Table of Contents
Do Jeff and Alison have to recognize income on Alison’s transfer of her interest in the house to Jeff in exchange of Jeff’s payment to her of the funds required under the divorce decree as specified by the § 2516 Certain property settlements?
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No. The income on interest generated by Alison’s share on the property will not be recognized as taxable income. This is because the payment made to her may be recognized as a gift , or an exchange of marital property which under the IRC section 1041 are not recognized as
Statement of Facts
Both Alison and Jeff require an understanding on whether any gain or loss would be considered during the transfer of property previously agreed on. When drafting the divorce decree, the couple did not put into consideration the recognition of gain or loss on the asset. Considering this fact, and that the transfer is initiated by a divorce proceeding the situation may be determined by the existing legislation, which state that gain or loss on a property would be considered during a transfer of property instigated by a divorce.
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Income generated from the house after transfer may not be recognized as an interest to the transfer. The transfer is within the specifications of the IRC section 1041 which describes that any looser gain may not be recognized if transfer is caused by divorce. The same is also described by Section 1041(a) which also explains that in an instance of divorce, not gain or loss in the value of a property may be recognized during a transfer. The legislation is; however, keen to define divorce as it states that a transfer of property can only be considered as instigated by divorce if the transfer happens within one year after the end of the marriage. In regards to this case, the situation meets the standard to be classified as a transfer instigated by divorce.
In regards to the case, recognized provision refers to the expectations on the code of governing the Internal Revenue actions in instances where couples get involved in instances of transfer of property. In the case Linda Gibbs v. Commissioner, Tc Memo 1997-96 a person receives payment from her husband as they agreed on the divorce decree. The case seeks to address the question whether the taxable income of the petitioner would be inclusive of the interest paid by her husband. This is after the court accepted that the transfer would-be recognized after $122500 is paid to the partner making the transfer. This is after the court value the compensation value as the half price of the property in question. For this reason, the situation could be described as transfer of property as instigated by divorce.
In the Alison and Jeff case, Alison had agreed to transfer the house to Jeff with an agreement that Jeff pays the half amount of the value of the house during the transfer periods. This was agreed during the divorce decree, and would affect when Brad finishes high school. Initially, the house was equally owned by the couples, but a divorce would mean an equal sharing of the value of the asset. In addition, the payment made to Alison is referred or described as her income.
Similar to the reference case, Jeff is required to pay Alison half the price of the house based on the fair market valuation. However, this is different from the Miller case as it is easier to realize the valuation of the house. In addition both cases the party receiving monetary compensation will benefit more considering the appreciating value of assets. The gain or loss from prior to the transfer of the property fall under IRC § 1041 which may not be recognized when taxing returns or income. This is because the transfer is instigated by divorce and recognized as just division of marital property thus no taxation may be required on income interests.
As provided by the IRC § 1041 the transfer between Alison and Jeff is instigated by divorce, and for this reason loss or gain from the asset may not be recognized for taxation. In addition, the transfer may be treated as a gift or division of matrimonial property which are not recognized under the provision as IRC § 1041 as taxable income. Conclusively, payments paid to Alison are recognized as income, bur may be defined as a gift therefore the loss or gain of the income may not be viable for taxation.
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- 1041 Transfers of property between spouses or incident to divorce.
- 2516 Certain property settlements.