Homework_Solutions_Chapter_5 - Homework Solutions Chapter 5...

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Homework Solutions Chapter 5 28. The $50,000 in medical bills paid by Ed’s employer cannot qualify as a nontaxable gift. (However, medical expenses subject to the 7.5% floor may qualify as an itemized deduction for Ed.) The $10,000 received from the general public is an excludible gift. The $12,000 that Ed’s widow received in her “time of need” may be excluded from gross income if the company has a general policy of making such payments. Otherwise, the IRS may challenge the payment as a taxable payment for Ed’s prior services. The life insurance proceeds are excluded from gross income since they were paid to the beneficiary of the life insurance policy. pp. 5-5 to 5-7 and Chapter 13 33. a. Fay is the beneficiary of the life insurance policy and can exclude the proceeds of $1.75 million from her gross income. b. The $20,000 of interest earned on the life insurance proceeds left with the insurance company is included in Fay’s gross income. c. Fay did not recognize a gain on the bargain purchase. Fay simply got a good price on the purchase under an arm’s length contract. pp. 5-7 to 5-9 35. Alejandro received a total of $11,000 and spent $8,900 ($3,300 + $3,400 + $1,000 + $1,200) on tuition, books, and supplies. The amount received for room and board is not excludible. Therefore, he must include $2,100 ($11,000 – $8,900) in gross income. When he received the money in 2009, Alejandro’s total expenses for the period covered by the scholarship were not known. Therefore, he is allowed to defer reporting the income until 2010, when all the uncertainty is resolved. pp. 5-9 and 5-10 36. a. Leigh must include in gross income the punitive damages of $50,000. The other amounts ($15,000 and $8,000) may be excluded as arising out of the physical injury, except the $1,000 amount received for damage to her automobile. This amount is a nontaxable recovery of capital (i.e., it reduces her basis for the automobile by $1,000). b. The $40,000 is included in Leigh’s gross income because it did not arise out of a physical personal injury. pp. 5-11 and 5-12
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37. a. The settlement in the sex discrimination case did not arise out of physical personal injury or sickness. Therefore, the $150,000 is included in Eloise’s gross income. b.
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This note was uploaded on 04/13/2010 for the course ACCT 232 taught by Professor Mark during the Spring '10 term at Adelphi.

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Homework_Solutions_Chapter_5 - Homework Solutions Chapter 5...

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