2018S #14

edited October 2022 in Odomirok.26-Taxes

So I was trying to figure out why this problem included EP in invested income but we didn't for 2017F #21.

It seems it's because the specific wording of the question says it is invested (I think this should be mentioned in the battlecard for TBI version 1).

The source is very short and just says

Taxable investment income consists of income from bonds, mortgages, real estate and venture capital holdings, and realized capital gains.

So I think we were supposed to assume that they sold this investment on 12/31 for CY1 (to realized cap gains), then immediately reinvest the original and the gains on 1/1, otherwise it's unrealized cap gains right?

Maybe that's overly pedantic, but I wouldn't put it past CAS to make the same comment.

Comments

  • Also in the Battlecard for TBI version 2 is
    "if EP is given, assume it's invested and apply compound interest (it's fully taxable)"

  • Where exactly do you find this wiki note on TBI version 2?

  • Actually, I had put that comment in BattleCard 30 from this list of web-based problems:

    I'm not sure the there was any real justification for using EP in invested income in the 2018 problem but not in the 2017 problem, other than that in 2018 they specifically told you the EP for that policy was to be invested. In the 2017 problem, they didn't specify investing EP (and didn't directly provide it, although I suppose they might have expected you to try to calculate it) so they didn't seem to require it be considered in the solution.

  • edited October 2022

    Sorry, I might be mistaken, but the point I was trying to make was that they wanted you to make the assumption that the interest on invested premium was realized capital gains (in addition to the assumption that you invested the premium).

    Then the additional assumption of reinvesting the EP and gains, then selling again so they are realized.

    I should not have included the first two paragraphs in the original post--that's just me rambling, sorry.

  • Oh, do you mean they must have bought an investment for $6500, earned interest and then sold the $6500 investment at the end of the year (for $6500)? Because the principal plus interest is all included in income?

    I don't think there actually are any capital gains here however you think about. The investment would have to be sold for more than $6500 for that to occur. Or am I misinterpreting what you're saying.

  • Let me start over:
    Given
    From exam 2018S 14:

    The premium (6500) is paid on 1/1/2016 and invested at an annual interest rate of 5%

    From Odomirok ch26:

    Taxable investment income consists of income from bonds, mortgages, real estate and venture capital holdings, and realized capital gains.

    Solution Sample 1:

    2016 Inv. Inc. = 6500 * 5% = 325

    The only way I can think of to tax this invested income is by realizing the capital gains, which means the investment must be sold 12/31/16 for 6825, with only 325 taxable.

    Then given

    2017 Inv. Inc. = (6500 + 325) * 5% = 341.25

    Similarly, this must mean the company reinvested the 6825 at 5% immediately on 1/1/2017, then sold again at 12/31/17. The taxable portion is the realized gains of 341.25.

    However, there was no indication that anything was sold/reinvested, so it shouldn't have been taxed.

  • Another way to think about it is that the interest may have been paid out in the form of a dividend, or a coupon, which would not necessitate the original investment to be sold. This is not explicitly stated in the question, either, so it would again be an assumption.

    Your assumption technically works, and if you explain it carefully in your answer, you may get credit. However, it's clear from the givens of the question that they want you to do some interest calculations. I would watch out for such tell-tale signs.

  • Hello, I have a question on this. When i was referring to the solution. I was slightly confused on why we need to bring the discounted loss reserve of 7000/1.05 = 6666.67 to the beginning year of 2016.

    The question was asking ‘Calculate the tax basis income for year end 2016’. Isn’t that the TBIL = 0 + (7,000-0) = 7,000

    Appreciate your help on this. Thanks!

  • It would make more sense that way. . . However, IRS discounts incurred loss to the beginning of the year-in-question, just a fact you have to know.

  • same to the Loss Reserve discount comments, it is super confusing the way IRS discounts. It might make sense to include you comment here in the wiki though.

  • I have inserted footnote 5 in the BattleTable here:

    And that footnote links back to this discussion thread.

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