Family Matters

[BHoffman]

Client's elderly and wealthy father found Love with a younger woman who promptly wiped him out and split. Left a lot of debt.

Client bailed out Father and paid debts. Father supposedly gave Client a Painting in exchange. Painting sold at auction for $200k. Client used proceeds to repay himself. I'm wondering what to do about this. Gift tax to Father? I do not prepare Father's return. Is this income to Client?

Thanks for advice.

[spanel]

Sounds like a loan and the painting paid off the loans...

I Might add up all the payments made.. less than 200k, then maybe a gift tax or capital gain tax maybe?

chris

[Nashville]

Independent Appraisal

Was there an independent appraisal anywhere of the painting? If painting was well-known in certain circles it may have been advertised or listed without having to call in an appraiser. The "gift"(indeed if there was any) would be measured by the value versus the amount of debts extinguised.

If no appraisal, the $200,000 would stand on its own value, and if the proceeds were used to extinguish debt, the mathematics of the situation would dictate there was no gift.

[spanel]

Would it change if he only paid $100,000 in bills?

Chris

[BHoffman]

I have the same question as Chris, but client claims his support of Father, including the debt payments, exceeds the $200k. He claims he kept documentation, but I haven't seen or asked for it yet.

[erchess]

Several Thoughts come to me and some may be right.

The first is that the gift of the painting has to be counted as support Dad provided for himself. The second is that it seems unlikely Dad meets the gross income test to be a dependent even if he does meet the support test. I realize OP does not actually say son is trying to claim Dad as a dependent but I kind of got the idea he was. I'd sure have to see Dad's financials and tax return before I'd do the son's return claiming Dad as dependent.

I also think you have a loan with imputed interest reportable by the son or else you have to have Dad file a gift tax return. If the son tells me he's going the latter route I want to see the gift tax return or I want someone (Son, Dad, or Dad's TP) to tell me in writing that one exists.

Nobody else has touched on this but Dad likely has high medical expenses and son may be able to take advantage of them even if Dad is not a dependent.