EXAMINATION II REVIEW QUESTIONS
For a person who is in the 35% marginal tax bracket, $1,000 of tax-exempt income and $1,538
[$1,000/(1 – .35)] of taxable income yield the same after-tax income.
$1,538 of income that is subject to taxation yields $1,000 [$1,538
(1 – .35)] after-tax income.
Wilbur owns a farm worth $100,000. He said to his nephew, “Peter, if you will take care of my farm
for the rest of my life, you can have it when I die.” Wilbur’s will conveyed the farm to Peter. At the
time of Wilbur’s death, the farm was worth $150,000. When Wilbur dies, Peter must include
$150,000 in his gross income.
The farm was received for services and therefore the nephew has gross income of $150,000.
The Red Tire Company had such a good year that the owner decided to give all of the employees a
$500 Christmas bonus. None of the employees had expected to receive the bonus. The employees
may exclude the $500 from gross income as a gift.
Section 102(c) provides that gifts made by an employer to an employee do not qualify for exclusion
Marvin was the beneficiary of a $50,000 group term life insurance policy on his wife.
employer paid all of the premiums on the policy. Marvin used the life insurance proceeds to
purchase a United States Government bond, which paid him $2,000 interest during the current year.
Marvin’s Federal gross income from the above is $2,000.
The $2,000 interest on United States Government bonds must be included in gross income. The life
insurance proceeds of $50,000 are excluded from gross income.
p. 5-6 | p. 5-7
Zack was the beneficiary of a life insurance policy on his wife. Zack had paid $20,000 in premiums
on the policy. He collected $50,000 upon the death of his wife. He used the insurance proceeds to
purchase a United States Government bond, which paid him $2,000 interest income during the year.
required to recognize any income from the above transactions.
The interest income of $2,000 is included in gross income because it is a taxable bond. The life
insurance proceeds of $50,000 are excludible under § 101(a).
p. 5-6 | p. 5-7