Ed, an employee of the Natural Color Company, suffered from a rare disease that was very expensive to treat.


Ed, an employee of the Natural Color Company, suffered from a rare disease that was very expensive to treat. The local media ran several stories about Ed’s problems, and the family received more than $10,000 in gifts from individuals to help pay the medical bills. Ed’s employer provided hospital and medical insurance for its employees, but the policy did not cover Ed’s illness. When it became apparent that Ed could not pay all of his medical expenses, the hospital canceled the $25,000 Ed owed at the time of his death. After Ed’s death, his former employer paid Ed’s widow $12,000 in “her time of need.” Ed’s widow also collected $50,000 on a group term life insurance policy paid for by Ed’s employer. What are Ed’s and his widow’s gross income?
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29. LO.2 Determine the gross income of the beneficiaries in the following cases:
a. Justin’s employer was downsizing and offered employees an amount equal to one year’s salary if the employee would voluntarily retire.
b. Trina contracted a disease and was unable to work for six months. Because of her dire circumstances, her employer paid her one-half of her regular salary while she was away from work.
c. Coral Corporation collected $1 million on a key person life insurance policy when its chief executive died. The corporation had paid the premiums on the policy of $77,000, which were not deductible by the corporation.
d. Juan collected $40,000 on a life insurance policy when his wife, Leona, died in 2013.
The insurance policy was provided by Leona’s employer, and the premiums were excluded from Leona’s gross income as group term life insurance. In 2014, Juan collected the $3,500 accrued salary owed to Leona at the time of her death.

30. LO.2, 5 Laura was recently diagnosed with cancer and has begun chemotherapy treatments.
A cancer specialist has stated that Laura has less than one year to live. She has incurred a lot of medical bills and other general living expenses and is in need of cash.
Therefore, she is considering selling stock that cost $35,000 and has a fair market value of $50,000. This amount would be sufficient to pay her medical bills. However, she has read about a company (the Vital Benefits Company) that would purchase her life insurance policy for $50,000. She has paid $30,000 in premiums on the policy.
a. Considering only the tax effects, would selling the stock or selling the life insurance policy result in more beneficial tax treatment?
b. Assume that Laura is a dependent child and that her mother owns the stock and the life insurance policy, which is on the mother’s life. Which of the alternative means of raising the cash would result in more beneficial tax treatment?

31. LO.2 What is the taxpayer’s gross income in each of the following situations?
a. Darrin received a salary of $50,000 in 2013 from his employer, Green Construction.
b. In July 2013, Green gave Darrin an all-expense-paid trip to Las Vegas (value of $3,000) for exceeding his sales quota.
c. Megan received $10,000 from her employer to help her pay medical expenses not covered by insurance.
d. Blake received $15,000 from his deceased wife’s employer “to help him in his time of greatest need.”
e. Clint collected $50,000 as the beneficiary of a group term life insurance policy when his wife died. The premiums on the policy were paid by his deceased wife’s employer.

32. LO.2 Donald was killed in an accident while he was on the job in 2013. Darlene,
Donald’s wife, received several payments as a result of Donald’s death. What is Darlene’s gross income from the items listed below?
a. Donald’s employer paid Darlene an amount equal to Donald’s three months’ salary ($60,000), which is what the employer does for all widows and widowers of deceased employees.
b. Donald had $20,000 in accrued salary that was paid to Darlene.
c. Donald’s employer had provided Donald with group term life insurance of $480,000 (twice his annual salary), which was payable to his widow in a lump sum. Premiums on this policy totaling $12,500 had been included in Donald’s gross income under § 79.

d. Donald had purchased a life insurance policy (premiums totaled $250,000) that paid $600,000 in the event of accidental death. The proceeds were payable to Darlene, who elected to receive installment payments as an annuity of $30,000 each year for a

25-year period. She received her first installment this year.

33. LO.2 Ray and Carin are partners in an accounting firm. The partners have entered into an arm’s length agreement requiring Ray to purchase Carin’s partnership interest from Carin’s estate if she dies before Ray. The price is set at 120% of the book value of
Carin’s partnership interest at the time of her death. Ray purchased an insurance policy on Carin’s life to fund this agreement. After Ray had paid $45,000 in premiums, Carin was killed in an automobile accident, and Ray collected $800,000 of life insurance proceeds.
Ray used the life insurance proceeds to purchase Carin’s partnership interest.
a. What amount should Ray include in his gross income from receiving the life insurance proceeds?
b. The insurance company paid Ray $16,000 interest on the life insurance proceeds during the period Carin’s estate was in administration. During this period, Ray had left the insurance proceeds with the insurance company. Is this interest taxable?
c. When Ray paid $800,000 for Carin’s partnership interest, priced as specified in the agreement, the fair market value of Carin’s interest was $1 million. How much should Ray include in his gross income from this bargain purchase?

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