TAX PROBLEMS – Class Two (2011)
1. Frank & Susan, a married couple, file a joint return for 2010. They are U. S. Citizens who
provided more than half of the support of the following individuals in 2010:
a. Their 18 year old son, Lance, who is in his first year of college and lives at the dorms
on campus. Lance earned $ 12,000 in 2010 from his summer job.
b. Frank’s sister, Marge, who is disabled but lives on her own. Her only income source
was $ 14,000 in social security benefits.
c. Frank’s best friend, Steve, lived with Frank & Susan during 2010 while he searched for
a job. His earnings for the year were $ 2,500.
d. Frank’s elderly mother, Adriana, who lives in Mexico City. Adriana has no legal status
in the United States and is a citizen of Mexico. She had no earnings in 2010.
ISSUE: How many personal & dependency exemptions will Frank & Susan be able to
claim on their 2010 tax returns?
ISSUE: Assume Frank & Susan were divorced in 2009, but the Frank continued to
support Lance, Marge, Steve and Adriana in 2010 – as indicated above. Will Frank
qualify as Head of Household in 2010?
2. In each of the following situations, will the prize or award received be Fully Includable,
Partially Includable or Not Includable in the taxpayer’s taxable income:
a. William won a $ 10,000 jackpot in Las Vegas after having lost $ 2,000 gambling.
b. Irina won the Nobel Prize for Chemistry and donated the $ 400,000 prize to her
university’s Chemistry Department.
c. Tom’s employer awarded him a $ 300 watch in honor of his 10 years of service to the
company.
d. Joe won $ 1,000,000 on “The Weakest Link” – a game show.
3. In each of the following situations, will the life insurance premiums or benefits be Fully
Includable, Partially Includable or Not Includable in the taxpayer’s gross income:
a. As part of Chung’s employee benefits package, his employer provides Chung with
$ 80,000 in group term life insurance in 2010.
b. Susan receives $ 100,000 in life insurance benefits on the death of her rich uncle
Moneybags.
c. Marcus, the insured on a whole-life policy of $ 250,000, is dying of cancer. He is
considering the following two options. Discuss the tax consequences to both Marcus
and Sam:
OPTION ONE: Cashing out his policy and taking a trip around the world.
OPTION TWO: “Selling” his policy to Sam, an investor. Sam will pay Marcus the
sum of $ 175,000 and Marcus will make Sam an irrevocable beneficiary on the
policy. When Marcus dies, Sam gets $ 250,000.
d. Bruin Corporation has taken out life insurance policies on several key employees
without their knowledge (each policy is $ 100,000). Whitney, their division manager,
dies in a traffic accident the following week and Bruin receives $ 100,000.
4. The following taxpayers received Tax Refunds in 2010 from tax returns they filed for 2009.
Will these sums be includable in or excludable from their gross income:
a. James received a $ 2,000 federal income tax refund with $ 100 in interest.
b. In 2009, Jane did not itemize deductions on her federal income tax return. In 2010, she
receives a $ 300 state income tax refund for state taxes paid in 2009, with $ 30 interest.
c. In 2009, Tony itemized deductions on his federal tax return. In 2010 he receives the
sum of $ 1,000 as a City of New York income tax refund for city taxes paid in 2009.
5. Graciela, an executive with L. A. Distributors (LAD), a California corporation, is transferred
on October 1, 2009 to LAD’s division in Chile. She works in Chile until September 30, 2010,
earning $ 60,000 in 2009 and $ 120,000 in 2010 (annual US & Chilean income combined).
What amounts, if any, will Graciela be able to exclude (foreign income exclusion) in 2009 and
2010?
6. In 2010, Joyce had an automobile accident caused by another driver’s negligence. Joyce
received $ 20,000 in personal injury damages from the driver’s insurance carrier. Joyce also
received $ 1,000 in County of Los Angeles bond interest, interest from U.S. Treasury bonds of
$ 2,500 and stock dividends valued at $ 5,000.
a. What is Joyce’s gross income in 2010?
b. What is her taxable income in 2010?
c. Would it make a difference if Joyce was given the option to take cash or stock
dividends prior to electing to receive the $ 5,000 stock dividends?
7. Dylan, is a divorced person and custodian of his 13 year old child. Pursuant to a marital
settlement agreement executed with his ex-wife in 1999, Dylan is supposed to receive $ 4,000
per month from his wealthy ex-wife. $ 1000 is designated as child support and $ 3,000 is
alimony (payable monthly until Dylan dies or remarries). However, in 2010, Dylan’s ex-wife
paid him only $ 20,000. Dylan’s gross income (exclusive of support payments from his exwife) in 2010 was $ 30,000. What should Dylan report on his tax return as gross income for
2010?