South-Western Federal Taxation

South-Western Federal Taxation

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Fred specified in his will that his nephew John should serve as executor of Fred’s estate. John received $10,000 for serving as executor. Can John exclude the $10,000 from his gross income? Explain.

  1. LO.2 Leonard’s home was damaged by a fire. He also had to be absent from work for several days to make his home habitable. Leonard’s employer paid Leonard his regular salary, $2,500, while he was absent from work. In Leonard’s pay envelope was the following note from the employer: To help you in your time of need. Leonard’s fellow employees also took up a collection and gave him $900. Leonard spent over $4,000 repairing the fire damage. Based on the preceding information, how much is Leonard required to include in his gross income?
  2. LO.1, 2 twenty college fraternity brothers each placed $2,500 in a mutual fund account. They agreed that upon the death of a fraternity brother, his beneficiary would receive $20,000 that was to be paid from the mutual fund account. The beneficiary of the last remaining fraternity brother would receive the balance remaining in the account. The mutual fund did very well. Earl was the last to die, at age 92, and his beneficiary received $250,000. Can the $250,000 be excluded from the beneficiary’s gross income? Why or why not?
  3. LO.2 Janice was a cash basis taxpayer. At the time of her death, she was owed $100,000 in accrued salary. Upon Janice’s death, the employer was required to pay Wayne, Janice’s brother, her accrued salary. Janice was a key employee, and her employer had purchased a $1,000,000 insurance policy on her life, with the proceeds payable to the employer. Her employer had paid $300,000 in premiums when it collected the face amount of the policy. What amount must be included in the gross income of Janice, Wayne, and Janice’s employer?
  4. LO.2 Dolly is a college student who works as a part-time server in a restaurant. Her usual tip is 20% of the price of the meal. A customer ordered a piece of pie and said that he would appreciate prompt service. Dolly abides with the customer’s request. The customer’s bill was $8, but the customer left a $100 bill on the table and did not ask for a receipt. Dolly gave the cashier $8 and pocketed the $100 bill. Dolly concludes that the customer thought that he had left a $10 bill, although the customer did not return to correct the apparent mistake. The customer had commented about how much he appreciated Dolly’s prompt service. Dolly thinks that a $2 tip would be sufficient and that the other $98 is like found money. How much should Dolly include in her gross income?
  5. LO.2 Carey is a waiter at a restaurant that pays a small hourly amount plus tips. Customers are not required to tip the waiter. Carey is especially attentive and friendly, and her tips average 25% of the restaurant charges. Is Carey required to include any of her tips in gross income when the customer has no legal obligation to make the payment? Explain the basis for your conclusion.
  6. LO.2 Lime Finance Company requires its customers to purchase a credit life insurance policy associated with the loans it makes. Lime is the beneficiary of the policy to the extent of the remaining balance on the loan at the time of the customer’s death. In 2012, Lime wrote off as no collectable a $5,000 account receivable from Wally, which included $1,500 of accrued interest. When Wally died in 2013, the life insurance policy was still in force and Lime received $3,500. Is the $3,500 of life insurance proceeds received by Lime included in its gross income? Explain.
  7. LO.2 Sarah, who has a terminal illness, cashed in her life insurance policy (cost of $24,000 and proceeds of $50,000) to go on an around-the-world cruise. Ed paid $24,000 of life insurance premiums before cashing in his life insurance policy for the $50,000 cash surrender value. He decided he could invest the money and earn a higher rate of return. Tom’s wife died, and Tom collected $50,000 as the beneficiary on a group term life insurance policy purchased by her employer. Determine the amounts that Sarah, Ed, and Tom should include in their gross income.
  8. LO.2 Joe is a graduate student who works as a resident adviser (RA) in the college dormitory. As compensation for serving as an RA, he is not charged the $2,200 other students pay for their dormitory rooms for the fall 2013 semester. As an RA, he is required to live in the dormitory. He is also paid $1,500 for being available to dormitory residents at all hours during the fall semester. Joe also has a scholarship that pays him $12,000 to be used for his tuition for the academic year. He uses the scholarship proceeds to pay $6,000 of tuition in August 2013. In January 2014, he pays $6,000 for his spring semester tuition. What is Joe’s gross income for 2013?
  9. LO.2 Billy fell off a bar stool and hurt his back. As a result, he was unable to work for three months. He sued the bar owner and collected $100,000 for the physical injury and $50,000 for the loss of income. Billy also collected $15,000 from an income replacement insurance policy he purchased. Amber was away from work for three months following heart bypass surgery. Amber collected $30,000 under an income replacement insurance policy purchased by her employer. Are the amounts received by Billy and Amber treated the same under the tax law? Explain.
