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    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 Preview

    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 ...

    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.