Separated Spouses

[JoshinNC]

Here's the situation, I think there's one "correct" way to do it and one "easy" way to do it:

TP and SP separated on 3/15/11. They owned a Joint Tenants WROS brokerage acct that held one mutual fund. Separation agreement allowed SP to "own" 100% of brokerage acct, but neither TP nor SP told brokerage firm. SP sold all the shares of the mutual fund on 5/1/11 for a gain (some LT, some ST). There were also dividends paid for each month in 2011.

Brokerage issues 1099-B under TP's SS# for joint acct for sale of mutual funds and 1099-DIV for all 2011 dividends under TP's SS#.

I believe the correct way to do it is send the brokerage a copy of the separation agreement and ask for a corrected 1099-B under SP SS# only for the mutual fund sale and a corrected 1099-DIV, one for the period from 1/1/11-3/15/11 under TP SS# and one for the period form 3/16/11-5/1/11 under the SP SS#.

The "easy" way is for the TP and SP to split the stock sale gain and the dividend income on their respective Single returns (they meet the unmarried rules for TY2011) to keep from "rocking the boat".

Thoughts?

[dan doshan]

I don't know if this is a possible solution or not.

Nominees. If you receive gross proceeds as a nominee (that is, the gross proceeds are in your name but actually belong to someone else), see the Instructions for Schedule D for how to report these amounts on Form 8949.

[JoshinNC]

That might be an option

I don't know if this is a possible solution or not.

Nominees. If you receive gross proceeds as a nominee (that is, the gross proceeds are in your name but actually belong to someone else), see the Instructions for Schedule D for how to report these amounts on Form 8949.

Thanks Dan!

[erchess]

Interesting case

here and one that probably is common. I think the decision should be left up to the taxpayers.

Josh's "easy" solution is not in my opinion cutting any ethical corners if both want to handle it that way. (To me calling it the easy solution suggests that it is cutting corners. Sorry if that was not your intent Josh.) This option has the least likelihood of subsequent inquiries from the IRS and I would think the lowest preparation fees. The bad news is that the taxpayer ends up being taxed a little more but it can't be too hard to figure out exactly how much extra tax he is paying and let spouse write him a check.

To my mind either Josh's "right" way or the nominee route would be the right answer on a test. I don't know what I would pick if they were both choices. They both raise Josh's fee. Nominee raises it more now and offers a better than even chance of not getting subsequent correspondence. Josh's "right" way would prob save a bit on his fee but I think you could count on an IRS letter which presumably Josh would charge extra for answering.

[taxea]

I agree with Erchess...you as the preparer must leave the decision and contact to the client/s.
Also you cannot discuss one's return with the other if you are doing both. Are they? Nor can you discuss your client's return info with the other spouse if you don't handle them both or a third party without the required 7216/s signed.

[Gary2]

The "easy" way is for the TP and SP to split the stock sale gain and the dividend income on their respective Single returns (they meet the unmarried rules for TY2011) to keep from "rocking the boat".

Whoa, backup a moment. Are you saying they have a decree of separate maintenance issued by a court? If so, I'd worry about what it said about the ownership of investment property. I'd also worry whether it really does qualify as being legally separated according to IRS interpretations.

Or do you really mean they have two or more kids, each parent having one kid for at least half the year, so that they each qualify for HoH?

[JoshinNC]

No, we have the following

Whoa, backup a moment. Are you saying they have a decree of separate maintenance issued by a court? If so, I'd worry about what it said about the ownership of investment property. I'd also worry whether it really does qualify as being legally separated according to IRS interpretations.

Or do you really mean they have two or more kids, each parent having one kid for at least half the year, so that they each qualify for HoH?

2 married individuals with no dependent children that separated in March 2011 and filed a mutually agreed upon separation agreement (valid in NC), who did not live together for even one night after the separation date. This qualifies each to file a single return for TY2011. The mutually agred upon separation agreement specifically stated that the spouse would receive this specific brokerage account in full.

[FEDUKE404]

But it was (is) a joint account

... They owned a Joint Tenants WROS brokerage acct that held one mutual fund. Separation agreement allowed SP to "own" 100% of brokerage acct, but neither TP nor SP told brokerage firm. ...

Brokerage issues 1099-B under TP's SS# for joint acct for sale of mutual funds and 1099-DIV for all 2011 dividends under TP's SS#.

I believe the correct way to do it is send the brokerage a copy of the separation agreement and ask for a corrected 1099-B under SP SS# only for the mutual fund sale and a corrected 1099-DIV, one for the period from 1/1/11-3/15/11 under TP SS# and one for the period form 3/16/11-5/1/11 under the SP SS#.

The "easy" way is for the TP and SP to split the stock sale gain and the dividend income on their respective Single returns (they meet the unmarried rules for TY2011) to keep from "rocking the boat".

