Reference no: EM132680414

After several years of a difficult marriage, David and Doris agreed to a divorce. Their divorce was finalized in 2019. As part of the property settlement, Doris transferred property worth $1,000,000 to David. The property Doris transferred to David consisted of corporate stock valued at $600,000 and a personal residence valued at $400,000. The fair market value of the property David transferred to Doris was only $500,000. Because the fair market value of the property David transferred to Doris was $500,000 less than the fair market value of the property Doris transferred to David, David agreed to pay Doris $500,000, payable over 10 years at 8% interest.

• For several years, David deducted the interest paid to Doris on his Federal income tax return as investment interest expense. Upon audit, the IRS disallowed the interest deduction, classifying it as nondeductible personal interest. David believes the interest is deductible.

Required:

Problem 1: Prepare a tax file memorandum fully explaining the proper result and citing all relevant authority. Analyze all issues completely. Your memorandum should include a complete and thorough discussion of the issue (including any limitations on, or additional requirements related to, David's interest deduction).