Question

Ray and Carin are parents 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 $800,0000 of life insurance proceeds. Ray used to life insurance proceeds to purchase Carin’s partnership interest. What amount should Ray include in his gross income from receiving the life insurance proceeds?

Answer 1

The answer is: 0$

Step-by-step explanation:

The proceeds form a life insurance policy are exempt from income tax.

The money Ray received form Carin's life insurance policy ($800,000) are exempt from his gross income. Ray would have to pay taxes only if he received any type of interest over that money (only interest counts as gross income).