Question

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:

1) $0.
2) $1,000,000 ($1,300,000 - $300,000).
3) $700,000 ($1,300,000 - $600,000).
4) $300,000 ($1,300,000 - $1,000,000).
5) None of these.

Answer 1

Mitch's recognized gain from the sale of stocks per the information provided is $700,000, which is calculated by subtracting the basis of $600,000 from the selling price of $1,300,000.

Step-by-step explanation:

To determine Mitch's recognized gain from the sale of the stocks he received from the joint brokerage account in his divorce from Thelma, we need to look at his basis and the selling price. The basis of the stocks was $600,000, which is the amount originally invested in them. When Mitch sold the stocks for $1,300,000, the recognized gain would be the selling price minus the basis. Therefore, the correct recognized gain is option 3) $700,000 ($1,300,000 - $600,000).

The payments made by Mitch to Thelma as described do not affect the calculation of the gain from the sale of the stocks. Since no other information is provided that would indicate a need to adjust the basis or the selling price for purposes of calculating the gain, we can conclude the $700,000 figure is indeed Mitch's recognized gain on the disposition of the stocks.