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?
a. The significant difference between the assets from a tax perspective is that the person who receives the stock will have a $600,000 basis when the value is $800,000 . Therefore, a taxable gain will be recognized if the assets are sold for more than $600,000 . The bonds do not have this taxable gain possibility. Alice cannot be absolutely certain that the property will never be sold; therefore, she should accept the bonds.
b. The bonds and stock are not of equal value because the stock has the lower tax basis thus creating a potential tax liability upon their sale.
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