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    Settlement Payment

    I have a client that received a settlement payment in 2011 regarding an issue with her deceased husband's employment. Her husband died over 10 years ago, and she had an agreement with her son that whatever income she received after her husband's death (he was a writer, so up till now all the income has been from royalties) would be split 50/50. She wrote her son a check for 1/2 of the settlement amount last year after receiving the payment. The amount was reported on a 1099-Misc in Box 3. So my question is "How do I report the income on her 2011 tax return so she gets taxed only on the amount she actually netted after sending her son 1/2 the amount?" I thought about doing a mail-in return and attaching documentation, including the agreement drawn up by an attorney after her husband's death allowing the split of royalties with her son. OR maybe it just can't be done, not sure. She may have to pay the tax and get her son to pay her back 1/2 of that. Any suggestions?

    #2
    Hmmmm.....here is the problem. Assuming the will of her deceased husband did not specify that 1/2 of the royalty income was to go the son, (hence, the agreement drawn up by the attorney later with the mother), the income by law is rightfully and legally hers as far as the payor is concerned. And the IRS for that matter. It is payable to his estate. (Read up on income-shifting.)

    It is structurally possible to report all on Sche E, deduct 1/2 to son as nominee, and send him a 1099. But I am not sure that is proper & legal according to the tax code. She may well owe the son the $$$ by virtue of her signed contract, but that is another matter. Not sure how the attorney-agreement reads, but it should have included the provision, "less one-half of the income taxes assessed." And that, IMHO, is how to handle it.
    Last edited by Burke; 03-17-2012, 12:14 PM.

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      #3
      It wasn't clear in the OP if the payment to the son was for services rendered by him (the son) such as editing, co-writing, etc., either before dad died or after ... or both ... or if it was simply a split of the dad's estate. It also wasn't clear if the payment was delayed salary, royalties, or a payment to an IC. (The post does refer to the "employer," but that term is often used loosely. So first these questions must be answered.

      If mom's payment to son is for his (son's) services, mom should report the full amount on her return, then take a deduction for the 50% paid to son. The next question then becomes, where to report that income? If the payment represents royalties, report it on Schedule E, deducting the son's portion as an expense on the same Schedule E. If it's delayed compensation (wages) or nonemployee income, I would report it on F-1040, Line 21, attaching a 3-line statement to the return showing the gross amount (as per form 1099-MISC), then the amount paid to son, then the net amount shown on line 21. In these two scenarios mom should have filed a form 1099-MISC herself, reporting the payment to son. Mom should not report the income on Schedule C, because it is not S-E income to her.

      Finally, if the payment to son amounts to distributing to him his share of dad's estate, then mom can not deduct that payment on her return at all. If the payment represents a gift to son, a GT return may need to be filed, and, of course, the payment/gift is not deductible my mom. The post-death document drawn up by the attorney may or may not be helpful in this case, depending on the legal substance of the issue(s) it covers or to what extent it is nothing more than a self-serving beard. If the payment is a gift or an estate split, I would hope that mom and son can agree upon a payment that takes into consideration the taxes mom will have to pay on the full settlement amount.
      Last edited by Roland Slugg; 03-17-2012, 02:40 PM. Reason: Correct typo
      Roland Slugg
      "I do what I can."

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        #4
        What about this? She pays tax on the whole thing (easier), subtracts 1/2 of the tax from the money she is going to give the son (even better figure what the tax would be without 1/2 and subtract the extra tax), give the son $13,000, put the rest in the bank to give him $13,000 each year. That way the son won't blow the money and your client will feel happy to be able to give him money for a few years.
        JG

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          #5
          Thank you so much everybody for your replies. The situation is rather unique, and it is further complicated by the fact that my client is slipping rapidly into what seems like Altzheimer's disease. I can't ask her any questions such as what really happened or what the settlement was for, because she really doesn't remember too much and doesn't have a clue what that money was for anyway. She thinks it's for royalties, but I think not because of the way it's described and coded on the 1099-Misc. The son usually gets the checks for the royalties and sends her half, but this time the check was written to her and she sent the son half, and she doesn't realize that this is a whole different thing. I called the IRS, and I couldn't get it through to the person I talked to there that I wasn't questioning whether or not the payment was taxable, but that I wanted to know how to report the deduction of the 1/2 that my client paid to her son. I'm thinking maybe the best approach is to get hold of her son and ask him some questions, then go from there. I'm trying to avoid the possibility of my client getting a letter from the IRS down the road a ways, because she doesn't handle stress very well at all. Okay, thanks!

