Question

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 $ 109,500 Contributions to qualified pension plan 17,300 Qualified health insurance premiums 9,200 Year-end bonus 21,700 Annual director’s fee 19,400 Group-term life insurance premiums (face value $40,000) 1,110 Whole life insurance premiums (face value $100,000) 1,910 Disability insurance premiums (no special elections) 4,570

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

b. Suppose that Ajax agrees to pay Charlie an additional $106,000 once Charlie completes five years of employment. Will this agreement alter Charlie’s gross income this year relative to your part (a) answer? Yes No

c. Suppose that in exchange for his promise to remain with the firm for the next four years, Ajax paid Charlie four years of director’s fees in advance. Will this arrangement alter Charlie’s gross income this year relative to your part (a) answer? Yes No

d. Assume that in lieu of a year-end bonus Ajax transferred 1,050 shares of Bell stock to Charlie as compensation. Further assume that the stock was listed at $42 per share and Charlie would sell the shares by year-end, at which time he expected the price to be $52 per share. What would be the value of compensation and gain on sale which would be included in Charlie’s gross income?

e. Suppose that in lieu of a year-end bonus Ajax made Charlie’s house payments (a total of $25,800). What would be the value of house payments which would be included in Charlie’s gross income?

Answer 1

a. Calculation of gross income

Particulars	Amount
Salary payments	$109,500
Contributions to qualified pension plan	$0
Qualified health insurance premiums	$0
Year-end bonus	$21,700
Annual director’s fee	$19,400
Group-term life insurance premiums (face value $40,000)	$0
Whole life insurance premiums (face value $100,000)	$1,910
Disability insurance premiums	$0
Gross Income	$152,510

b. No. The payment is supposed to be in future and hence is not taxable as Charlie uses cash method for tax purpose. Income will be recognized in the year when the payment is received.

c. Yes. The receipt of payment in advance will increase Charlie's gross income and will be taxable as he uses cash method. Under this method, income is taxed when the payment is received irrespective of whether it is earned or not.

d. Charlie will have to report compensation of $44,100 (1,050 shares * $42). If he sells those shares for $52, he will have to recognize the gain of $10,500 (1,050 shares * $10) in his gross income.

e. Charlie will have to report the total value of house payments received ($25,800) as his income.