Homework Solutions Chapter 5
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
Fay is the beneficiary of the life insurance policy and can exclude the
proceeds of $1.75 million from her gross income.
The $20,000 of interest earned on the life insurance proceeds left with the
insurance company is
included in Fay’s gross income.
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
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
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).
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