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CHAPTER 6—GROSS INCOME: INCLUSIONS AND EXCLUSIONS TRUE/FALSE 1. In the calculation of gross income, income that is nontaxable in total is generally not reported on the tax return, while income that is partially taxable and partially nontaxable is generally reported on the return. ANS: T An example is that nontaxable employee fringe benefits do not have to be recorded on the tax return; yet total dividend income, while divided into two parts—the nontaxable portion (e.g., return of capital) and the taxable portion—is reported in full and the nontaxable portion is subtracted in arriving at gross income. PTS: 1 REF: p. 6-2 2. Distributions of cash and other assets to shareholders by U.S. corporations in excess of their current and accumulated earnings and profits qualify as dividends, provided the shareholder's basis in the stock has been reduced to zero. ANS: F Distributions in excess of current and accumulated earnings and profits are considered a return of cap- ital until the shareholder's basis in the stock is reduced to zero and are thereafter capital gains. PTS: 1 REF: pp. 6-4 and 6-5 3. When a mutual fund distributes dividends, the dividends are deductible by the fund and the undis- tributed income is taxable to the fund. ANS: T Mutual funds can deduct dividends, whereas C corporations cannot. PTS: 1 REF: p. 6-6 4. Any dividend declared, with the option of receiving cash or additional common stock, qualifies for the stock dividend exclusion if stock instead of cash is selected. ANS: F . Regardless of whether the shareholder elects to receive cash or stock, he or she has dividend income as long as the choice is available. PTS: 1 REF: p. 6-7 and § 305(b)(2) 5. All interest from state and municipal bonds is excluded from gross income. ANS: F For example, interest received from industrial development and arbitrage bonds is included in the gross income of the recipient. PTS: 1 REF: p. 6-9 and §§ 103(b) and (c)
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6. If an annuitant dies before recovering the entire investment in the annuity contract, the amount of the unrecovered investment is allowed as a deduction on the taxpayer's final tax return. ANS: T The unrecovered amount is deductible. PTS: 1 REF: Example 12 and p. 6-14 7. Generally, reimbursement for employee business travel is included in gross income. ANS: T The reimbursement by the employer is included in gross income of the employee but may be offset by an employee business deduction. Note that there is an exception to this general rule when employees have properly accounted for the expense that was reimbursed to their employer. PTS: 1 REF: p. 6-19 8. The board of directors of Q Corporation votes to award the president of the company $5,000 in recog- nition of its appreciation for the president's hard work in securing a government contract. The presid- ent will pay no income tax on this bonus (award).
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