Federal Income Taxation

Federal Income Taxation - FEDERAL INCOME TAXATION Problems...

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FEDERAL INCOME TAXATION Problems Compensation for Services 1. A law student is considering a job offer from a law firm in a small town. The hiring partner tells her: “With our client base, we can only afford to pay first-year associates $50,000. But to be more competitive with big-city law firms, here’s what we’ll do: Instead of paying you the $50,000, we’ll directly pay off $50,000 of your student loans. Since you’ll never receive any money, you won’t have to report any income to the IRS, and you will save a lot of taxes.” Does this work? ANSWER : $50,000 included in law student’s gross income under IRC § 61(a)(1), as, satisfaction of a taxpayer’s obligation by another is an economic benefit ( Old Colony ). Fringe Benefits 2. A commercial airline permits its employees and their families to fly for free on any scheduled flight on a standby ( i.e. , space-available) basis. Scott, a flight attendant, flies free to Los Angeles. Does Scott have taxable income as a result? ANSWER : Excluded as a no-additional-cost service under § 132(b) – flight is ordinary business of airline and no additional cost because flying standby, which means that employee not bumping any paying customers. 3. The airline also permits employees and their families to purchase reserved seat tickets at a 10 percent discount. Scott buys such a ticket. Does Scott have taxable income as a result? ANSWER : Excluded as a qualified employee discount under § 132(c) – less than a 20% discount and flight is in line of business of an airline. 4. Scott’s wife purchases such a ticket. Does Scott (or his wife) have taxable income as a result? ANSWER : Excluded as a qualified employee discount under § 132(c) because an employee’s wife treated as employee under § 13(h) for purposes of § 132(c) discounts. 5. Scott’s father purchases such a ticket. Does Scott (or his father) have taxable income as a result? ANSWER : Excluded as a qualified employee discount under § 132(c) because an employee’s parent treated as employee under § 13(h) for purposes of § 132(c) discounts.
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6. Suppose the airline allows only top executives to purchase reserved seat tickets at a 10 percent discount. Does an executive who purchases such a ticket have taxable income as a result? ANSWER : Included in gross income because highly compensated employees may only exclude an employee discount under § 132(c) if the discount is given to most employees. 7. You are an associate in a law firm. The firm follows a policy of reimbursing its associates for the cost of a restaurant meal and taxi fare home on any day on which the associate works past 6:00 p.m. Do you have taxable income as a result of your receipt of the supper money and cab fare reimbursement? ANSWER
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Federal Income Taxation - FEDERAL INCOME TAXATION Problems...

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