BUS-A 328 Fall 2013 – Chapter 5 classwork
Otto and Fiona are negotiating the terms of their divorce. Otto has agreed to transfer property to Fiona over the next two years, but he has reserved the right to make cash payments in lieu of property transfers. Will tax considerations play a role in Otto’s decision to transfer property or pay cash? How will Otto’s choice affect the combined gross income and income taxes paid by Otto and Fiona? Explain.
Under the proper conditions (under a written separation agreement or divorce decree that does not designate payments as something other than alimony, the spouses do not live together when the payments are made, and the payments that cease on the recipient’s death), cash payments are deductible alimony whereas property settlements have no immediate tax implications. Because alimony is included in the gross income of the recipient and is deductible by the person making the payment, the choice to make cash payments will not affect their combined gross income. However, the choice will affect combined taxes paid if Otto and Fiona do not have the same marginal tax rates on the payments. The combined taxes payable will be lower if Otto has a higher rate than Fiona (the alimony deduction reduces taxes at a high rate and the alimony income is taxed at a lower rate) than if Fiona has a higher marginal tax rate than Otto. 30.
Rolando purchases a golf cart from his employer, E-Z-Go Golf Carts, for a sizable discount. Explain the rules for determining if Rolando’s purchase results in taxable income for him. Although the general rule is that bargain purchases by an employee from an employer creates taxable compensation income to the employee, the tax law does provide a limited exclusion for employee bargain purchases. Specifically, employees may exclude a) a discount on employer-provided goods as long as the discount does not exceed the employer's gross profit percentage on all property offered to sale to non-employee customers and (b) up to 20 percent employer-provided discount on services. Discounts in excess of these amounts are taxable as compensation. Thus, if Rolando purchases the golf cart for a price that equals or exceeds his employer’s cost, the purchase will not result in any taxable income for him. 34.
Cassie works in an office and has access to several professional color printers. Her employer allows Cassie and her fellow employees to use the printers to print color postcards for the holidays. This year Cassie printed out two dozen postcards worth almost $76. Must Cassie include this amount in her gross income this year? Explain your answer.
No - the benefit is considered a nontaxable de minimis fringe benefit because it is small in amount and infrequent.
For the following independent cases, determine whether economic income is present and, if so, whether it must be included in gross income (that is, is it realized and recognized for tax purposes?). a.
Asia owns stock that is listed on the New York Exchange, and this year the stock increased in value by $20,000. b.
Ben sold stock for $10,000 and paid sales commission of $250. Ben purchased the stock several years ago for $4,000. c.
Bessie is a partner in SULU Enterprises LLC. This year SULU reported that Bessie’s share of rental income was $2,700 and her share of municipal interest was $750. a.
Economic income of $20,000 is present, but there is no realization for tax purposes. Without realization, there can be no recognition. Hence this will not be included in the gross income. b.
Economic income is present and has been realized through the sale. Return of capital limits the addition to gross income to the net gain on the sale, $5,750. The presumption in the law is that realized income is included in gross income. Thus, absent some additional facts which allow the deferral or exclusion of the income, recognition would follow realization, and the income would be taxed. c.
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