Question 1. Benny loaned $100,000 to his controlled corporation. When it b

1. Benny loaned $100,000 to his controlled corporation. When it became apparent the corporation would not be able to repay the loan in the near future, Benny canceled the debt. The corporation should treat the cancellation as a nontaxable contribution to capital.

a. True

b. False

2. Zork Corporation was very profitable and had accumulated excess cash. The company decided to repurchase some of its bonds that had been issued for $1,000,000. Because of an increase in market interest rates, Zork was able to retire the bonds for $900,000. The company is not required to recognize $100,000 of income from the discharge of its indebtedness but must reduce the basis in its assets.

a. True

b. False

.

3. Amber Machinery Company purchased a building from Ted for $250,000 cash and a mortgage of $750,000. One year after the transaction, the mortgage had been reduced to $725,000 by principal payments by Amber, but it was apparent that Amber would notbe able to continue to make the monthly payments on the mortgage. Ted reduced the amount owed by Amber to $600,000. This reduced the monthly payments to a level that Amber could pay. Amber must recognize $125,000 income from the reduction in the debt by Ted.

a. True

b. False

4. The taxpayer’s marginal tax bracket is 25%. Which would the taxpayer prefer?

a. $1.00 taxable income rather than $1.25 tax-exempt income.

b. $1.00 taxable income rather than $.75 tax-exempt income.

c. $1.25 taxable income rather than $1.00 tax-exempt income.

d. $1.40 taxable income rather than $1.00 tax-exempt income.

e. None of the above.

5. Cash received by an employee from an employer:

a. Is notincluded in gross income if it was not earned.

b. Is nottaxable unless the payor is legally obligated to make the payment.

c. Must always be included in gross income.

d. May be included in gross income although the payor is notlegally obligated to make the payment.

e. None of the above.

.

6. Sharon had some insider information about a corporate takeover. She unintentionally informed a friend, who immediately bought the stock in the target corporation. The takeover occurred and the friend made a substantial profit from buying and selling the stock. The friend told Sharon about his stock dealings, and gave her a pearl necklace because she “made it all possible.” The necklace was worth $10,000, but she already owned more jewelry than she desired.

a. The necklace is a nontaxable gift received by Sharon because the friend was not legally required to make the gift.

b. The value of the necklace is not included in Sharon’s gross income unless she sells it.

c. The value of the necklace is not included in Sharon’s gross income because passing the information was an illegal act and the SEC can confiscate the necklace.

d. The value of the necklace must be included in Sharon’s gross income for the tax year it was received by her.

e. None of the above.

7. Carin, a widow, elected to receive the proceeds of a $150,000 life insurance policy on the life of her deceased husband in 10 installments of $17,500 each. Her husband had paid premiums of $60,000 on the policy. In the first year, Carin collected $17,500 from the insurance company. She must include in gross income:

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