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Wrap-Up Questions for Chapter 8

29 July, 2015 - 16:31
  1. The basis of Davis was that taxpayer’s wife’s interest partook “more of a personal liability of the husband than a property interest of the wife.” Hence, taxpayer merely fulfilled his obligation by giving up appreciated property – a recognition event. Was Congress right to reverse the holding?
  2. Mr. Davis would have benefited from § 1041. Exactly how does § 1041 affect Mrs. Davis’s basis in her inchoate marital rights?
  3. Dissolution of marriage is a matter of state law. Often, the Code yields to state law in such matters as status, property ownership, and legal duties. Why should the Code (so forcefully) intervene in determining whether payments between ex-spouses are alimony, child support, or property settlement?
  4. Can you argue that the holding of Revenue Ruling 93-27 is incorrect?
  5. What should happen if H and W jointly own all of the stock of a corporation that owns a McDonald’s franchise. They divorce. McDonald’s does not allow divorced spouses to own jointly a franchise. As part of their property settlement, H and W agree that the corporation will redeem W’s stock. For this, W must pay tax on the gain. In reaching this agreement, the parties carefully considered its tax consequences. Specifically, a large chunk of cash would go to W, and she would pay income tax at the capital gains rate – much lower than the tax rate on ordinary income. W decides not to pay the tax on the gain and to argue in court that the corporation, a third party, was paying the property settlement obligation of H. Hence, he should be subject to income tax on dividend income. What result? SeeArnes v. United States, 981 F.2d 456 (9th Cir. 1992) and Commissioner v. Arnes, 102 T.C. 522 (1994). What is the effect of Reg. § 1.1041-2(c)?