Lisa and David Got Married and They Have Approached You

question 12

Essay

Lisa and David got married and they have approached you seeking your views about the gift tax and income tax consequences on the following facts.
As per the prenuptial agreement, Lisa gave to David $100,000 of appreciated stock on the morning of their wedding. Lisa's basis in the stock was $35,000. Under the terms of the agreement, David surrendered all other marital rights and claims to Lisa's assets in exchange for these securities. Both David and Lisa are residents of Arizona.
The file memo you prepared contains the following legal conclusions, based on controlling authority:
▪IRC Section 2501 imposes a tax on the transfer of property by gift, not when it is received by the donee, but upon the transfer. The donor is taxed, not the donee.
▪The Supreme Court has held that prenuptial transfers in relinquishment of marital rights are not adequate and full consideration for the transfer of property. So, the transfer is treated as a gift.
▪Since the prenuptial agreement is enforceable only after the marriage, the transfer has not taken place until after the marriage occurred. Thus, the transfer is eligible for the gift tax marital deduction.
▪Although the transaction resulted in a gift, no gift tax is imposed due to the application of the annual exclusion and the unlimited gift tax marital deduction.
▪Neither party recognizes gross income upon release of the marital rights. Gross income does not include the value of property acquired by gift.
▪The donee takes the donor's income tax basis in the transferred property.
Based on the information provided above, draft a client letter to an unsophisticated client explaining the gift tax consequences and the income tax consequences of the stock transfer.

Grasp the definitions and distinctions between systematic and unsystematic risk.

Explain the importance of only systematic risk to risk-averse investors and the irrelevance of total risk.

Comprehend the transition from historical to expected returns and the rationale behind it for analysis purposes.

Define and calculate portfolio weights.

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Definitions:

Accumulated Depreciation

The contra asset account credited when recording the depreciation of a fixed asset.

Perpetual Inventory System

An inventory system that records the sale or purchase of inventory immediately through the use of computerized point-of-sale systems and enterprise asset management software.

Inventory System

A method of tracking the quantity, type, and value of products or materials a company has in stock.

Single-step Income Statement

A simplified income statement format that calculates net income by subtracting total expenses from total revenues in a single step.