Suppose your client, Maritza, is an unmarried individual U.S. taxpayer living in New York City.

Suppose your client, Maritza, is an unmarried individual U.S. taxpayer living in New York City. She informs you that she recently entered into a seTlementagreement with her investment advisor. ±he investment advisor has paid Maritza $150,000. ±he payment is aTributable to investment losses caused by theinvestment advisor’s alleged failure to follow the asset alloca²on direc²ons from Maritza. SpeciFcally; Maritza instructed her advisor to change the investmentobjec²ve for her account from “all equity” to “current income.” ±he advisor understood these instruc²ons to mean reallocate her por³olio from equity to incomegradually over ²me, rather than an immediate sell o´ and restructuring. Maritza claims that her inten²on was to do an immediate sell o´ and restructuring.Hence, a dispute arose with respect to the correct interpreta²on of her instruc²ons and the decline in market value of the equity posi²on over the length of ²meit took her advisor to gradually sell (restructure) her equity por³olio to income. Maritza says this could have been avoided had the change in asset alloca²onbeen implemented immediately the way she wanted. In the interests of both par²es in seTling the dispute without admission of fault by either party, theinvestment advisor agreed to pay Maritza $150,000.Maritza (the payee) wants to know the following:Is this seTlement payment taxable for federal income tax purposes?AndIf so, what is the character of the payment? Is it a reduc²on of tax basis of investment assets, ordinary income, or short or long-term capital gainincome?In addi²on, research and address what the income tax consequences are to the investment advisor (the payor) in making the seTlement payment. Is thepayment deduc²ble, and if so, what is the character of the deduc²on?Hint: Recall that income tax consequences in general are symmetrical; meaning that if one taxpayer for a given transac²on has to report income, then the othertaxpayer to the transac²on generally has a deduc

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