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24211_ch18_final_p001-014 - 18 Employee Compensation and...

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Employee Compensation and Retirement Plans Solutions to Problem Materials D I S C U S S I O N Q U E S T I O N S 18-1 Yes. The dentist must recognize gross compensation income in an amount equal to the fair market value of the service received by the dentist (i.e., the preparation of his tax return). Compensation payments may be made in a medium other than cash. (See p. 18-2 and Reg. § 1.61-2(d)(1).) 18-2 A fringe benefit may be defined as an indirect and often noncash compensatory payment to an individual that in some manner improves the individual s economic position. Fringe benefits are included in gross income unless specifically excludable by statute. (See pp. 18-2 and 18-3 and § 132.) 18-3 The value of a Christmas turkey or ham is excludable from gross income as a de minimis fringe benefit under § 132(e) because the value is so small as to make accounting for it administratively impractical. However, a Christmas bonus of $500 cash is not excludable under § 132, and is therefore includible in gross income under § 61. (See p. 18-3 and Chapter 6.) 18-4 A cafeteria plan is a package of employee fringe benefits, both taxable and nontaxable, from which employees may choose the benefit or benefits most attractive to them. [See p. 18-3 and § 125(c).] 18-5 The receipt of shares of stock or stock options by a corporate employee transforms the employee into an owner of the business and, theoretically, strengthens that employee s commitment to the corporation and its future growth. (See p. 18-34.) 18-6 The taxpayer must consider the immediate tax effect of the current gross income recognition required by the § 83(b) election. He also must assess the likelihood that he will have to forfeit the restricted property in the future, in which case the election would be a costly mistake. Finally, the taxpayer must predict the increase in the value of the restricted property during the restriction period; the greater the predicted increase, the greater the value of the § 83(b) election. (See pp. 18-4 through 18-6.) 18-7 Upon exercise of an ISO, the differential between the exercise price and the market price (the bargain element) escapes taxation as ordinary compensation income, and is taxed as capital gain only upon future sale of the stock. [See Example 30, p. 18-35 and § 421(a).] 18-8 An employee would normally prefer a funded retirement plan because of the security offered by the funds themselves. The employer, however, would prefer not to have to tie up cash or other business assets to secure an employee retirement plan. (See pp. 18-33 and 18-34.) 18 18-1
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18-9 A cash basis taxpayer recognizes income upon receipt of payment, regardless of when the income was earned or the perfected right of the taxpayer to payment. Thus, if a cash basis taxpayer has earned the right to receive compensation at some future date, but has no current right to payment, he is not in constructive receipt of the deferred compensation. [See pp. 18-31 through 18-33 and Reg. § 1.451-2(a).]
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