Marco Rivas had been employed by the investment brokerage firm Big Bucks in New York for 20 years when he died on June 21, 2022. At that time, he was working under a yearly employment contract entitling him to an annual salary of $416,000. In addition, if he was still in the firm’s employ on September 30, 2022, the end of its fiscal year, he was entitled to an additional amount equal to .55% of the firm’s net profits.

During the latter part of his employment Marco had required hospitalization more than 20 times and had undergone seven major operations. On many of these occasions partners of Big Bucks called Juanita Rivas, Marco’s spouse, to offer financial assistance. The couple always declined, preferring to manage on their own. Most of the Big Bucks partners attended Marco Rivas’s funeral, including two having flown in from Chicago despite a blizzard. Some of the Big Bucks partners later suggested that the Rivas’ son, Jimmy, come to work for the firm, which he did for a while.

In 2022, Big Bucks was managed by an administrative committee consisting of seven of the general partners. At a meeting of this committee held shortly after Marco’s death, the committee decided to pay Juanita Rivas what her spouse would have earned under his contract if he had lived until the end of the firm’s fiscal year. These payments amounted to $160,000, of which $8,000 would be paid in 15 weekly checks and constituted what would have been Marco Rivas’s salary. The remaining $40,000 was what would have been his .55% share of the firm’s profits.

While no minutes were kept of the administrative committee meeting at which the payments to Juanita Rivas were authorized, two members of the committee stated that they agreed that at the time of Marco Rivas’s death, Big Bucks had no established plan or policy with respect to payments to the survivors of valued employees; indeed, Marco Rivas was the first employee to have died. Both attested to the affection and esteem in which Marco Rivas was held. William J. Biggs, the managing partner, stated that he felt sympathy for the widow, but that this did not enter into the particular decision since “we would be sympathetic to any widow,” but that, on the other hand, he doubted whether the payment would have been made if Marco Rivas had not been survived by a wife and son. He said further that, as was fairly obvious, Marco Rivas’s past services were a factor in arriving at the decision.

Juanita originally assumed the payments were taxable income, but a friend told her they sounded more like a gift. She has hired you to research this issue regarding how to handle the payments for federal tax purposes.

Your Responsibility

Prepare a tax research memo addressing the question that has been raised.

You will need to support your conclusion using primary sources of tax law with at least one court case.

Answer rating: 100% (QA)

Tax Research Memo Tax Treatment of Payments to Juanita Rivas To Juanita Rivas From Your Name Date Date Subject Tax Treatment of Payments from Big Bucks Question Presented How should the payments recei... View the full answer