Ray and Carin are partners in an accounting firm. The partners have entered into an arms length agreement requiring Ray to purchase Carins partnership interest from Carins estate if she dies before Ray. The price is set at 120% of the book value of Carins partnership interest at the time of her death. Ray purchased an insurance policy on Carins life to fund this agreement. After Ray had paid $45,000 in premiums, Carin was killed in an automobile accident, and Ray collected $800,000 of life insurance proceeds. Ray used the life insurance proceeds to purchase Carins partnership interest.

a)What amount should Ray include in his gross income from receiving the life insurance proceeds?

b)The insurance company paid Ray $16,000 interest on the life insurance proceeds during the period Carins estate was in administration. During this period, Ray had left the insurance proceeds with the insurance company. Is this interest taxable?

c)When Ray paid $800,000 for Carins partnership interest, priced as specified in the agreement, the fair market value of Carins interest was $1 million. How much should Ray include in his gross income from this bargain purchase?