Please read the 3 question prompts on the following pages. Be sure to answer eac

Please read the 3 question prompts on the following pages. Be sure to answer each of the questions in sufficient detail in order to get maximum points. Keep in mind that a “yes” or “no” answer will not suffice. Your detailed explanation of “why” you have arrived at your stated answer will be much more important.
You will be awarded points based on your ability to spot issues. You will also be graded on your ability to analyze the facts to determine the appropriate outcome of the scenario. Remember, the correctness of a “yes” or “no” answer is not important; the explanation of “why” is what counts. You should use relevant, prior reading assignments to support your analysis.
The answers provided should be in essay format only. Please note that you should not put your answer in memorandum format (i.e. no facts section, or issue section is needed). Simply provide your answers to the question(s).
Format: Typed, Times New Roman, Double Spaced, 12-point font, 1-inch
margins. Handwritten answers will not be accepted.

1. Please determine the tax consequences for Ms. Smith that will result if she wins the lawsuit below. Specifically, will the taxpayer need to include the lawsuit/settlement amounts below in gross income? Are there any available exclusions? Do the available exclusions apply?
Sally Smith was involved in an auto accident with Jerry Jones in Weld County Colorado. Ms. Smith’s vehicle pulled out in front of Mr. Jones’s motorcycle causing the motorcycle to collide with Ms. Smith’s vehicle. Due to the accident, Mr. Jones was seriously injured and spent several weeks in the hospital with medical bills exceeding $500,000. At the time of the accident, Ms. Smith was insured by Sun Insurance Mutual Insurance Company (hereinafter referred to as Sun Insurance) with policy limits of $100,000 per person and $300,000 per accident. A review by Sun Insurance led to the determination by Sun Insurance that Ms. Smith’s liability for the auto accident was “both clear and aggravated.”
Sometime after the accident, Mr. Jones’s attorneys contacted Sun Insurance to request an affidavit of no additional insurance and also provided Sun Insurance with a proposed form of the affidavit in August 2015 as well. In addition, Mr. Jones’s attorneys requested that Sun Insurance pay the applicable policy limits of $100,000 to Mr. Jones. Although Sun Insurance signed and executed the affidavit, they never actually sent the executed affidavit until November 9, 2015. Due to Sun Insurance ’s failure to comply with the aforementioned request, Mr. Jones rejected Ms. Smith’s tender of the policy limits and pursued litigation.
A suit was filed on behalf of Mr. Jones on September 11, 2015 in the Case Jones v. Smith (hereinafter referred to as the Jones litigation). Damages totaling $1,652,207 were awarded to Mr. Jones as a result of this litigation. Ms. Smith then filed a complaint against Sun Insurance under the following causes of action: 1) Breach of Contract, 2) Bad Faith Breach of Contract, and 3) violation of C.R.S. § 10-3-1115. Ms. Smith alleged that Sun Insurance ’s actions before the Jones litigation caused a rejection of Ms. Smith’s tender of the policy limits and the resulting litigation. Ms. Smith is currently seeking the following damages:
1) Payment of the remaining balance of the judgment from the Jones litigation less punitive damages and partial payments by Sun Insurance.
2) Damages to Ms. Smith for her credit and reputation.
3) Non-economic damages for emotional distress, anguish, and inconvenience
4) Statutory Damages pursuant to C.R.S. § 10-3-1115 and 1116 (statute designed to
dissuade insurance companies from arbitrarily denying claims).
2. In year 20X0, Elyse is employed as a ticket vendor at an off-track betting parlor in New York. No credit is extended to customers, and employees are not allowed to bet on races. Elyse is a compulsive gambler and occasionally places bets without paying for them. In the past, she has always managed to cover her bets without being detected by her employer. Earlier this year, Elyse ran up $80,000 in bets that she did not pay for and won only $33,000. She was unable to cover this large loss and turned herself in to her employer. Elyse was convicted of grand larceny and sentenced to five years of probation, required to perform 200 hours of community service and pay a $500 fine. Her employer was liable to the racetrack for the bets she had made and obtained a judgment against her for the $47,000 shortfall it had to pay because of her indiscretions. How much, if any, gross income must Elyse recognize from her illegal betting? May she deduct the losses for her gambling winnings? Please explain.
3. Suppose that Elyse’s employer and the racetrack betting parlor above agree not to call the police or pursue criminal charges against Elyse. Instead, the employer only requires that Elyse pay back the outstanding $47,000 via a 5 year note at a competitive 8% interest rate. However, in year 20X3, Elyse has turned her life around significantly, but she is unable to make continued note payments. Her employer decides to forgive the remaining balance of $38,500. Elyse’s assets total $12,000 and her liabilities total $43,000 (including the $38,500 note). What amount, if any, of the debt forgiveness is includable in her gross income? Please explain.