of the $12,000, $8,000 is used for tuition and fees, and $4,000 is used for room and board. Chuck and
Luane’s AGI, before the educational savings bond exclusion, is $114,000.
a. Determine the tax consequences for Chuck and Luane, who will file a joint return, and for Susie.
b. Assume that Chuck and Luane purchased the bonds in Susie’s name. Determine the tax consequences for Chuck and Luane and for Susie.
c. How would your answer to (a) change if Chuck and Luane filed separate returns?

55. LO.2 Albert established a qualified tuition program for each of his twins, Kim and Jim.
He started each fund with $20,000 when the children were 5 years old. Albert made no further contributions to his children’s plans. Thirteen years later, both children have graduated from high school. Kim’s fund has accumulated to $45,000, while Jim’s has accumulated to $42,000. Kim decides to attend a state university, which will cost $60,000 for four years (tuition, fees, room and board, and books). Jim decides to go to work instead of going to college. During the current year, $7,500 is used from Kim’s plan to pay the cost of her first semester in college. Because Jim is not going to go to college now or in the future, Albert withdraws the $42,000 plan balance and gives it to Jim to start his new life after high school.
a. During the period since the plans were established, should Albert or the twins have been including the annual plan earnings in gross income? Explain.
b. What are the tax consequences to Kim and Albert of the $7,500 being used for the first semester’s higher education costs?
c. Because of her participation in the qualified tuition program, Kim received a 10% reduction in tuition charges, so less than $7,500 was withdrawn from her account.
Is either Albert or Kim required to include the value of this discount in gross income? Explain.
d. What are the tax consequences to Albert and Jim of Jim’s qualified tuition program being closed?
Decision Making

56. LO.3 How does the tax benefit rule apply in the following cases?
a. In 2011, the Orange Furniture Store, an accrual method taxpayer, sold furniture on credit for $1,000 to Sammy. The cost of the furniture was $600. In 2012, Orange took a bad debt deduction for the $1,000. In 2013, Sammy inherited some money and paid Orange the $1,000 he owed. Orange was in the 35% marginal tax bracket in 2011, the 15% marginal tax bracket in 2012, and the 35% marginal tax bracket in 2013.
b. In 2012, Marvin, a cash basis taxpayer, took a $2,000 itemized deduction for state income taxes paid. This increased his itemized deductions to a total that was $800 more than the standard deduction. In 2013, Marvin received a $1,600 refund when he filed his 2012 state income tax return. Marvin was in the 15% marginal tax bracket in 2012, but was in the 35% marginal tax bracket in 2013.
c. In 2012, Barb, a cash basis taxpayer, was in an accident and incurred $8,000 in medical expenses, which she claimed as an itemized deduction for medical expenses.
Because of the 10%-of-AGI reduction, the expense reduced her taxable income by only $3,000. In 2013, Barb successfully sued the person who caused the physical injury and collected $8,000 to reimburse her for the cost of her medical expenses.
Barb was in the 15% marginal tax bracket in both 2012 and 2013.

57. LO.4, 5 Fran, who is in the 35% tax bracket, recently collected $100,000 on a life insurance policy she carried on her father. She currently owes $120,000 on her personal residence and $120,000 on business property. National Bank holds the mortgage on both pieces of property and has agreed to accept $100,000 in complete satisfaction of either mortgage. The interest rate on the mortgages is 8%, and both mortgages are payable over 10 years. What would be the tax consequences of each of the following alternatives assuming that Fran currently deducts the mortgage interest on her tax return?
a. Retire the mortgage on the residence.
b. Retire the mortgage on the business property.
Which alternative should Fran select?

58. LO.4 Vic, who was experiencing financial difficulties, was able to adjust his debts as follows:
a. Vic is an attorney. Vic owed his uncle $25,000. The uncle told Vic that if he serves as the executor of the uncle’s estate, Vic’s debt will be canceled in the uncle’s will.
b. Vic borrowed $80,000 from First Bank. The debt was secured by land that Vic purchased for $100,000. Vic was unable to pay, and the bank foreclosed when the liability was $80,000, which was also the fair market value of the property.
c. The Land Company, which had sold land to Vic for $80,000, reduced the mortgage on the land by $12,000.
Determine the tax consequences to Vic.

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