Thelma and Mitch were divorced.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 6 years, or until Thelma's death, whichever should occur first.Thelma and Mitch lived apart when the payments were made by Mitch.Mitch 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:

Question

Quizplus · Accepted Answer

Since the stocks were transferred to Mitch as part of the divorce agreement, the transfer falls under the rules of Section 1041. This section provides that transfers of property between spouses or former spouses incident to divorce are not taxable events. Therefore, Thelma's transfer of the stocks to Mitch did not result in any taxable gain or loss.

When Mitch sold the stocks for $1,300,000, his recognized gain would be the sales price ($1,300,000) minus his basis in the stocks ($600,000), which equals $700,000. This gain is subject to capital gains tax, but is not considered alimony because the divorce agreement did not specify it as such.

Thelma and Mitch Were Divorced