MODULE 33 TAXES: INDIVIDUAL
come is the stock's fair market value on date of distribution.
Similarly, the shareholder's basis for the dividend shares
will be equal to their fair market value on date of distribu-
tion (10 x $60 = $600).
I.B.10. Interest Income
IS. (c) . The requirement is to determine the correct
statement(s) regarding the amortization of bond premium on
a taxable bond. The amount of premium amortization on
taxable bonds acquired by the taxpayer after 1987 is treated
as an offset to the amount of interest income reported on the
bond. The method of calculating the annual amortization is
determined by the date the bond was issued, as opposed to
the acquisition date. If the bond was issued after Septem-
ber 27, 1985, the amortization must be calculated under the
constant yield to maturity method. Otherwise, the amortiza-
tion must be made ratably over the life of the bond. Under
the constant yield to maturity method, the amortizable bond
premium is computed on the basis of the taxpayer's yield to
maturity, using the taxpayer's basis for the bond, and com-
pounding at the close of each accrual period.
16. (c) The requirement is to determine whether two
statements are true concerning the exclusion of interest in-
come on US Series EE Bonds that are redeemed to pay for
higher education. The accrued interest on US Series EE
savings bonds that are redeemed by a taxpayer is excluded
from gross income to the extent that the aggregate redemp-
tion proceeds (principal plus interest) are used to finance the
higher education of the taxpayer, taxpayer's spouse, or de-
pendents. Qualified higher educational expenses include
tuition and fees, but not room and board or the cost of
courses involving sports, games, or hobbies that are not part
of a degree program. In determining the amount of available
exclusion, qualified educational expenses must be reduced
by qualified scholarships that are exempt from tax, and any
other nontaxable payments such as veteran's educational
assistance and employer-provided educational assistance.
17. (a) The requirement is to determine the amount of
interest subject to tax in Kay's 2009 tax return. Interest
must generally be included in gross income, unless a specific
statutory provision provides for its exclusion (e.g., interest
on municipal bonds). Interest on US Treasury certificates
and on a refund of federal income tax would be subject to
tax on Kay's 2009 tax return.
18. (c) The requirement is to determine the amount of
interest income taxable on Charles and Marcia's joint in-
come tax return. A taxpayer's income includes interest on
state and federal income tax refunds and interest on federal
obligations, but excludes interest on state obligations. Here,
their joint taxable income must include the $500 interest on
federal income tax refund, $600 interest on ,state income tax
refund, and $800 interest on federal government obligations,
but will exclude the $1,000 tax-exempt interest on state gov-
ernment obligations. Although a refund of federal income
tax would be excluded from gross income, any interest on a
refund must be included in gross income.
19. (a) The requirement is to determine the condition
that must be met for tax exemption of accumulated interest
on Series EE US Savings Bonds. An individual may be able
to exclude from income all or a part of the interest received
on the redemption of Series EE US Savings Bonds. To
457
qualify, the bonds must be issued after December 31, 1989,
the purchaser of the bonds must be the sole owner of the
bonds (orjoint owner with his or her spouse), and the
owner(s) must be at least twenty-four years old before the
bond's issue date. To exclude the interest the redemption
proceeds must be used to pay the tuition and fees incurred
by the taxpayer, spouse, o~ dependents to attend a college or
university or certain vocational schools.
20. (d) The requirement is to determine the amount of
tax-exempt interest. Interest on obligations of a state or one
of its political subdivisions (e.g., New York Port Authority
bonds), or a possession of the US (e.g., Puerto Rico Com-
monwealth bonds) is tax-exempt.
21. (c) Stone will report $1,700 of interest income.
Interest on FIT refunds, personal injury awards, US savings
bonds, and most other sources is fully taxable. However,
interest on state or municipal bonds is generally not taxable.
22. (d) The requirement is to determine how Don Raffs
$500 interest forfeiture penalty should be reported. An in-
terest forfeiture penalty for making a premature withdrawal
, from a certificate of deposit should be deducted from gross
income in arriving at adjusted gross income in the y':ear in
which the penalty is incurred, which in this case is 2009.
1.B.12. Scholarships and Fellowships
23. (c) The requirement is to determin which pay-
mentes) must be included in a recipient's gross income. A
candidate for a degree can exclude amounts received as a
scholarship or fellowship if, according to the conditions of
the grant, the amounts are used for the payment of tuition
and fees, books, supplies, and equipment required for
courses at an educational institution. All payments received
for services must be included in income, even if the services
. are a condition of receiving the grant or are required of all
candidates for the degree. Here, the payment to a graduate
assistant for a part-time teaching assignment and the grant to
a Ph.D. candidate for participation in research are payments
for services and must be included'in income.
24. (c) The requirement is to determine the amount of
scholarship awards that Majors should include as taxable
incomein 2009. Only a candidate for a degree can exclude
amounts received as a scholarship award. The exclusion
available to degree candidates is limited to amounts received
for the payment of tuition and fees, books, supplies, and
equipment required for courses at the educational institution.
Since Majors is a candidate for a graduate degree, Majors
can exclude the $10,000 received for tuition, fees, books, ,
and supplies required for courses. However, the $2,000
stipend for research services required by the scholarship
must be included in taxable income for 2009.
I.B.16. Lease Improvements
25. (a) The requirement is to determine a lessor's 2009
gross income. A lessor excludes from income any increase
in the value of property caused by improvements made by
the lessee, unless the improvements were made in lieu of
rent. In this case, there is no indication that the improve-
ments were made in lieu of rent. Therefore, for 2009, Parley
should only include the six rent payments in income: 6 x
$1,000 = $6,000.