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Sally was an all-state soccer player during her junior and senior years in high school. She accepted an athletic scholarship from State University. The scholarship provided the following:
Tuition and fees $15,000
Housing and meals 6,000
Books and supplies 1,500
Transportation 1,200
a. Determine the effect of the scholarship on Sally’s gross income.
b. Sally’s brother, Willy, was not a gifted athlete, but he received $8,000 from their father’s employer as a scholarship during the year. The employer grants the children of all executives a scholarship equal to one-half of annual tuition, fees, books, and supplies. Willy also received a $6,000 scholarship (to be used for tuition) as the winner of an essay contest related to bioengineering, his intended field of study. Determine the effect of the scholarships on Willy’s and his father’s gross income.
35. LO.2 Adrian was awarded an academic scholarship to State University for the 2013–2014 academic year. He received $6,500 in August and $7,200 in December 2013. Adrian had enough personal savings to pay all expenses as they came due. Adrian’s expenditures for the relevant period were as follows:
Tuition, August 2013 $3,700
Tuition, January 2014 3,750
Room and board
August–December 2013 2,800
January–May 2014 2,500
Books and educational supplies
August–December 2013 1,000
January–May 2014 1,200
Determine the effect on Adrian’s gross income for 2013 and 2014.
36. LO.2 Leigh sued an overzealous bill collector and received the following settlement:
Damage to her automobile that the collector attempted to repossess $ 3,300
Physical damage to her arm caused by the collector 15,000
Loss of income while her arm was healing 6,000
Punitive damages 80,000
a. What effect does the settlement have on Leigh’s gross income?
b. Assume that Leigh also collected $25,000 of damages for slander to her personal reputation caused by the bill collector misrepresenting the facts to Leigh’s employer and other creditors. Is this $25,000 included in Leigh’s gross income? Explain.
37. LO.2 Determine the effect on gross income in each of the following cases:
a. Eloise received $150,000 in settlement of a sex discrimination case against her former employer.
b. Nell received $10,000 for damages to her personal reputation. She also received $40,000 in punitive damages.
c. Orange Corporation, an accrual basis taxpayer, received $50,000 from a lawsuit filed against its auditor who overcharged for services rendered in a previous year.
d. Beth received $10,000 in compensatory damages and $30,000 in punitive damages in a lawsuit she filed against a tanning parlor for severe burns she received from using its tanning equipment.
e. Joanne received compensatory damages of $75,000 and punitive damages of $300,000 from a cosmetic surgeon who botched her nose job.
38. LO.2 Rex, age 55, is an officer of Blue Company, which provides him with the following nondiscriminatory fringe benefits in 2013:
• Hospitalization insurance premiums for Rex and his dependents. The cost of the coverage for Rex is $2,900 per year, and the additional cost for his dependents is $3,800 per year. The plan has a $2,000 deductible, but his employer contributed $1,500 to
Rex’s Health Savings Account (HSA). Rex withdrew only $800 from the HSA, and the account earned $50 of interest during the year.
• Long-term care insurance premiums for Rex, at a cost of $12,600 per year.
• Insurance premiums of $840 for salary continuation payments. Under the plan, Rex will receive his regular salary in the event he is unable to work due to illness. Rex collected $4,500 on the policy to replace lost wages while he was ill during the year.
• Rex is a part-time student working on his bachelor’s degree in engineering. His employer reimbursed his $5,200 tuition under a plan available to all full-time employees.
Determine the amount Rex must include in gross income.
39. LO.2 The UVW Union and HON Corporation are negotiating contract terms. Assume that the union members are in the 25% marginal tax bracket and that all benefits are provided on a nondiscriminatory basis. Write a letter to the UVW Union members explaining the tax consequences of the options discussed below. The union’s address is
905 Spruce Street, Washington, DC 20227.
a. The company would eliminate the $250 deductible on medical insurance benefits.
Most employees incur more than $250 each year in medical expenses.
b. Employees would get an additional paid holiday with the same annual income (the same pay but less work).
c. An employee who did not need health insurance (because the employee’s spouse works and receives family coverage) would be allowed to receive the cash value of the coverage.
40. LO.2, 5 Mauve Corporation has a group hospitalization insurance plan that has a $200 deductible amount for hospital visits and a $15 deductible for doctor visits and prescriptions.
The deductible portion paid by employees who have children has become substantial for some employees. The company is considering adopting a medical reimbursement plan or a flexible benefits plan to cover the deductible amounts. Either of these plans can be tailored to meet the needs of the employees. What are the cost considerations to the employer that should be considered in choosing between these plans?
41. LO.2 Belinda spent the last 60 days of 2013 in a nursing home. The cost of the services provided to her was $16,000. Medicare paid $8,500 toward the cost of her stay. Belinda also received $9,500 of benefits under a long-term care insurance policy she purchased.
What is the effect on Belinda’s gross income?
