Question

3. The Internal Revenue Code provides several income items that are excluded from gross income for tax. Please list and explain three exclusions. Provide specific examples and include in your answer how the exclusion works and the reason the exclusion was created. (4 POINTS) Alling the ta formulalaulatubatavus ACI E DOINTS

Answer 1

Types of income are excluded from gross income calculation.

Forms of income which the IRS does not subject to the income tax.

Certain Death Benefits (Section 101)

I.R.C. 101(a) Proceeds of Life Insurance Contracts Payable by Reason of Death

I.R.C. 101(a)(1) General Rule —

provided in paragraphs (2) and (3), subsection (d), subsection (f), and subsection (j), gross income does not include amounts received (whether in a single sum or otherwise) under a life insurance contract, if such amounts are paid by reason of the death of the insured.

I.R.C. 101(a)(2) Transfer for Valuable Consideration —

In the case of a transfer for a valuable consideration, by assignment or otherwise, of a life insurance contract or any interest therein, the amount excluded from gross income by paragraph (1) shall not exceed an amount equal to the sum of the actual value of such consideration and the premiums and other amounts subsequently paid by the transferee. The preceding sentence shall not apply in the case of such a transfer—

I.R.C. 101(a)(2)(A) —

if such contract or interest therein has a basis for determining gain or loss in the hands of a transferee determined in whole or in part by reference to such basis of such contract or interest therein in the hands of the transferor, or

I.R.C. 101(a)(2)(B) —

if such transfer is to the insured, to a partner of the insured, to a partnership in which the insured is a partner, or to a corporation in which the insured is a shareholder or officer.

The term “other amounts” in the first sentence of this paragraph includes interest paid or accrued by the transferee on indebtedness with respect to such contract or any interest therein if such interest paid or accrued is not allowable as a deduction by reason of section 264(a)(4).

Gifts and Inheritances (Section 102)

I.R.C. 102(a) General Rule —

Gross income does not include the value of property acquired by gift, bequest, devise, or inheritance.

I.R.C. 102(b) Income —

Subsection (a) shall not exclude from gross income—

I.R.C. 102(b)(1) —

the income from any property referred to in subsection (a); or

I.R.C. 102(b)(2) —

where the gift, bequest, devise, or inheritance is of income from property, the amount of such income.

Where, under the terms of the gift, bequest, devise, or inheritance, the payment, crediting, or distribution thereof is to be made at intervals, then, to the extent that it is paid or credited or to be distributed out of income from property, it shall be treated for purposes of paragraph (2) as a gift, bequest, devise, or inheritance of income from property. Any amount included in the gross income of a beneficiary under subchapter J shall be treated for purposes of paragraph (2) as a gift, bequest, devise, or inheritance of income from property.

I.R.C. 102(c) Employee Gifts

I.R.C. 102(c)(1) In General —

Subsection (a) shall not exclude from gross income any amount transferred by or for an employer to, or for the benefit of, an employee.

I.R.C. 102(c)(2) Cross References —

For provisions excluding certain employee achievement awards from gross income, see section 74(c).

For provisions excluding certain minimize fringes from gross income, see section 132(e).

Qualified Scholarships (Section 117)

I.R.C. 117(a) General Rule —

Gross income does not include any amount received as a qualified scholarship by an individual who is a candidate for a degree at an educational organization described in section 170(b)(1)(A)(ii).

I.R.C. 117(b) Qualified Scholarship —

For purposes of this section—

I.R.C. 117(b)(1) In General —

The term “qualified scholarship” means any amount received by an individual as a scholarship or fellowship grant to the extent the individual establishes that, in accordance with the conditions of the grant, such amount was used for qualified tuition and related expenses.

I.R.C. 117(b)(2) Qualified Tuition and Related Expenses —

For purposes of paragraph (1), the term “qualified tuition and related expenses” means—

I.R.C. 117(b)(2)(A) —

tuition and fees required for the enrollment or attendance of a student at an educational organization described in section 170(b)(1)(A)(ii).

I.R.C. 117(b)(2)(B) —

fees, books, supplies, and equipment required for courses of instruction at such an educational organization.