Final answer:
The proceeds from a key person's life policy received by a corporation are generally non-taxable. Taxation may apply under certain conditions, such as transfer for value or noncompliance with IRS requirements. Cash value withdrawals over premiums paid may also be taxable.
Step-by-step explanation:
If a corporation collects the policy benefit on a key person's life policy, the amount received is generally non-taxable. Life insurance proceeds paid to beneficiaries upon the death of the insured are typically not subject to income tax. However, if the policy has been transferred to the beneficiary for valuable consideration, or the corporation does not meet certain IRS requirements, such as having a demonstrable insurable interest and consent from the employee, there could be tax implications. Therefore, the answer is B) Amount received is non-taxable, but specific circumstances might render the proceeds partially taxable.
It's important to consider the two principles of taxation: the benefit principle taxation which suggests those who benefit from government services should pay in proportion to the benefit they receive, and the ability to pay principle, which holds that those who are more capable of bearing the burden of taxes should pay more. However, these principles don't directly dictate the tax status of life insurance proceeds.
The cash-value portion of a life insurance policy, such as a whole life policy, can accumulate an amount that serves as a savings account. While the death benefit is typically non-taxable, withdrawals from the cash value account may be taxable if they exceed the premiums paid into the policy.