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:
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

Since Thelma transferred the stocks to Mitch under a divorce agreement, the transfer is considered a transfer incident to divorce and is therefore nontaxable.

However, since Mitch sold the stocks for $1,300,000, he must recognize the gain attributable to the appreciation of the stocks from $600,000 to $1,300,000, which is $700,000 ($1,300,000 - $600,000).

Thelma and Mitch Were Divorced