Is the $3,500 of life insurance proceeds received by Lime included in its gross income? Explain.

Lime Finance Company requires its customers to purchase a credit life insurance policy associated with the loans it makes. Lime is the beneficiary of the policy to the extent of the remaining balance on the loan at die time of the customer’s death. In 2017, Lime wrote off as uncollectible a $5,000 account receivable from Wally, which included $1,500 of accrued interest. When Wally died in 2018, the life insurance policy was still in force and Lime received $3,500.

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Expert Solution

Assuming that Lime had taxable income in 2017 of at least $5,000, it received a tax benefit from writing off the receivable. So Lime would include $3,500 in gross income in 2018 under the tax benefit rule. The insurance proceeds could not be excluded from gross income because the insurance contract proceeds were in consideration of the loan and not payable merely as the result of Wally’s death.

Lime would include $3,500 in gross income in 2018 under the tax benefit rule.

Renze Joy Candido answered 1 year ago

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