Question

1. Charlie was hired by Ajax this year as a corporate executive and a member of the board of directors. During the current year, Charlie received the following payments or benefits paid on his behalf.

Salary payments	$	128,500
Contributions to qualified pension plan		17,100
Qualified health insurance premiums		7,700
Year-end bonus		16,300
Annual director’s fee		13,300
Group-term life insurance premiums (face = $40,000)		1,240
Whole life insurance premiums (face = $100,000)		2,030
Disability insurance premiums (no special elections)		4,780

a. Charlie uses the cash method and calendar year for tax purposes. Calculate Charlie’s gross income for the current year.

Gross income ___?__

d. Assume that in lieu of a year-end bonus Ajax transferred 650 shares of Bell stock to Charlie as compensation.  Further assume that the stock was listed at $116 per share and Charlie would sell the shares by year-end, at which time he expected the price to be $119 per share.  What would be the value of compensation and gain on sale which would be included in Charlie’s gross income?

Value of compensation __?__

Gain on sale __?__

e. Suppose that in lieu of a year-end bonus Ajax made Charlie’s house payments (a total of $31,100).  What would be the value of house payments which would be included in Charlie’s gross income?

Income __?__

Answer 1

SOLUTION

A. The salary, bonus, director’s fee, and whole life premiums are taxable, but the pension contributions, health insurance, group­term life insurance, and disability insurance premiums are excluded from income (Charlie did not elect to have the insurance premiums included as taxable compensation). Charlie’s gross income is $160,130.

	Amount Includible ($)
Salary payments	128,500
Contributions to qualified pension plan	0
Qualified health insurance premiums	0
Year­- end bonus	16,300
Annual director’s fee	13,300
Group­term life insurance premiums (face = $40,000)	0
Whole life insurance premiums (face = $100,000)	2,030
Disability insurance premiums	0
Gross income	160,130

D. Charlie would report the value of the stock $75,400 (650 * $116) as compensation. If Charlie did sell the stock at the expected price, the gain of $1,950 (650 * ($119-$116)) on the sale would also be included in his gross income.

E. Charlie would report the value of the house payments ($31,100) as income.