  10. LO.2 Wes was a major league baseball pitcher who earned $10 million for his 20 wins this year. Sam was also a major league baseball pitcher before a career-ending injury caused by a negligent driver. Sam sued the driver and collected $6 million as compensation for lost estimated future income as a pitcher and $4 million as punitive damages. Do the amounts that Wes and Sam receive have the same effect on their gross income? Explain.
  11. LO.2 Holly was injured while working in a factory and received $12,000 as workers compensation while she was unable to work because of the injury. Jill, who was self-employed, was also injured and unable to work. Jill collected $12,000 on an insurance policy she had purchased to replace her loss of income while she was unable to work. How much are Holly and Jill each required to include in their gross income?
  12. LO.2 Melba’s employer provides a flexible spending plan for medical and dental expenses not covered by insurance. Melba contributed $1,500 during 2013, but by the end of December 2013, she still had $300 remaining in the account. Melba intended to get new eyeglasses, but was too busy during the holiday season to do so. Is Melba required to forfeit the balance in her flexible spending account? Explain.
  13. LO.2, 5 Casey is in the 15% marginal tax bracket, and Jean is in the 35% marginal tax bracket. Their employer is experiencing financial difficulties and cannot continue to pay for the company’s health insurance plan. The annual premiums are approximately $8,000 per employee. The employer has proposed to either (1) require the employee to pay the premiums or (2) reduce each employees pay by $10,000 per year with the employer paying the premium. Which option is less objectionable to Casey, and which is less objectionable to Jean?
  14. LO.2 what is the difference between a cafeteria plan and an employee flexible spending plan?
  15. LO.2 Ted works for Azure Motors, an automobile dealership. All employees can buy a car at the company’s cost plus 2%. The company does not charge employees the $300 dealer preparation fee that non employees must pay. Ted purchased an automobile for $29,580 ($29,000 + $580). The company’s cost was $29,000. The price for a non-employee would have been $33,900 ($33,600 + $300 preparation fee). What is Ted’s gross income from the purchase of the automobile?
  16. LO.2, 5 Wilbur has been offered a job at a salary that would put him in the 25% marginal tax bracket. In addition to his salary, he would receive health insurance coverage. Another potential employer does not offer health insurance but has agreed to match the first offer on an after-tax and insurance basis. The cost of health insurance comparable to that provided by the other potential employer is $9,000 per year. How much more in salary must the second potential employer pay so that Wilbur’s financial status will be the same under both offers?
  17. LO.2, 5 Eagle Life Insurance Company pays its employees $.30 per mile for driving their personal automobiles to and from work. The company reimburses each employee who rides the bus $100 a month for the cost of a pass. Tom collected $100 for his automobile mileage, and Mason received $100 as reimbursement for the cost of a bus pass. A. What are the effects of the above on Toms and Masons gross income. Assume that Tom and Mason are in the 28% marginal tax bracket and the actual before-tax cost for Tom to drive to and from work is $.30 per mile. What are Toms and Mason’s after-tax costs of commuting to and from work?
  18. LO.2 Several of Egret Company’s employees have asked the company to create a hiking trail that employees could use during their lunch hours. The company owns vacant land that is being held for future expansion but would have to spend approximately $50,000 if it were to make a trail. Non employees would be allowed to use the facility as part of the company’s effort to build strong community support. What are the relevant tax issues for the employees?
  19. LO.2 the Sage Company has the opportunity to purchase a building located next to its office. Sage would use the building as a day care center for the children of its employees and an exercise facility for the employees. Occasionally, portions of the building could be used for employee’s family events such as reunions, birthday parties, and anniversaries. The company would like to know if the planned uses of the building would fit into a beneficially taxed employee compensation plan.
  20. LO.2 Brad is a single individual with $25,000 in taxable interest income and a salary of $86,000 from working in a foreign country for the past 12 months. What tax rate is applied to Brad’s taxable income in 2013?
  21. LO.2, 5 Tammy, a resident of Virginia, is considering purchasing a North Carolina bond that yields 4.6% before tax. She is in the 35% Federal marginal tax bracket and the 5% state marginal tax bracket. She is aware that State of Virginia bonds of comparable risk are yielding 4.5%. However, the Virginia bonds are exempt from Virginia tax, but the North Carolina bond interest is taxable in Virginia. Which of the two options will provide the greater after-tax return to Tammy? Tammy can deduct any state taxes paid on her Federal income tax return.
