Assignment 4

Jack is a top-level executive at Bigco Industries, earning $540,000 of salary each year. Jen is a psychology professor at State University earning $94,000 per year.

In fall 2022 Jen took a sabbatical granted to her under university policy. The sabbatical is for one semester, and the university will pay Jens regular salary for the semester. The university requires that a faculty member who takes a sabbatical leave return for the same amount of the time as the sabbatical, or the faculty member must repay the sabbatical funds.

In December 2022 Jack decides he wants to retire. He tells Jen and she says that she will also retire so they can travel more. Jen informs the university in January 2023 and she is told that she will be required to repay the $47,000 sabbatical pay she received in fall 2022.

Jack and Jen had $657,000 of taxable income in 2022. In 2023 they expect much less income, although Jack will receive $150,000 of deferred compensation in 2023.

Using chapter 5 and its discussion of doctrines, explain:

1. Which doctrine will apply to determine the tax effect of the sabbatical pay Jen received in 2022 on the couples 2022 and 2023 tax returns?

2. What tax computation is involved when determining the tax effect of the 2022 and 2023 sabbatical treatment? HINT: If you get the doctrine right the text has an explanation with a tax law reference.