Capital Loss C/O Community Property State

[WhiteOleander]

I have a client who divorced in Texas. There is a capital loss c/o created on a return filed as married joint. The stock was held by the husband before they married. But sold after he married on the joint return.
Now the wife wants half of the loss carryover. And husband is agreeable. But, according to the pub. on community property, stock is considered separate property. Texas has very stringent and specific laws regarding something remaining separate property after marriage.
Does anyone have any experience with this issue. Can the wife take half of the loss carryover after the divorce. Or is the stock indeed considered separate property and the loss only goes to the husband after the divorce.
I think the loss can be split. If he had died, she would get the full stepped-up basis. So, it seems to me that she has an ownership in the stock.
Thanks for your help

[Jesse]

Marital Property law determines

I have a client who divorced in Texas. There is a capital loss c/o created on a return filed as married joint. The stock was held by the husband before they married. But sold after he married on the joint return.

In a textbook I have it discusses a case in Wisconsin which Husband & Wife were married in 1952. In 1963 W's mother died, leaving a will which provided that her bequests should forever remain the separate property of the beneficiaries and that the inheritances were never to become marital property. The assets W inherited were invested in shares of stock.

H & W moved to WI in 1966 and these stocks were sold during various periods from 1969 to 1975, generating captial losses. The majority of these sales were made from the account in W's individual name. H & W divorced in 1982. The proceeds from the stock were deemed to be unidentifiably commingled at the time of the filing of the divorce petition. H filed tax returns from 1979 through 1987 claiming capital loss carryforwards for himself.

The Dept of Revenue assessed him additional taxes and interest for those years, on the basis that he was not entitled to captal losses associated with sales of the stock sold in 1969-1975. The Wisconsin Tax Appeals Commission concluded that H was not entitled to capital loss carryforwards because the shares sold at a loss were the individual property of W. H has appealed this decision to the Circuit Court.

[WhiteOleander]

Thanks for the info. I have not found any info from the IRS on this subject. I think I will have them split as they wish to do and see if the IRS objects. I'll just explain that the IRS may make them undo it and have the Husband take all the carryover.

[Nancy]

Capital loss carryover

According to Reg. 1.1212-1(c), a capital loss carryover from a joint return can only be deducted on the separate return of the spouse who actually sustained the loss.

I think Texas law would determine who actually sustained the loss.

[WhiteOleander]

According to Reg. 1.1212-1(c), a capital loss carryover from a joint return can only be deducted on the separate return of the spouse who actually sustained the loss.

I think Texas law would determine who actually sustained the loss.

That's the whole issue. I think since it is a community property state, that it is a joint loss. It is not separate property.

[jainen]

separate property on a joint return

Reporting income and loss from separate property on a joint return does not make it community property. That status only applies to assets acquired during the marriage.

[Nancy]

Texas Community property rules

From the Internet:

Definition of Community Property

The definition of community property under Texas law is governed by the Texas Family Code and the judicial decisions of the Texas courts.

Looking at the Family Code, we see that Sections 5.01 and 5.02 set forth the definition of community property:

Section 5.01. Marital Property Characterized.

A. A spouse's separate property consists of:

the property owned or claimed by the spouse before marriage;
the property acquired by the spouse during marriage by gift, devise, or descent and
the recovery for personal injuries sustained by the spouse during marriage, except any recovery for loss of earning capacity during marriage.

B. Community property consists of the property, other than separate property, acquired by either spouse during marriage.

[WhiteOleander]

See that's the problem.
In Texas, you have to keep very stringent rules to keep property owned before marriage separate property after marriage. Can't find anything in IRS addressing this issue of the loss carryover.

[Unregistered]

From the previous posts:

Point 1. According to Texas law the stock was his seperate property. It follows that it was his loss.

Point 2. The IRS says that if it was his loss, it is his carryover.

The reason nobody has a cite supporting the split is because there is no such cite.

[Nancy]

Trace the original stock

How was the original stock that created the capital loss carryover held? Was it a single stock titled to the husband? Or, was it held in a joint brokerage account? What happened to other like-type assets during the divorce? Were they held to be community property or characterized as separate property? If the stock paid dividends, was the dividend income put into a joint account?

Texas law says that property is presumed to be community property unless it is clearly shown to be separate property.