Question

Denise, a solvent individual but a recovering alcoholic, embezzled $5,000 from her employer. In the same year that she embezzled the funds, her employer discovered the theft. Her employer did not fire her and told her she did not have to repay the $5,000 if she would attend Alcoholics Anonymous. Denise met the conditions and her employer canceled the debt. Which of the following statements is true?
a. Denise is not required to include the $5,000 in gross income because her employer made a gift to her.b. Denise may exclude the $5,000 from gross income because the debt never existed.c. Denise must include $5,000 in gross income from discharge of indebtedness.d. Denise did not realize any income because she obtained the funds illegally.e. None of these choices are correct.

Answer 1

Answer:

The answer is: c. Denise must include $5,000 in gross income from discharge of indebtedness.

Explanation:

All debt discharges that are not a result from bankruptcy filings, should be included as gross income.

The logic behind Denise not having to return the $5,000 she stole from her company, is that the $5,000 serve as an incentive for Denise to attend Alcoholics Anonymous. Al incentives or bonuses are included in gross income.