Section 108 provides several exclusions for COD income, including: (1) discharge in a Title 11 bankruptcy case, (2) discharge while the taxpayer is insolvent (to the extent of insolvency), (3) discharge of qualified farm indebtedness, (4) discharge of qualified real property business indebtedness, and (5) discharge of qualified principal residence indebtedness (temporarily). When COD income is excluded, the taxpayer must reduce certain tax attributes (such as NOLs, basis of property) by the excluded amount. Answer B is incorrect because most COD income is taxable unless a specific exception applies. Answer C is incorrect because the exclusions do not depend on recourse vs. non-recourse status. Answer D is incorrect because the voluntariness of the forgiveness is not the determining factor.

Under Section 86, up to 85% of Social Security benefits are includible in gross income for taxpayers whose 'combined income' (AGI plus tax-exempt interest plus 50% of Social Security benefits) exceeds $34,000 (single) or $44,000 (MFJ). Between the lower thresholds ($25,000 single / $32,000 MFJ) and the upper thresholds, up to 50% is taxable. Below the lower thresholds, no benefits are taxable. Answer A is incorrect because Social Security is potentially taxable. Answer B is incorrect because the maximum inclusion rate is 85%, not 100%. Answer C is partially correct but incomplete; it describes only the 50% tier without noting the 85% tier.

Under Section 79, the cost of the first $50,000 of employer-provided group-term life insurance coverage is excluded from the employee's gross income. Coverage in excess of $50,000 results in a taxable benefit computed using IRS Table I rates (uniform premium table), which are included in the employee's wages. Answer A ($25,000) is below the statutory threshold. Answer C ($100,000) exceeds the $50,000 exclusion. Answer D is incorrect because only the first $50,000 of coverage is excluded.

Under Section 61 and the broad scope of gross income, found money is includible in gross income in the year it is retained by the finder. The Supreme Court has held that gross income encompasses all accessions to wealth, clearly realized, over which the taxpayer has complete dominion. Keeping found money satisfies all of these elements. Answer A is incorrect because earning is not required; accession to wealth is sufficient. Answer B is incorrect because Form 1099 reporting is irrelevant to whether income exists. Answer D is incorrect because the income is recognized when the money is kept, not contingent on whether the owner claims it.

Under Section 103, interest on obligations of a state, territory, political subdivision, or the District of Columbia (commonly called municipal bonds or tax-exempt bonds) is excluded from federal gross income. This exclusion encourages state and local borrowing at lower interest rates. Answer B is incorrect because U.S. Treasury bond interest is subject to federal income tax (though exempt from state tax). Answer C is incorrect because corporate bond interest is fully taxable regardless of credit rating. Answer D is incorrect because foreign government bond interest is taxable for U.S. federal income tax purposes.

Under Section 121, a single taxpayer who has owned and used a property as a principal residence for at least 2 of the 5 years preceding the sale may exclude up to $250,000 of gain ($500,000 for married filing jointly). The taxpayer owned and used the home for 3 of the last 5 years, meeting the requirements. If the gain is $15,000, the full amount is excluded (well within the $250,000 limit). Answer A is incorrect because Section 121 provides a significant exclusion. Answer B ($125,000) was the exclusion under prior law (one-time exclusion for taxpayers over 55), now replaced by Section 121. Answer C ($500,000) is the MFJ exclusion, not the single filer amount.

Under Section 74(b), certain prizes and awards that the recipient did not seek, are given in recognition of religious, charitable, scientific, educational, artistic, literary, or civic achievement, and are transferred directly to a governmental unit or qualifying tax-exempt organization (with no services required by the recipient) may be excluded. Answer B ($500 raffle prize) is includible. Answer C (Nobel Prize) is normally includible if accepted by the recipient; the exclusion under Section 74(b) requires that the prize be assigned to charity. Answer D (employer sales contest prize) is compensation included in gross income.

Under Section 117, a qualified scholarship for a degree candidate is excluded from gross income to the extent used for qualified tuition and related expenses (tuition, fees, books, supplies, and equipment required for courses). Amounts used for room and board, personal living expenses, or travel are not qualified expenses and are taxable. Answer A incorrectly includes room and board. Answer C is incorrect because scholarships are not compensation (unless tied to required services). Answer D is incorrect because the exclusion applies to degree candidates at eligible educational institutions generally, not only four-year universities.

Interest earned on a savings account at a bank is fully includible in gross income under Section 61(a)(4). There is no exclusion for ordinary bank interest. Answer B is incorrect because interest on state and local government bonds is excluded from federal gross income under Section 103. Answer C is incorrect because Puerto Rico is a U.S. territory and its bonds qualify for the Section 103 exclusion. Answer D is incorrect because below-market loans between family members below the $10,000 de minimis threshold may be exempt from imputed interest rules under Section 7872.

Under Section 85, unemployment compensation received under the laws of the United States or any state is included in gross income in full. Unlike Social Security benefits, there is no partial exclusion or income threshold; the full amount is taxable. Answer A is incorrect because unemployment compensation is taxable. Answer C is incorrect; there is no percentage-of-prior-wages threshold. Answer D describes a temporary ARPA provision that applied only to 2020 returns (for the first $10,200), which expired and is no longer in effect for subsequent years.