Thoughts?

I got a bit lost on any "corrected" Form 1099-DIV/INT/etc being necessary.

The brokerage firm properly reported the account activity under the SSN of the (primary) owner. There is nothing to "correct"! (And they may, hopefully nicely, tell you such....)

If, for whatever reasons, it becomes necessary for owner primary to disclaim the income and assign it to owner otherwise, that mechanism is quite simple at tax-filing time using nominee distribution for interest/dividends and a slightly different procedure for Sch D reporting.

The TPs dropped the ball here. If the intent was for the spouse to "own" the account, then the logical thing to do would have been to close account A (joint) immediately and replace it with account B (spouse).

One would think the attorney(s) who drew up the separation agreement might have mentioned issues such as this to the parties involved?

It's just your job to report it, and charge accordingly for the work involved.

FE

[Kram BergGold]

Nominee Distribution

I do this a few times a year. It is the way to go.

[Gary2]

2 married individuals with no dependent children that separated in March 2011 and filed a mutually agreed upon separation agreement (valid in NC), who did not live together for even one night after the separation date. This qualifies each to file a single return for TY2011. The mutually agred upon separation agreement specifically stated that the spouse would receive this specific brokerage account in full.

Be careful about this. The NC DOR has a page on filing status which says:

Although an agreement pursuant to N.C.G.S. 52-10.1 is a legal contract without being sanctioned by a court, it does not constitute a legal separation under a decree of divorce or of separate maintenance within the meaning of the Internal Revenue Code. Therefore, a separation agreement must be sanctioned by a court in the form of a decree or judgment for parties to be considered unmarried for purposes of filing status. (updated December 2009) [emphasis edited]

They may still be ok. I think the key point is that having the agreement isn't enough, nor is actually filing it with the court as part of the divorce process. The court has to issue some sort of decree approving the agreement.

[FEDUKE404]

Those NC rules

Be careful about this. The NC DOR has a page on filing status which says:

Although an agreement pursuant to N.C.G.S. 52-10.1 is a legal contract without being sanctioned by a court, it does not constitute a legal separation under a decree of divorce or of separate maintenance within the meaning of the Internal Revenue Code. Therefore, a separation agreement must be sanctioned by a court in the form of a decree or judgment for parties to be considered unmarried for purposes of filing status. (updated December 2009) [emphasis edited]

They may still be ok. I think the key point is that having the agreement isn't enough, nor is actually filing it with the court as part of the divorce process. The court has to issue some sort of decree approving the agreement.

I was actually mulling over mentioning that myself, but I did not want to get slammed by some of the more "informed" readers here. In so many words, I do not necessarily agree with the conclusion ("This qualifies each to file a single return for TY2011") stated by JoshinNC. J could be right/wrong.....I just do not know for sure.

My limited knowledge of things in NC is that there is much muddy water regarding filing status when dealing with living apart for one year, separation agreement, separate maintenance agreement, divorce decree, et al. The most commonly encountered situation is "we have a separation agreement." Well....OK!

About the only thing I will hang my hat on in NC is if the judge says "divorce final" then I can go with that. Otherwise, my standard answer is "check with your attorney for specific guidance."

Thanks for your input!!

FE

[JoshinNC]

This is good info, I've never heard this before

I was actually mulling over mentioning that myself, but I did not want to get slammed by some of the more "informed" readers here. In so many words, I do not necessarily agree with the conclusion ("This qualifies each to file a single return for TY2011") stated by JoshinNC. J could be right/wrong.....I just do not know for sure.

My limited knowledge of things in NC is that there is much muddy water regarding filing status when dealing with living apart for one year, separation agreement, separate maintenance agreement, divorce decree, et al. The most commonly encountered situation is "we have a separation agreement." Well....OK!

About the only thing I will hang my hat on in NC is if the judge says "divorce final" then I can go with that. Otherwise, my standard answer is "check with your attorney for specific guidance."

Thanks for your input!!

FE

I was going wholly by the Fed rules which do specifically state that a "separate maintenance decree" is required if not divorced. I always "assumed" that a mutually agreed upon and requisitely filed at the county courthouse separation agreement was a "separate maintenance decree", but maybe I am wrong. I will need to do ALOT of research into this as this is a more than once in a year item for our practice.

Do you guys have any links for NC specific items I can review?

[ttbtaxes]

A decree is issued by a judge. Unless your client had a NC judge signing off then you must file MFJ or MFS (assuming no kids).

There are several court cases that may help lead you to a specific case decided in NC:

Sullivan 256 F.2nd 664
Donigan 68 TC 632
Klementowski TCM 1986-145

Legal separations ordered and issued by a judge are rare.