Chapter 06N Solutions - SOLUTIONS TO HW AND SELECTED...

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Unformatted text preview: SOLUTIONS TO HW AND SELECTED CHAPTER 6 QUESTIONS 6-10 a. Payments that represent alimony are deductible for A.G.I. by the payor and taxable income to the payee. Child support payments are nondeductible personal expenses and nontaxable income to the recipient. [See Examples 33 through 39] b. For payments to qualify as child support, they must be a specific fixed amount, paid solely for the support of minor children (under age 21), and payable by decree, instrument, or agreement. If all three requirements are not met, the payments are treated as alimony with no part considered to be child support. In the current arrangement, the entire amount would be deductible by the husband and taxable income for the wife. (See Example 38) c. Many divorce agreements require that (1) periodic cash payments be made by one party to the other and (2) title to specified assets be transferred from one party to the other. Tax implications of cash payments are given in b above. When title to assets is transferred, (1) the recipient has no taxable income and the bases in the assets (or portion of an asset) not previously owned transfers with the property, and (2) neither party recognizes any gain or loss. These varying tax results allow for considerable tax-planning when negotiation is possible. For discussion purposes, it is assumed the husbands marginal tax rate is 28 percent and the wifes is 15 percent after changes to the agreement made below. (See Example 61) 1. One possible option is to increase the amount of the periodic payment and allocate most or all of it to alimony rather than child support. All of it is treated as alimony if no specific dollar amount is assigned to child care. This benefits both the husband and wife because every $100 of alimony has an after-tax cost to the husband of $72 and an after-tax benefit to the wife of $85. In contrast, his after-tax cost of $85 of child care is $85 and her benefit is $85. Thus, her situation remains the same and he saves $13 with the change. 2. Another available option is to transfer title of more income-producing property to the wife and decrease periodic payments. In this situation, the taxable income from the property is taxed at the wifes lower marginal rate. This achieves the same tax effect as alternative (1) above. Of course, the property transferred should have taxable income and not be tax-exempt or tax-deferred. 3. Any property to be sold should be transferred to the party with the lower marginal tax rate (and possibly to one of the children). 6-14 a. When no amount is specifically assigned to a non-competition agreement, the entire amount is for goodwill. Thus, the allocation as stated would result in $40,000 capital gain to the seller and a deductible business expense (amortized ratably over a period of 15 years) to the purchaser. (See Example 49) b. Because amounts assigned to a non-competition clause are included in ordinary income, the seller may be reducing his tax liability with the current arrangement (where all of the $40,000 is considered...
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This note was uploaded on 09/26/2011 for the course BA 101 taught by Professor Jackson during the Summer '06 term at University of Nevada, Las Vegas.

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Chapter 06N Solutions - SOLUTIONS TO HW AND SELECTED...

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