Tax effects of estate assets and punitive vs compensatory
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1. For 2005, Arlene's only capital transactions are a short-term loss of $2,000 and a long-term loss of $2,000. How are these losses handled for tax purposes?
2. During the year, Wilbur received the following in connection with his father's estate:
? His father's will named Wilbur as the executor of the estate. He received $7,500 for serving as executor.
? Wilbur was also a beneficiary of his father's estate and received real estate that was included in the estate at a value of 100,000 that his father had purchased for $30,000.
? Wilbur was the beneficiary of one of his father's life insurance policies. He elected to collect the proceeds of the $100,000 policy in four installments of $30,000 each. Each $30,000 payment consists of principal and interest. He collected $30,000 this year.
Determine the effect on Wilbur's gross income.
3. Determine the effect on gross income in each of the following cases:
a. Eloise received $150,000 in settlement of a sex discrimination case against her former employer.
b. Nell received $10,000 for damages to her personal reputation. She also received $40,000 punitive damages.
c. Orange Corporation, an accrual basis taxpayer, received $50,000 from a lawsuit filed against its auditor who overcharged for services rendered in a previous year.
d. Beth received $10,000 compensatory damages and $30,000 punitive damages in a lawsuit she filed against a tanning parlor for severe burns she received from using its tanning equipment.
e. Joanne received compensatory damages of $75,000 and punitive damages of $300,000 from a cosmetic surgeon who botched her nose job.
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Solution Summary
The solution explains the distinction between compensatory and punitive damages as applies to the problem plus the tax effects for assets coming from an estate.
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1. When combining capital losses, there are two rules: Short term losses are used first and losses in total are limited to $3000 per year. She will be able to deduct $3000 and have a carryover to the following year.
2. Wilbur will earn the $7500 and it is income to him and reportable. Assets coming ...
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