1. Theresa is an employee of Hubbard Corporation with an annual salary of $60,000. Hubbard has a cafeteria plan that lets all employees select a total of 10% of their annual salary from a menu of nontaxable fringe benefits. Theresa selects medical insurance that costs the company $4,200, and $50,000 worth of group term life insurance that costs the company $1,000, and takes the remainder in cash. What is the effect of Hubbard's cafeteria plan on Theresa's gross income?

2. Determine the taxability of the damages received in each of the following situations:

a. Helio Corporation sues Wrongo Corporation, charging that Wrongo made false statements about one of Helio's products. Helio claims that the statements injured its business reputation with its customers. The court awards Helio $2,000,000 in damages.

b. Lien is injured when a chair on a ski lift she is riding on comes loose and crashes to the ground. Lien sues the ski resort and receives $12,000 in full payment of her medical expenses, $4,000 for pain and suffering, and $6,500 for income lost while she recovers from the accident. The company that manufactured the ski lift also pays Lien $50,000 in punitive damages.

c. A major broadcasting company reports that Dr. Henry Mueller was engaged in Medicare fraud. The doctor is incensed and sues the company for libel. The court rules that the report was made with reckless disregard for the truth and awards Mueller $20,000 for the humiliation he suffered because of the allegation, $200,000 for loss of his business reputation, and $150,000 in punitive damages.