          Comment


            #6
            Originally posted by manyhappyreturns View Post
            She wrote her son a check for 1/2 of the settlement amount last year after receiving the payment. The amount was reported on a 1099-Misc in Box 3.
            Originally posted by manyhappyreturns View Post
            She thinks it's for royalties, but I think not because of the way it's described and coded on the 1099-Misc. ...I'm thinking maybe the best approach is to get hold of her son and ask him some questions.
            I had to go read through both posts to see that you already understood the obvious, both about the misreporting and contacting the son. That would seem like the best approach, relying on the premise that giving the info to the son would not be adverse to your client's interests. Alternatively, you might try contacting the payer, though they might require explicit permission from your client. If that's difficult, ask if they could send a written explanation to your client at the address they have for her.

            Given your comment about stress, JG's response might be the most practical, assuming it doesn't result in any inappropriate reduction in taxes.
            Last edited by Gary2; 03-18-2012, 07:06 AM. Reason: Edited for conciseness and adding last sentence

            Comment


              #7
              Originally posted by Burke View Post
              Hmmmm.....here is the problem. Assuming the will of her deceased husband did not specify that 1/2 of the royalty income was to go the son, (hence, the agreement drawn up by the attorney later with the mother), the income by law is rightfully and legally hers as far as the payor is concerned. And the IRS for that matter. It is payable to his estate. (Read up on income-shifting.)
              Wouldn't that depend on the laws of the state? If there's no will, or if the will is silent on the estate's income or IRD, then those laws would kick in. I have no experience with this, but I wouldn't bet that all 50 states give all such income to the spouse and none to the children.

              As for the payor, it's common for payors to be lazy with regard distributing funds and tax documents. It's conceivable that they reached a legal agreement obligating them to both mother and son, while allowing them to send the amounts and tax documents to just the mother. (This was a negotiation point for some of my family members and a commercial tenant, since the tenant wanted to issue just one rent check, but eventually agreed to issue them separately.)

              Indeed, now that I think about it, it could be controlled by the will and/or intestacy laws, or by the agreement with the payor, or by some combination of both - say if both heirs are entitled to income, but the settlement was strictly between the payor and just one heir.

              Comment


                #8
                Originally posted by Roland Slugg View Post
                Finally, if the payment to son amounts to distributing to him his share of dad's estate, then mom can not deduct that payment on her return at all. If the payment represents a gift to son, a GT return may need to be filed, and, of course, the payment/gift is not deductible my mom. The post-death document drawn up by the attorney may or may not be helpful in this case, depending on the legal substance of the issue(s) it covers or to what extent it is nothing more than a self-serving beard. If the payment is a gift or an estate split, I would hope that mom and son can agree upon a payment that takes into consideration the taxes mom will have to pay on the full settlement amount.
                I'm not following this. If income that rightfully belongs to an estate is, instead, distributed to just one of the beneficiaries of the estate, wouldn't the tax treatment somehow follow what would happen if it had been correctly issued to the estate in the first place, even if the estate no longer exists? In other words, assuming the funds are actually transferred, shouldn't it be treated as any other erroneous 1099 that should have been split into two 1099s, but wasn't?

                Comment


                  #9
                  We are doing a lot of guessing here, because we do not have all the information to give an informed response.

                  1. Was there a will? If so, did all go the spouse? (It usually does when one is living.)

                  2. You called this a settlement. Of what? I am assuming it was a one-time payment to relieve the payor from future royalties. This would have been payable to the decedent's estate or its direct heir. We don't know if the son was a primary heir or not under the will. If there was no will, then defer to intestate distribution under the state of residence for the decedent as to who is entitled to what.

                  3. You call the payor his "employer" but was he really an employee? This does not sound like wages or salary.

                  4. With a legally-drawn contract between the mother and son, it does not sound like a gift. But what, exactly, was the "contract" for? Did the son agree to certain terms to receive monies? Or is it just a promissory note from the mother to the son?

                  5. The IRS is not going to have a clue about this until it is understood what the payment actually is. And even then, they could not get into state inheritance laws or intestate succession. Don't waste your time there.
                  Last edited by Burke; 03-18-2012, 12:39 PM.

                  Comment


                    #10
                    Good advice to not waste time calling the IRS. Anytime I call them regarding an unusual tax situation that I can't find answers for in the publications and form instructions, they ask me questions off of a script they are reading, then read to me the same things I just read from Pub 17 or whatever. They can't read between the lines any better than I can, so you are right, it is a waste of time, especially since I have to wait 20-30 minutes to talk to somebody who just tells me what I already know and doesn't address my question (because that's not in the script).

                    That is why I'm so thankful to have found this forum! I like the idea about contacting the issuer of the settlement payment and having them send a letter to my client. Then I would have it in writing if there was a problem down the road. I'll probably also contact my client's son with her permission. She just wants it done right, and she is depending on me.

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