Question

5. 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 created a website that generated 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?

Answer 1

$0

Explanation:

The $10,000 that Ed's family received as gifts from individuals to help them pay the hospital bill are not included as part of their gross income.

Generally debt cancellations are taxable, except when they are made out of "detached and disinterested generosity", i.e. debt is cancelled for humane reasons and not business reasons. I believe that the $25,000 debt that was cancelled by the hospital fits into the definition of disinterested generosity, therefore, the $25,000 are considered a gift and are not taxable.

Under section 102, money given by an employer to an employee's widow may be considered a gift and is not taxable. If the payment is made due to a special circumstance and not in recognition of previous work done, then it is a gift. I also believe that the family can argue that this money is a gift since Ed died of a rare disease that left them almost bankrupt.

Life insurance proceeds are not taxable.