Chapter 5 Notes

Chapter 5 Notes - Bob Ryan DePaul University Accounting 380...

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Bob Ryan DePaul University Class Notes Accounting 380 Tax Treatment of Individuals and Property Transactions Chapter 5 – Gross Income: Exclusion 2012 Text 1. Exclusions Defined: (Why would anything ever be excluded from taxation?) a. Items of income that are specifically designated as not included in gross income. b. Exclusions are generally found in Sections 101 through 150 of IRC 2. Gifts and Inheritances: a. Gifts are not taxable to the donee if: 1. Transfer is voluntary without adequate consideration, and 2. Made out of affection, respect, admiration, charity, or donative intent. b. Inheritances are nontaxable to beneficiary c. Income earned on gifts or inheritances is taxable under normal rules Example: Father gifts corporate bond to daughter. Gift is excluded from daughter’s gross income, but interest income earned after gift date is taxable to her. d. Transfers by employers to employees do not qualify as excludible gifts: 1. may be excludible under other provisions. i.e. employee achievement awards. 2. victims of a qualified disaster who are reimbursed by their employers for living expenses, funeral expenses, and property damage can exclude the payment from gross income. e. Employee death benefits: amount paid to by employer to deceased employee’s spouse, child or others: 1. If decedent had a non forfeitable right to payments (i.e. accrued salary) amounts are taxable to employee. f. Employee death benefits may be excluded as a gift if: 1. Paid to surviving spouse or children (not to estate of employee) 2. Employer derived no benefit from payments 3. Surviving spouse and children performed no service for employer. 4. Decedent had been fully compensated for services rendered, and 1
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5. Payments have been made pursuant to a board of directors resolution under a granted company policy. A payment of $1,000 to the following: Taxable or “Excluded: to recipient: 1. My brother who has fallen on tough times. 2. My sister who prepared an interior design plan at no charge. 3. The boy next door to my parents who have for years who was paid to cut their grass and shovel their snow. He is going off to college. What if he was not paid? 4. My employee passed away and the company gave his wife the “gift” after all obligations to the party are satisfied with the approval of the board of directors. 5. My “assistant” who always did the little things that made me look good to the big shots. 6. Same as #4, except that I must agree to be part of a company ad to illustrate how wonderful the company is and it should be named a Top 100 Family Friendly Company. 3. Life Insurance Proceeds: Sec. 101: (a) General Rule: Except as other wise provided in paragraph (2) and subsection (d) and (f), gross income does not include amounts received (whether in single sum or otherwise) under a life insurance contract, if such amounts are paid by reason of the death of the insured. a.
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Chapter 5 Notes - Bob Ryan DePaul University Accounting 380...

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