The film is a comedy about three women seeking justice after their husbands became successful and divorced them for younger women. Brenda, Elise, Cynthia and Annie were close friends in college, but after graduation from Middlebury, they lost touch with one another for 27 years. When Cynthia committed suicide after her ex-husband married a much younger mistress, the other three women met at her funeral for the first time since college. Seeing that their friend grew unhappy after her husband left her for a younger woman, they found themselves in the similar situation.
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Brenda is now divorced, depressed, and struggling financially. She helped her husband Morton open a profitable chain of discount electronics stores, but now that his business has made him a minor celebrity, he has taken up with a much younger woman named Shelly. Elise, a movie actress whose husband also left her for a younger woman, has now become reliant on plastic surgery to keep her career afloat. Her husband, Bill, is demanding a divorce and half of her fortune. Annie, meanwhile, is separated, suffering extreme self-esteem issues, and going through a therapy with her husband Aaron.
Shortly after Cynthia’s funeral, Annie’s husband asks her for a divorce to leave her for the therapist. After talking to each other and getting angry about their situations, Brenda, Elise, and Annie decide to put together a plan that would eventually give them control of their ex-husband’s businesses and allow them to do whatever they want with the money they helped earn. Thus, the three women created The First Wives Club. There are several tax issues in this movie. The first one is related to the Bvlgari pearl necklaces that Cynthia gave her three friends as graduation gifts.
A gift is defined as “a transfer of property from a donor to a donee that is not a profit-motivated arm’s length transaction”. Neither the donor nor the donee recognizes any income or pays income tax on the transfer of gift. In this situation, Cynthia presented her friends with matching pearl necklaces out of affection and hoped that they will always be there for one another throughout the remainder of their lives. For that reason, the necklaces constitute excludable gifts. The exclusion of gifts from income taxation is to relieve double taxation caused by the gift tax.
Brenda, Elise and Annie are not subject to income taxation; however, Cynthia (the donor who gave the gift) might be subject to gift tax rules, based on the fair market value of the gift. Whether the donor must pay a gift tax or not depends on several factors, such as the fair market value of the gift or total gifts made during the year. Cynthia had also given her maid her necklace before she committed suicide, saying it was a raise. Therefore, the maid recognized some income from the gift. The second recognizable tax issue is the alimony between Elise and her husband, Bill.
Bill is a film producer, who achieved success through Elise’s connections but eventually left her for a younger actress. Bill is now suing her for the alimony and insisting that all of their marital assets be liquidated with the proceeds divided between them. Alimony is a legal obligation on a person to provide financial support to his or her spouse after divorce or separation. In other words, it is a sharing of income between two parties. Alimonies were traditionally paid by husbands to ex-wives, but since the 1970s an ex-husband may also be entitled to alimony from his former wife thanks to gender equality in many Western countries.
Alimonies are taxable to the recipient and deductible for adjusted gross income by the payer, i. e. , it is an allowable transfer of income from one spouse to another. Therefore, if Elise agreed to pay alimony, that amount of money would be deductible for her adjusted gross income but taxable to Bill’s. Certain conditions must be met in order for that payment to be considered alimony: * The payment must be in cash * The payment must be in written agreement.
Furthermore, the agreement must not specify that the payments are for child support or property settlement (a division of marital property) * The payer and the payee cannot be members of the same household at the time of the payment * There is no legal responsibility to make payments after the death of the payee. The next tax issue is Morty’s income tax fraud. Morty is an electronics tycoon and has a profitable chain of electronics stores which Brenda helped him opened. Morty, after divorcing Brenda, even went as far as to have her signed a settlement, then used the money received to buy gifts for Shelly, his new fiance.
But after his business made him wealthy, he left Brenda for a much younger woman. Brenda later finds out through her uncle, who has connections to the Mafia, that Morty is guilty of income tax fraud. In the first year of business, his inventories were all stolen merchandises. Morty’s activities, therefore, were criminal. In the United States, a person’s taxable income is generally subject to the same Federal income tax rules, regardless of whether the income was obtained legally or illegally. That person may also take deductions for necessary expenses related to criminal activities.
In addition to the taxes, Morty may have to pay certain penalties for his criminal activities. The fourth tax issue is related to Elise’s selling her husband’s property to Annie for one dollar, which is “an extremely reasonable price”. Then, Annie put all properties up for an auction to “raise fund for the club”. The transaction between Elise and Annie involves a component of self-dealing and is not an arm’s length transaction. An arm’s length transaction is one in which taxpayers acted independently, bargained in good faith and for their individual benefits.
In this case, the two women have tried to structure the transactions in a way that may not reflect economic reality, so that they will not be given any tax effect. The last tax issue is related to charitable contribution. Instead of vengeance against their husbands, the three women try to push their men into funding the establishment of a crisis center for women. It is a nonprofit organization dedicated to aiding abused women, in memory of their friend Cynthia. Brenda found out her husband’s income tax fraud and set out to expose him unless he contributes a substantial amount of money to the construction of the center.
Elise tricked her ex-husband Bill into thinking that he was having a fling with a sixteen-year-old actress. After being threatened by Elise, he agreed to make a substantial donation to the women’s crisis center. Lastly, Annie used the money she earned from the auction to buy out a 51 percent share of her ex-husband’s advertising firm, thus giving her the authority to control him. Aaron reluctantly wrote a check for her. Morty, Bill and Aaron can deduct the amount of money that they donated for the center as deduction for adjusted gross income.
The contributions are all made in cash, so they generally do not present valuation problems. There are some limitations on the deductible amount of charitable contributions. One of them is that the overall amount cannot exceed 50 percent of the taxpayer’s adjusted gross income. That is the tax rule applicable to individuals. The kind of business Morty and Aaron owns is a sole proprietorship; Morty owns a chain of electronics stores and Aaron owns an advertising firm. Therefore, that amount of donation is not deductible because they already deducted that expense as an itemized deduction.
