Mother is a sculptor. She gives her latest work to her daughter. If Daughter sells it some years later, who is taxed on the personal services income from producing the sculpture? Mother also gave Daughter the next three years worth of dividends on stock she owns. Who would be taxed on that income? When?
The Correct Answer and Explanation is:
For tax purposes, the income from both the sale of the sculpture and the dividends would generally be taxed based on the ownership and timing of the transactions.
- Taxation on the Personal Services Income from Producing the Sculpture:
The personal services income from the creation of the sculpture is typically taxed to the person who created the work, in this case, the mother. This is because the sculpture is the product of the mother’s work, and the income from producing and selling it is considered income derived from personal services. While the daughter may sell the sculpture years later, she is not the one who created it, so the tax liability on the original creation of the sculpture would generally fall on the mother. However, if the sculpture is a gift, the mother may be subject to gift tax depending on its value, but the income from the sale, if taxable at the time of the transaction, would still be the mother’s. - Taxation on the Dividends:
Dividends are typically taxed to the person who owns the stock at the time the dividend is paid. In this case, since the mother owns the stock, the dividends would be taxed to her. Even though the mother gave the daughter the rights to the next three years’ worth of dividends, the mother will still be taxed on the dividends until she formally transfers ownership of the stock or the dividend rights to the daughter.- If the mother gives the daughter the right to receive the dividends, this may be considered a gift, and the mother may need to file a gift tax return, depending on the value.
- If the dividends are paid during the three years the mother gave the daughter the rights, the mother would still be taxed on the dividend income, as she retains ownership of the stock.
- If the stock is transferred to the daughter in the future, then the daughter would be taxed on the dividends she receives after the transfer.
Thus, in both cases, the mother would initially be taxed on the income from the sculpture and dividends, though the daughter may be taxed later if the ownership of either asset is transferred to her.
