Question

23. Ted and Alice were in the process of negotiating a divorce agreement. They own bonds with a basis of $800,000 and a fair market value of $800,000. They also own common stock with a basis of $600,000 and a fair market value of $800,000. Alice is trying to decide whether to bargain to receive the bonds or the stock. She has no plans for selling the bonds or stock, whichever she receives.

a. Which would you advise Alice to receive?
b. From Ted’s perspective, are the assets of equal value?

Answer 1

Answer:

a.

When the value of the bonds is $800,000, the receiver of those bonds will have the basis amounting $600,000 from a tax perspective. Hence, if the bonds are sold at the amount more than $600,000, then a taxable gain will be recognised. This is not possible with the bonds because there is no question of taxable gain in the case of bonds. Alice cannot take for granted that the property will never be sold. Therefore, the bonds should be accepted by Alice.

b.

The value of stock and bonds are not equal. The reason is that the stock has the tax basis of lower value. Therefore, the sale of stock attracts the tax liability. From Ted’s perspective, the assets do not have the equal value.