Thelma and Mitch were divorced in 2018.The couple had a joint brokerage account that included stocks with a basis of $600,000 and a fair market value of $1,000,000.Under the terms of the divorce agreement, Mitch would receive the stocks and Mitch would pay Thelma $100,000 each year for six years, or until Thelma's death, whichever should occur first.Thelma and Mitch lived apart when the payments were made by Mitch.He paid the $600,000 to Thelma over the six-year period.The divorce agreement did not contain the word "alimony." Then, Mitch sold the stocks for $1,300,000.Mitch's recognized gain from the sale is:
A)$-0-.
B)$1,000,000 ($1,300,000 - $300,000).
C)$700,000 ($1,300,000 - $600,000).
D)$300,000 ($1,300,000 - $1,000,000).
E)None of these.

Question

Quizplus · Accepted Answer

Mitch's basis in the stocks was $600,000, and he sold them for $1,300,000, resulting in a realized gain of $700,000 ($1,300,000 - $600,000). Since the divorce agreement did not specify that the payments to Thelma were alimony, they are treated as property settlements, and therefore, the $600,000 payment to her has no impact on Mitch's recognized gain from the sale.

Thelma and Mitch Were Divorced in 2018