  22. LO.3 Zack is a farmer who buys his feed and fertilizer from a farmer’s cooperative. In 2012, Zack purchased $300,000 in feed and fertilizer for the farm and $10,000 of household goods. Because the cooperative made a profit in 2012, it distributed to its members2% of their purchases. Zack received his share of the distribution, $6,200, in March 2013. What is Zack’s gross income from the distribution?
  23. LO.2 Andrea entered into a 529 qualified tuition program for the benefit of her daughter, Joanna. Andrea contributed $15,000 to the fund. The fund balance had accumulated to $25,000 by the time Joanna was ready to enter college. However, Joanna received a scholarship that paid for her tuition, fees, books, supplies, and room and board. Therefore, Andrea withdrew the funds from the 529 plan and bought Joanna a new car. A. What are the tax consequences to Andrea of withdrawing the funds? Assume instead that Joanna’s scholarship did not cover her room and board, which cost $7,500 per academic year. During the current year, $7,500 of the fund balance was used to pay for Joanna’s room and board. The remaining amount was left in the 529 plan to cover her room and board for future academic years. What are the tax consequences to Andrea and to Joanna of using the $7,500 to pay for the room and board?
  24. LO.3 Dolly is a cash basis taxpayer. In 2013, she filed her 2012 Virginia income tax return and received a $2,200 refund. Dolly took the standard deduction on her 2012Federal income tax return, but will itemize her deductions in 2013. Molly, a cash basis taxpayer, also filed her 2012 Virginia income tax return in 2013 and received a $600 refund. Molly had $12,000 in itemized deductions on her 2012 Federal income tax return, but will take the standard deduction in 2013. How does the tax benefit rule apply to Dolly’s and Molly’s situations? Explain.
  25. LO.4 Harry purchased equipment for his business and gave the seller cash and a note due in two years. Larry also purchased business equipment, but financed the transaction with a bank loan. Because Harry and Larry were having financial difficulty, the creditors reduced the balance due on each mortgage by $50,000. What are the tax effects of the debt adjustments experienced by Harry and Larry?
  26. LO.4 Ralph has experienced financial difficulties as a result of his struggling business. He has been behind on his mortgage payments for the last six months. The mortgage holder, who is a friend of Ralph’s, has offered to accept $80,000 in full payment of the $100,000 owed on the mortgage and payable over the next 10 years. The interest rate of the mortgage is 7%, and the market rate is now 8%. What tax issues are raised by the creditors offer? PROBLEMS
  27. LO.2, 4 Ed, an employee of the Natural Color Company, suffered from a rare disease that was very expensive to treat. The local media ran several stories about E.Ds. problems, and the family received more than $10,000 in gifts from individuals to help pay the medical bills. E.Ds. employer provided hospital and medical insurance for its employees, but the policy did not cover E.Ds. illness. When it became apparent that Ed could not pay all of his medical expenses, the hospital canceled the $25,000 Ed owed at the time of his death. After E.Ds. Death, his former employer paid E.Ds. widow $12,000 in her time of need. E.Ds. widow also collected $50,000 on a group term life insurance policy paid for by E.Ds. employer. What are E.Ds? and his widows gross income?
  28. LO.2 Determine the gross income of the beneficiaries in the following cases: a. Justin’s employer was downsizing and offered employees an amount equal to one year’s salary if the employee would voluntarily retire. Trina contracted a disease and was unable to work for six months. Because of her dire circumstances, her employer paid her one-half of her regular salary while she was away from work’s. Coral Corporation collected $1 million on a key person life insurance policy when its chief executive died. The corporation had paid the premiums on the policy of $77,000, which were not deductible by the corporation. Juan collected $40,000 on a life insurance policy when his wife, Leona, died in 2013.The insurance policy was provided by Leona’s employer, and the premiums were excluded from Leona’s gross income as group term life insurance. In 2014, Juan collected the $3,500 accrued salary owed to Leona at the time of her death.
  29. LO.2, 5 Laura was recently diagnosed with cancer and has begun chemotherapy treatments. A cancer specialist has stated that Laura has less than one year to live. She has incurred a lot of medical bills and other general living expenses and is in need of cash. Therefore, she is considering selling stock that cost $35,000 and has a fair market value of $50,000. This amount would be sufficient to pay her medical bills. However, she has read about a company (the Vital Benefits Company) that would purchase her life insurance policy for $50,000. She has paid $30,000 in premiums on the policy. A. Considering only the tax effects, would selling the stock or selling the life insurance policy result in more beneficial tax treatment. Assume that Laura is a dependent child and that her mother owns the stock and the life insurance policy, which is on the mother’s life. Which of the alternative means of raising the cash would result in more beneficial tax treatment?
