1099S- Nominee?

[Burke]

The other thing is, where is the money? Is it in a bank account titled in the Trust's name? You said it was "paid into the Trust."

[kathyc2]

So here's the latest update. The following is e-mail reply from client in response to my request for trust documents. For reference clients son that he refers to is an attorney in yet another state.

"No I did not know it existed until this started. I have consulted with my son and am trying to get more documents from the title company but I am thinking they are afraid of exposure. He said we should not have gotten a 1099 without a check. We have no control over the money so in his opinion we should not pay taxes. I have contacted the titl.e company asking for the title report used at closing. I do not think they are going to sent it. Without our signatures on the quick claim deed he feels the second quick claim deed is not valid. This is a nightmare adnI don't want to upset dad at this point. My brother had his accountant zero out the 1099 and put on it see attached distribution of funds. Follow the money trail we did not receive this."

My draft reply is:

"I agree that you should not have received a 1099 without a check. I also question whether the second quit claim deed is valid. But, if it is invalid, that would mean that you and your siblings would have still been owners at the time of sale, and you correctly should have received the 1099, but you also should have received your share of proceeds.

Depending on what type of trust your Dad had the proceeds may have been taxable income to the trust and the trust should have received the 1099 and then file a trust tax return. My understanding from you is that the trust is not planning on filing.

Unless the trust in question is a living revocable, your Dad did not own the house and would not qualify for the primary residence exclusion. In that case there would be tax due from somewhere, and with what I have seen to date it looks like it should have been the trust.

I understand why you don't feel this transaction should be taxable to you. However, I'm getting caught up in a professional ethics dilemma as the paperwork filed by the title company does not trace back the funds received to the trust. Is there any way you can get me the federal ID number of the trust?"

I would appreciate if you think my response is accurate and if I've covered my bases.

[Burke]

It's a good start and all the information you impart is correct. Let him come back to you. I would not want to put this info on the return "then back it out" unless I was positively sure that is the correct way to handle it. Or to simply ignore the 1099. I don't care what all the other children did. File an extension.

You don't suppose the "son in the other state who is an attorney" is the one who drew up the trust? As I said before, he is going to have to deal with this when the father dies anyway, so do the legwork now. Note that quitclaim deeds are a fast way to transfer property but my understanding of them is that no guarantee of title goes with them. So the ownership is in question here, but that is a legal matter. And it is probably why the title company had all the children and spouses sign the document you speak of. My first step if I were in this position would be to go down to the courthouse and see who did that 2nd deed, and contact that attorney. (Not you, your client.) If this is in another state than your client lives in, then tell him to make a phone call. Those are public records.

[Gary2]

Unless the trust in question is a living revocable, your Dad did not own the house and would not qualify for the primary residence exclusion.

Possible nit: I think that any grantor trust would qualify, not just a living revocable.

[kathyc2]

I think a resolution has been reached on this.... finally. While I was still contemplating whether I wanted to send the e-mail or not, client called. I think I was a little short with him, but I pretty much told him that at this point no one really knows who owned the property at the time of sale. I further told him that unless I have convincing evidence that a form issued to him and IRS is in error, I need to go with the form. Then, being on a roll, that if he wanted it handled the way his brothers return was handled no hard feelings that he could pick up his information and take it elsewhere because being 3/26 I don't have hours to try to figure it if he owned it or not.

So... he calls back a couple hours later and says after talking with his son and that he called the IRS and talked to a tax attorney, he will file and pay the resulting tax.

He is going to MN this summer and will try to get the rest of his Dad's financial mess straightened out. He then thanked me for my integrity! Didn't see that one coming...

Thanks for all the help, and I'll be adding basics of trusts to my CPE list!

[Burke]

Glad he is being reasonable about this. You can let him know that once all this is determined, you can always go back and amend his return. Since he is saying "we have no control over the money" (how does he know this if he doesn't know anything about the trust?), I am strongly leaning towards the trust being the one who bears the responsibility. Then there is the special circumstance of determining the father's life estate interest percentage (see IRS 7520 tables) which could be mitigated by the 121 exclusion if he lived there 2 out of the last 5, and the balance going to the trust for long-term capital gains. Or it could all be on the father's 1040 as we have discussed. I would try to talk him into filing an extension, which would give you guys until October 15 to straighten this out. Wouldn't he rather do that than amend later?

[kathyc2]

They have a 3K federal refund even after the 1099S, so I'll just go ahead and file and then amend if need be.

[Burke]

Okay. Don't forget to post when the facts are known. Very interesting situation.