Chapter 4 Homework Solutions
Distinguish group term life insurance from whole life insurance.
Group-term life insurance is insurance provided for a group of
employees for a limited term.
The policy will only pay the
beneficiaries if the employee dies during the term of the policy.
insurance is only insurance, there is no savings component.
A whole-life insurance policy is a policy on a single individual for the
life of the individual.
That is, in contrast to term insurance, once the
policy is paid for, the proceeds are always paid at death.
insurance includes an insurance component and a savings
component (i.e., it has a cash surrender value)
A fire extensively damaged a small Alaska town where Intech Company
had its primary plant.
Intech decided to give $200 to each household that
lost its residence.
About 12% of the payments were made to Intech
Is the receipt of $200 by some Intech employees taxable as
compensation or excludable as a gift?
The question to be resolved is whether the payments made to Intech
employees are gifts (excluded) or are a form of compensation.
order to be a gift, the payment must be made with a "detached and
disinterested generosity" that is out of "affection, respect, admiration,
charity, or like impulses."
In making this determination, the courts
have held that it is the intention of the transferor that is the controlling
factor in determining whether a payment is a gift.
The facts would
indicate that the payments to Intech employees do constitute gifts.
Because Intech gave $200 to all households that suffered damage, the
payments show detachment (payments to individuals that are not its
employees) and charitable intent (helping out the community), with no
specific intent to compensate its employees.
Herman inherits stock with a fair market value of $100,000 from his
grandfather on March 1.
On May 1, Herman sells half of the stock at a gain
of $10,000 and invests the $60,000 proceeds in Jordan County school
The bonds' annual interest rate is 6%, which is paid on July 31 and
On October 15, Herman receives a $2,200 dividend on the
remaining shares of stock.
How much gross income does Herman have
from these transactions?
Herman must include the $10,000 capital gain from the sale of half of
the stock and the $2,200 of dividend income in his gross income.
receipt of the inherited stock is excluded from income.
subsequent earnings on the stock is not part of the inheritance and
must be included in gross income.
The interest Herman receives from
the Jordan County school bonds is excludable municipal bond