  30. LO.2 what is the taxpayer’s gross income in each of the following situations? A. Darrin received a salary of $50,000 in 2013 from his employer, Green Construction. In July 2013, Green gave Darrin an all-expense-paid trip to Las Vegas (value of $3,000) for exceeding his sales quota. Megan received $10,000 from her employer to help her pay medical expenses not covered by insurance. Blake received $15,000 from his deceased wife’s employer to help him in his time of greatest need.e. Clint collected $50,000 as the beneficiary of a group term life insurance policy when his wife died. The premiums on the policy were paid by his deceased wife’s employer.
  31. LO.2 Donald was killed in an accident while he was on the job in 2013. Darlene, Donald’s wife, received several payments as a result of Donald’s death. What is Darlene’s gross income from the items listed below? a. Donald’s employer paid Darlene an amount equal to Donald’s three months’ salary ($60,000), which is what the employer does for all widows and widowers of deceased employees’. Donald had $20,000 in accrued salary that was paid to Darlene’s. Donald’s employer had provided Donald with group term life insurance of $480,000 (twice his annual salary), which was payable to his widow in a lump sum. Premiums on this policy totaling $12,500 had been included in Donald’s gross income under 79.d. Donald had purchased a life insurance policy (premiums totaled $250,000) that paid $600,000 in the event of accidental death. The proceeds were payable to Darlene, who elected to receive installment payments as an annuity of $30,000 each year for a25-year period. She received her first installment this year.
  32. LO.2 Ray and Carin are partners in an accounting firm. The partners have entered into an arm’s length agreement requiring Ray to purchase Carin’s partnership interest from Carin’s estate if she dies before Ray. The price is set at 120% of the book value of Carins partnership interest at the time of her death. Ray purchased an insurance policy on Carin’s life to fund this agreement. After Ray had paid $45,000 in premiums, Carin was killed in an automobile accident, and Ray collected $800,000 of life insurance proceeds. Ray used the life insurance proceeds to purchase Carin’s partnership interest. A. What amount should Ray include in his gross income from receiving the life insurance proceeds? The insurance company paid Ray $16,000 interest on the life insurance proceeds during the period Carin’s estate was in administration. During this period, Ray had left the insurance proceeds with the insurance company. Is this interest taxable? When Ray paid $800,000 for Carin’s partnership interest, priced as specified in the agreement, the fair market value of Carin’s interest was $1 million. How much should Ray include in his gross income from this bargain purchase?
  33. LO.2 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 $15,000Housing and meals 6,000Books and supplies 1,500Transportation 1,200a. Determine the effect of the scholarship on Sally’s gross income. 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 bio engineering, his intended field of study. Determine the effect of the scholarships on Willy’s and his father’s gross income.
  34. 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 3,750Room and board August December 2013 2,800 January May 2014 2,500Books and educational supplies August December 2013 1,000 January May 2014 1,200Determine the effect on Adrian’s gross income for 2013 and 2014.
  35. 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 15,000Loss of income while her arm was healing 6,000Punitive damages 80,000a. What effect does the settlement have on Leigh’s gross income? 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.
  36. 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.
  37. 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.
  38. 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 unions address is905 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 employees spouse works and receives family coverage) would be allowed to receive the cash value of the coverage.
  39. 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?
  40. 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?
  41. LO.2 Tim is the vice president of western operations for Maroon Oil Company and is stationed in San Francisco. He is required to live in an employer-owned home, which is three blocks from his company office. The company-provided home is equipped with high-speed Internet access and several telephone lines. Tim receives telephone calls and e-mails that require immediate attention any time of day or night because the company’s business is spread all over the world. A full-time administrative assistant resides in the house to assist Tim with the urgent business matters. Tim often uses the home for entertaining customers, suppliers, and employees. The fair market value of comparable housing is $9,000 per month. Tim is also provided with free parking at his company’s office. The value of the parking is $350 per month. Calculate the amount associated with the company-provided housing and free parking that Tim must include in his gross income.
  42. LO.2 Does the taxpayer recognize gross income in the following situations? a. Ava is a filing clerk at a large insurance company. She is permitted to leave the premises for lunch, but she usually eats in the company’s cafeteria because it is quick and she is on a tight schedule. On average, she pays $5 for a lunch that would cost $8 at a restaurant. However, if the prices in the cafeteria were not so low and the food was not so delicious, she would probably bring her lunch at a cost of $3 per day. b. Scott is an executive for an international corporation located in New York City. Often he works late, taking telephone calls from the company’s European branch. Scott often stays in a company-owned condominium when he has a late-night work session. The condominium is across the street from the company office. c. Ira recently moved to take a job. For the first month on the new job, Ira was searching for a home to purchase or rent. During this time, his employer permitted Ira to live in an apartment the company maintains for customers during the buying season. The month that Ira occupied the apartment was not during the buying season, and the apartment would not otherwise have been occupied.
