Scan0051.rtf

MODULE 33 TAXES: INDIVIDUAL

459

tion is granted to an employee. When the option is exercised, any excess of the stock's FMV over the option' price is a tax preference item for purposes of the employee's alternative minimum tax. However, an employee is not subject to regular tax until the stock acquired through exercise' of the option is sold. . If the employee holds the stock acquired through exercise of the option at least two years from the date the option \ was granted (and holds the stock itself at least one year), the employee's realized gain is treated as long-term capital gain in the year of sale, and the employer receives no compensation deduction. If the preceding holding period rules are not met at the time the stock is sold, the employee must report ordinary income to the extent that the stock's FMV at date of.exercise exceeded the option price, with any remaining gain reported as long-term or short-term capital gain. As a result, the employer receives a compensation deduction equal to the amount of ordinary income reported by the employee.

~ips, d.uring one month while working for one employer, the individual must report the total amount of tips to that em~loyer by, the tenth day of the next month. Then the tips are included m gross income for the month in which they are reported to the employer. Here, Pierre received $2,000 in ~ips during December 2008 that he reported to his employer m January 2009. Thus, the $2,000 of tips will be included in Pierre's gross income for 2Q09.

3.6. (a) The requirement is to determine the amount that is taxable as alimony in Ann's return. In order to be treated as alimony, a payment must be made in cash and be received by or on behalf of the payee spouse. Furthermore, cash payments must be required to terminate upon the death of the rayee spouse to be treated as alimony. In this case, the transfer of title in the home to Ann is not a cash payment and cannot be treated as alimony. Although the mortgage . payments are cash payments made on behalf of Ann, the payments are not treated as alimony because they will be made throughout the full twenty-year mortgage period and will not terminate in the event of Ann's death.

42. (d) The requirement is to determine the amount of a $10,000 award for outstanding civic achievement that Joan should include in her 2009 adjusted gross income. An award for civic achievement can be excluded from gross income only if the recipient was selected without any action on hislher part, is not required to render substantial future services as a condition of receiving the award, and designates that the award is to be directly transferred by the payor to a governmental unit or a tax-exempt chari~ble, educational, or religious organization. Here, since Joan accepted and actually received the award, the $10,000 must be included in her adjusted gross income.

37. (c) The requirement is to determine the correct statement with regard to income in respect of a cash basis decedent. Income in respect of a decedent is income earned by a decedent before death that was not includible in the decedent's final income tax return because of the decedent's method of accounting (e.g., receivables of a cash basis decedent). Such income must be included in gr;oss income by the person who receives it and has the same character (e.g., ordinary or capital) as it would have had if the decedent had lived.

43. (d) The requirement is to determine the amount of lottery winnings that should be included in Gow's taxable income. Lottery winnings are gambling winnings and must be included in gross income. Gambling losses are deductible from AGI as a miscellaneous deduction (to the extent of winnings) not subject to the 2% of AGI floor if a taxpayer itemizes deductions. Since Gow elected the standard deduction for 2009, the $400 spent on-lottery tickets is not deductible. Thus, all $5,000 of Gow's lottery winnings are included in his taxable income.

38. (d) The requirement is to determine the amount of gross income. Drury's gross income includes the $36,000 salary, the $500 of premiums paid by her employer for group-term life insurance coverage in excess of $50,000, and the $5,000 proceeds received from a state lottery.

I.C.S. Rents and Royalties

39. (b) The requirement is to determine the amount of foster child payments to be included in income by the Charaks. Foster child payments are excluded from income ~o the extent they represent reimbursement for expenses incurred for care of the foster child. Since the payments ($3,900) exceeded the expenses ($3,000), the $900 excess used for the Charaks' personal expenses must be included in their gross income. 40. (b) The requirement is to determine the amount and the year in which the tip income should be included in Pierre's gross income. If an individual receives less than $20 in tips during one month while working for one employer, the tips do not have to be reported to the employer and the tips are included in the individual's gross income when received. However, if an individual receives $20 or more in

41. (c) The requirement is to determine the correct statement regarding the alimony deduction in connection with a 2009 divorce. To be considered alimony, cash payments must terminate on the death of the payee spouse. Answer (a) is incorrect because alimony payments cannot be contingent on the statu~ of the divorced couple's children. Answer (b) is incorrect because the divorced couple cannot be members of the same household at the time the alimony is paid. Answer (d) is incorrect because only cash payments can be considered alimony.

44. (d) The requirement is to determine the amount of advance rents and lease cancellation payments that should be reported on Lake Corp.' s 2009 tax return. Advance rental payments must be included in gross income when received, regardless of the period covered or whether the taxpayer uses the cash or accrual method. Similarly, lease cancellation payments are treated as rent and must be included in income when received, regardless of the taxpayer's method of accounting. 4S. (c) The requirement is to determine the amount to be reported as gross income. Gross income includes the $50,000 of recurring rents plus the $2,000 lease cancellation payment. The $1,000 of lease improvements are excluded from income since they were not required in lieu of rent. 46. (c) The requirement is to determine the amount of net rental income that Gow should include in his adjusted gross income. Since Gow lives in one of two identical apartments, only 50% of the expenses relating to both apartments can be allocated to the rental unit.