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.

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Definitions:

Evade Regulation

The act of avoiding compliance with laws and rules, typically through loopholes or other indirect methods, often to gain competitive advantage or reduce costs.

Vertical Relationships

Connections between companies or entities at different stages of the supply chain, such as producers and distributors.

Regulated Good

A product or service that is subject to governmental controls and restrictions.

Decrease Retailer Prices

The activity of reducing the cost at which goods or services are sold by retail outlets to the consumer market.