  43. LO.2, 5 Bertha is considering taking an early retirement offered by her employer. She would receive $3,000 per month, indexed for inflation. However, she would no longer be able to use the company’s health facilities, and she would be required to pay her hospitalization insurance premiums of $8,000 each year. Bertha and her husband will file a joint return and take the standard deduction she currently receives a salary of $55,000 a year. If she retires, she will spend approximately $300 less each month for commuting and clothing. Bertha and her husband have other sources of income and are in and will remain in the25% marginal tax bracket. She currently pays Social Security and Medicare taxes of 7.65% on her salary, but her retirement pay would not be subject to this tax. According to Bertha, she and her husband could live well if her after-tax retirement income was at least 50% of her current income. Provide Bertha with information she will need to make her decision.
  44. LO.2, 5 Finch Construction Company provides the carpenters it employs with all of the required tools. However, the company believes that this practice has led to some employees not taking care of the tools and to the mysterious disappearance of some tools. The company is considering requiring all of its employees to provide their own tools. Each employee’s salary would be increased by $1,500 to compensate for the additional cost. Write a letter to Finch’s management explaining the tax consequences of this plan to the carpenters. Finch’s address is 300 Harbor Drive, Vermilion, SD 57069.
  45. LO.2, 5 Bluebird, Inc., does not provide its employees with any tax-exempt fringe benefits. The company is considering adopting a hospital and medical benefits insurance plan that will cost approximately $9,000 per employee. To adopt this plan, the company may have to reduce salaries and/or lower future salary increases. Bluebird is in the 35% (combined Federal and state rates) bracket. Bluebird is also responsible for matching the Social Security and Medicare taxes withheld on employees’ salaries (at the full 7.65% rate for 2013). The hospital and medical benefits insurance plan will not be subject to the Social Security and Medicare taxes, and the company is not eligible for the small business credit for health insurance. The employees generally fall into two marginal tax rate groups: Income Tax Social Security and Medicare Tax Total .15 .0765 . 2265 .35 .0145 . 3645The company has asked you to assist in its financial planning for the hospital and medical benefits insurance plan by computing the following: a. How much taxable compensation is the equivalent of $9,000 of exempt compensation for each of the two classes of employees? b. What is the company’s after-tax cost of the taxable compensation computed in part (a)? c. What is the company’s after-tax cost of the exempt compensation? d. Briefly explain your conclusions from the preceding analysis.
  46. LO.2, 5 Rosa’s employer has instituted a flexible benefits program. Rosa will use the plan to pay for her daughter’s dental expenses and other medical expenses that are not covered by health insurance. Rosa is in the 28% marginal tax bracket and estimates that the medical and dental expenses not covered by health insurance will be within the range of $4,000 to $5,000. Her employer’s plan permits her to set aside as much as $5,000 in the flexible benefits account. Rosa does not itemize her deductions. a. Rosa puts $4,000 into her flexible benefits account, and her actual expenses are $5,000. What is her cost of underestimating the expenses? b. Rosa puts $5,000 into her flexible benefits account, and her actual expenses are only $4,000. What is her cost of overestimating her expenses? c. What is Rosa’s cost of underfunding as compared to the cost of over funding the flexible benefits account? d. Does your answer in part (c) suggest that Rosa should fund the account closer to the low end or to the high end of her estimates?
  47. LO.2 Sparrow Corporation would like you to review its employee fringe benefits program with regard to the tax consequences of the plan for the company’s president (Polly), who is also the majority shareholder. A. The company has a qualified retirement plan. The company pays the cost of employees attending a retirement planning seminar. The employee must be within 10 years of retirement, and the cost of the seminar is $1,500 per attendee. The company owns a parking garage that is used by customers, employees, and the general public. Only the general public is required to pay for parking. The charge to the general public for Polly’s parking for the year would have been $3,000 (a $250 monthly rate).c. All employees are allowed to use the company’s fixed charge long-distance telephone services, as long as the privilege is not abused. Although no one has kept track of the actual calls, Polly’s use of the telephone had a value (what she would have paid on her personal telephone) of approximately $600.d. The company owns a condominium at the beach, which it uses to entertain customers. Employees are allowed to use the facility without charge when the company has no scheduled events. Polly used the facility 10 days during the year. Her use had a rental value of $1,000.e. The company is in the household moving business. Employees are allowed to ship goods without charge whenever there is excess space on a truck. Polly purchased a dining room suite for her daughter. Company trucks delivered the furniture to the..


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