MODULE 33 TAXES: INDIVIDUAL
tion is granted to an employee. When the option is exer-
cised, any excess of the stock's FMV over the option' price
is a tax preference item for purposes of the employee's al-
ternative minimum tax. However, an employee is not sub-
ject to regular tax until the stock acquired through exercise'
of the option is sold. . ~ips during December 2008 that he reported to his employer
If the employee holds the stock acquired through exer-
cise 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 compensa-
tion 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 em-
ployee.
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 re-
ceived 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.
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 de-
cedent). 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.
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.
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 Pi-
erre'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 re-
ceived. However, if an individual receives $20 or more in
459
~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
m January 2009. Thus, the $2,000 of tips will be included in
Pierre's gross income for 2Q09.
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 pay-
ments 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.
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 desig-
nates that the award is to be directly transferred by the payor
to a governmental unit or a tax-exempt chari~ble, educa-
tional, or religious organization. Here, since Joan accepted
and actually received the award, the $10,000 must be in-
cluded in her adjusted gross income.
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 deducti-
ble 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 de-
duction 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.
I.C.S. Rents and Royalties
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 in-
cluded in income when received, regardless of the tax-
payer'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.