Reference no: EM131139438
FACTS:
Client A, is an unmarried individual U.S. taxpayer living in New York City. She informs you that she recently entered into a settlement agreement with her investment advisor. The investment advisor has paid Client A $150,000. The payment is attributable to investment losses caused by the investment advisor's alleged failure to follow the asset allocation directions from Client A. Specifically; Client A instructed her advisor to change the investment objective for her account from "all equity" to "current income." The advisor understood these instructions to mean reallocate her portfolio from equity to income gradually over time, rather than an immediate sell off and restructuring. Client A claims that her intention was to do an immediate sell off and restructuring. Hence, a dispute arose with respect to the correct interpretation of her instructions and the decline in market value of the equity position over the length of time it took her advisor to gradually sell (restructure) her equity portfolio to income. Client A says this could have been avoided had the change in asset allocation been implemented immediately the way she wanted. In the interests of both parties in settling the dispute without admission of fault by either party, the investment advisor agreed to pay Client A $150,000.
ISSUE 1 - Is this settlement payment taxable for federal income tax purposes?
ISSUE 2 - If so, what is the character of the payment?
ISSUE 3 - Is it a reduction of tax basis of investment assets, ordinary income, or short or long-term capital gain income?
ISSUE 4 - What are the income tax consequences to the investment advisor (the payer) in making the settlement payment?
ISSUE 5 - Is the payment deductible, and if so, what is the character of the deduction?
CONCLUSION: Your memorandum should include a section that briefly summarizes the conclusions you have drawn from your analysis or discussion.
LAW AND ANALYSIS: This section (some refer to as "Discussion") is the core of the memorandum. It restates each of the issues. Each question is followed by a discussion or analysis in which the writer shows how the tax law (statutes, cases, etc.) applies to the facts in the case. Each question should be answered.
Required: Please prepare a conclusion and the Law Analysis on base on the above facts and issues.
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