Stock sold at loss considered gross income

[Greenbriar]

Can't find a definitive answer on this. Client has 3 children under 14 who each sold stocks and bonds at a loss in 2008. Only other income for the children is about $300 in interest for each child. Gross sale on 1099B is 3,500 but cost is 4,100 in each child's case. I once read that all 1099B sales must be reported, assuming they were above the filing threshhold, even if it represented the taxpayer's only income and resulted in a loss. I can't find that anywhere now. There is no capital gain and only $300 in interest so I'm inclined not to file for the children; however, how does the IRS know that 1099B is really a loss? Thanks for assistance here.

[erchess]

File the returns

The IRS has no idea about basis so if you don't file returns for these kids the IRS will prepare returns assuming their was no basis and ask for the corresponding tax. It will save the parents money in the long run to go ahead and pay you to file correct returns which will most likely satisfy the IRS. Of course you can't promise that there won't be an IRS letter but even if there is one it will be easier to deal with than the letter that is virtually certain to come if the returns do not get filed.

[Greenbriar]

Agree

Thanks. I have always filed when the 1099B was above the filing threshhold and this makes sense but I got hung up over the whole kiddie tax thing which I don't run into very often. I'll file their returns and carry the losses forward.

[OtisMozzetti]

filing requirement determined by gross proceeds

The requirement to file a return is determined by the gross proceeds, from stock sales and incidentally from gross revenues that go on a Schedule C or Schedule E, not by the gross income.

[S T]

Kids returns

Yes, you need to report 1099B activity that is in the "children's name and SSA" on the Children's return, and if a loss then follow through from year to year and file a return.

I always file whether or not they meet the threshold for filing - but I also do that on other clients as well, such as some seniors.

Seems like once they think they "don't have to file" they think it is forever moving forward, and then forget to let you know when something changes.

Have had this occur a few times, so you don't want those CP 2000 notices or to lose the capital loss carryforward.

Sandy

[OtisMozzetti]

thank you

...
I always file whether or not they meet the threshold for filing - but I also do that on other clients as well, such as some seniors.

...

you don't want those CP 2000 notices or to lose the capital loss carryforward.
...
Sandy

Although these kids did have more gross proceeds and other income (interest, to wit) than their $900 standard deduction, and therefore were required to file, you are quite correct that they do want to file in order to claim their capital loss carryforward!

Speaking of seniors, I recently spent considerable time dealing with the case of a woman whose mother had died about three years ago. It was all a case of trying to establish that a.) she had authority to act for her deceased mother, and b.) therefore she could have an IRS transcript to find out her mother's income, and c.) her mother hadn't had any filing requirement for the year in question. It was the state, of California, that was causing the difficulties, not the IRS. A number of hassles would have been saved if only that senior (mother) had filed a return anyhow for everyone's peace of mind back when she was alive.

[New York Enrolled Agent]

The requirement to file a return is determined by the gross proceeds, from stock sales and incidentally from gross revenues that go on a Schedule C or Schedule E, not by the gross income.

Otis

I must disagree with you. The requirement to file a tax return depends on gross income and not gross proceeds from the sale of stock. Gross income includes gains derived from dealings in property.

The Service has addressed this issue in SCA 200018051 and reached the conclusion that I've posted. The SCA states that "the filing requirement is triggered by gross income".

HOWEVER, the SCA further notes that while the technical answer to filing a return may be no, the practical answer may be yes to avoid any CP2000 inquiries in the future.

[OtisMozzetti]

OK, New York EA, you are correct

Otis

I must disagree with you. The requirement to file a tax return depends on gross income and not gross proceeds from the sale of stock. Gross income includes gains derived from dealings in property.

OK, New York EA, you are correct that there is no requirement to file a return based upon the gross proceeds from stock sales. As you also noted, it may nonetheless be necessary or wise to file a return based upon the gross proceeds.

If I could quote such an "indisputable" source of authority as the state instructions about filing requirements in California, it used to say "gross income does not include any adjustments or deductions". Cost or other basis is a deduction from the gross proceeds or amount realized in determining the gain from sale of property.

So, New York EA, would you say that gross rents received (before expense deductions) cause there to be a requirement to file a tax return?

[New York Enrolled Agent]

So, New York EA, would you say that gross rents received (before expense deductions) cause there to be a requirement to file a tax return?

Code §61 and the regs for §61 determine what constitutes gross income for purposes of the requirement to file a return. In a prior post you wrote" The requirement to file a return is determined ...and incidentally from gross revenues that go on a Schedule C or Schedule E, not by the gross income." IMO, I believe that there is a difference between Schedule C and Schedule E.

Reg §1.61-8 says that gross income includes all rent receipts (i.e before any expenses or deductions). Line 3 of Schedule E (rents received) = gross income for purposes of filing a return.

However, Reg §1.61-3 says gross income from a business is gross receipts (revenues) less the cost of good sold. Line 7 of Schedule C = gross income for purposes of filing a return. Some businesses, of course, have no COGS and thus gross revenue would often (but not always) equal gross income.

These differences are the technical answers to the requirement to file a return. The original poster wanted such an answer. The practical answers, prudence and good business practice may no doubt lead to different conclusions - file the return to avoid problems down the road.

[Davc]

Agree with NY EA. I've has clients in the same situation who opted to wait for the letter and then reply with a copy of the gain/loss statement from the broker. Works fine.