Chapter 18

2011 Federal Taxation (with H&R BLOCK At Home(TM) Tax Preparation Software CD-ROM)

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CHAPTER 18—EMPLOYEE COMPENSATION AND RETIREMENT PLANS TRUE/FALSE 1. Taxpayer A, a dentist, fills a cavity for Taxpayer B, an attorney, in exchange for legal services. If the value of the dental services equals the value of the legal services, neither A nor B has earned taxable income. ANS: F Both taxpayers have taxable income equal to the value of the services received. PTS: 1 REF: p. 18-3, and Reg. § 1.61-2(d) 2. As a general rule, any economic benefit granted an employee by his or her employer and intended to compensate the employee for services rendered represents gross income to the employee. ANS: T Compensation may take the form of a variety of noncash economic benefits. PTS: 1 REF: p. 18-3 3. If the value of a noncash fringe benefit is not specifically excluded from gross income by statutory law, it must be included in the recipient's gross income. ANS: T The value of a noncash fringe benefit is includible in gross income unless a specific statutory exclu- sion (e.g., § 132) applies. PTS: 1 REF: p. 18-3 and § 61(a)(1) 4. The value of an annual employer-sponsored Christmas party may be excluded from an employee's gross income because it is a de minimis fringe benefit. ANS: T The value of a company party is clearly negligible. PTS: 1 REF: p. 18-3 5. During the current year, AC Corporation required a key employee, Taxpayer X, to transfer from AC's San Diego, California office to AC's Phoenix, Arizona office. AC agreed to pay the commission charged by the real estate agent on the sale of X's home in San Diego. Because the payment represents a "working condition fringe benefit," the amount of the real estate commission paid is not included in X's gross income for the current year. ANS: F The payment of the commission is not a "working condition fringe benefit" because X could not have deducted the payment under § 162 if he had paid the commission directly. Therefore, the payment is not excludable from income under § 132(d) or any other section and is includible in X's gross income for the year. PTS: 1 REF: p. 18-3 and § 132
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6. In 2008, M corporation transferred 1000 shares of its common stock worth $90,000 to Y, an employ- ee, in connection with her performance of services for the corporation. The shares, however, are sub- ject to substantial restriction: Y will have to forfeit the shares if she leaves M corporation before 2011. Y makes a § 83(b) election to include the $90,000 value of the shares in her 2008 income. In 2011 Y is still working for M corporation and her 1,000 shares are worth $230,000. Y realizes $140,000 of tax- able income on her 2011 return. ANS: F By making the § 83(b) election in 2008, Y accelerated recognition of gross income on the restricted stock. Y reasoned that the market value of the stock would increase and that the marginal tax rate in 2008 would not be significantly lower than in 2010. Because she took the gamble of accelerated recog- nition, Y does not have additional gross income in 2010 when the risk of forfeiture is over. PTS:
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Chapter 18 - CHAPTER 18EMPLOYEE COMPENSATION AND RETIREMENT...

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