GROSS INCOME: EXCLUSIONS
Wilbur must include in gross income the $7,500 of compensation for serving as executor
of his father’s estate and $5,000 from each of the 4 installment payments of the insurance
proceeds. Each installment consists of $25,000 of recovery of capital.
Include in gross income
pp. 5-4 to 5-7 and Chapter 13
The $4,000 in accrued salary and the $2,500 of vacation pay earned by Jose but
received by his daughter must be included in her gross income in the tax year she
receives it. Such income that has been earned, but not received, at the time of the
decedent’s death is income in respect of a decedent.
Although the employer may have altruistic motives, because Josh is an employee,
the payments cannot be treated as gifts for income tax purposes. Therefore, Josh
must include the $1,500 in his gross income. However, if the employer expected to
be repaid when Josh is able to work, the payments could be treated as a loan.
c.Jay’s wife does not recognize income from the receipt of $10,000, since the proceeds
are from life insurance and are payable to her as the result of Jay’s death. The
mortgage holder received the proceeds from a policy as a result of a transaction for
consideration. The mortgage holder must recognize gain if its basis (unrecovered
amount of the loan) in the mortgage is less than $40,000.
Lavender, Inc. is the beneficiary of a life insurance policy it purchased and whose
proceeds were paid upon the death of the insured. Therefore, the proceeds are
excluded from its gross income.
When Rex dies, Jackson will receive the life insurance proceeds of $75,000.
Normally the $75,000 would be excludible from Jackson’s gross income because the
life insurance proceeds are payable as the result of death. However, since Jackson
acquired the life insurance policy in exchange for valuable consideration, the
exclusion treatment does not apply. So Jackson must include in his gross income the
$75,000 life insurance proceeds reduced by the sum of $45,000 and the life
insurance premiums that he pays.
pp. 5-4 to 5-7