Sole Proprietorship Assets lost in Divorce Settlement

[equinecpa]

OK, I'm not sure what to do with this. I have a client who used a truck for business use (100%) . He got divorced last year and part of the settlement to his wife was the truck. How should this be accounted for on his tax return?

I imagine it would be considered asset converted to personal use...but he'll never realize proceeds on this so now what happens?

Carolyn

[JohnH]

Song

Whatever the tax consequences, I think he has the makings of a Country & Western song - at least the first line. What happened to his dog and his guns?

[Roland Slugg]

... so now what happens?

Nothing. The asset just drops off the business depreciation schedule. The remaining basis in the truck, if any, carries over to the wife.

If the wife wanted that truck in the divorce, methinks it was not used 100% in business as claimed.

[equinecpa]

Whatever the tax consequences, I think he has the makings of a Country & Western song - at least the first line. What happened to his dog and his guns?

Should I add the wife got the horses too LOL !

If the wife wanted that truck in the divorce, methinks it was not used 100% in business as claimed.

Truth be wife wanted EVERYTHING...this is what she got.

[veritas]

The Truck

at the very least is listed property. So you may have depreciation recapture since the business use dropped below 50%.

On the other hand since the transfer was incident to divorce no gain or loss is recognized.

[cpadan]

There is no gain or loss per section 1041. But listed property or section 179 recap could be an issue.

However, the transferee would be subject to recapture (if any) per the example given in Reg § 1.1041-1T, A-13 which involves a business car transferred from husband to wife;

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Reg § 1.1041-1T. Treatment of transfer of property between spouses or incident to divorce (temporary).

Q-13. Will a transfer under section 1041 result in a recapture of investment tax credits with respect to the property transferred?

A-13. In general, no. Property transferred under section 1041 will not be treated as being disposed of by, or ceasing to be section 38 property with respect to, the transferor. However, the transferee will be subject to investment tax credit recapture if, upon or after the transfer, the property is disposed of by, or ceases to be section 38 property with respect to, the transferee. For example, as part of a divorce property settlement, B receives a car from A that has been used in A's business for two years and for which an investment tax credit was taken by A. No part of A's business is transferred to B and B's use of the car is solely personal. B is subject to recapture of the investment tax credit previously taken by A.
Caution: The Treasury has not yet amended Reg § 1.1041-1T to reflect changes made by P.L. 105-34, P.L. 100-647

[cpadan]

Just saw your update Carolyn. If wife kept the business then no recapture.

[veritas]

Nice tax planning

by the husband.



My wife got my truck and dog,

so I gave her my 280f recapture


doesn't rhyme but willie nelson could make it work

[Bees Knees]

Reg § 1.1041-1T. Treatment of transfer of property between spouses or incident to divorce (temporary).

Q-13. Will a transfer under section 1041 result in a recapture of investment tax credits with respect to the property transferred?

A-13. In general, no. Property transferred under section 1041 will not be treated as being disposed of by, or ceasing to be section 38 property with respect to, the transferor. However, the transferee will be subject to investment tax credit recapture if, upon or after the transfer, the property is disposed of by, or ceases to be section 38 property with respect to, the transferee. For example, as part of a divorce property settlement, B receives a car from A that has been used in A's business for two years and for which an investment tax credit was taken by A. No part of A's business is transferred to B and B's use of the car is solely personal. B is subject to recapture of the investment tax credit previously taken by A.
Caution: The Treasury has not yet amended Reg § 1.1041-1T to reflect changes made by P.L. 105-34, P.L. 100-647

Nice parallel citation.

Problem is, Section 280F is not Section 38. As much as we would like to apply principals consistently so that we can maintain our sanity, they are not applied consistently. So you cannot use this to justify making the wife claim Section 280F recapture. Plus, it is a temporary regulation that apparently has not been updated for a law past ten years ago.

[cpadan]

RIA seems to conclude the recap rules are the same. They say “on account of any recapture rules.” See below.
Dan

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228,301. Gain or loss on transfers incident to a divorce.
Except as discussed below, no gain or loss is recognized on a transfer of property from an individual to, or in trust for the benefit of, a former spouse, if the transfer is incident to a divorce ( 228,302 ). 17 Among other things, this means that, where this nonrecognition rule applies, no gain or loss is recognized by the transferor on account of any unrealized appreciation or depreciation on the transferred property, 17.1 or on account of any recapture rules. 18 For interest received in connection with the transfer, see 228,305 .

17
Code Sec. 1041(a)(2) ; Reg § 1.1041-1T, Q&A 1 .

17.1
Balding, Hazel, (1992) 98 TC 368 , 15 EBC 1233 .

18
H Rept No. 98-432 (PL 98-369) p. 1492 .
The nonrecognition rule applies to any transfer of property, whether real or personal, tangible or intangible. 18.1 The rule applies to any indebtedness that is discharged in connection with the transfer. 19

18.1
Reg § 1.1041-1T(a), Q&A 4 .

19
H Rept No. 98-432 (PL 98-369) p. 1492 .

[Bees Knees]

RIA seems to conclude the recap rules are the same. They say “on account of any recapture rules.” See below.
Dan

I looked up all the citations listed, and none refer to Section 280F.

In fact, the way I read your quote,

"Among other things, this means that, where this nonrecognition rule applies, no gain or loss is recognized by the transferor on account of any unrealized appreciation or depreciation on the transferred property... or on account of any recapture rules"

It says no gain or loss is recognized...on account of any recapture rules...

That says you don't pay any tax on account of any recapture rule, so no Section 280F recapture, as that is a recapture rule that no gain or loss applies to...

[Bees Knees]

Again, I'm not trying to make the case Section 280F recapture does not apply. I'm just saying nobody has provided a citation yet that says it does.

There is no such thing as Generally Accepted Tax Principals. I've read too many court cases, code sections, and regulations that contradict each other. Ever heard of "Uniform Definition of a Qualifying Child?"

How many different definitions are allowed before we can say it is not uniform any longer?

[cpadan]

[QUOTE=
It says no gain or loss is recognized...[b]on account of any recapture rules...[/b]


It says “no gain or loss is recognized by the transferor….on account of any recapture rules.”

To me that says the property is transferred “as is”. The transferee is responsible for any gain/loss or recapture. If she (in this case) decides to sale the business two years from now, all the 1231, 1245, 280F, ect would be her problem. In an earlier era she would have also been responsible for any Sec 38 recap.

Pub 504 also says any Sec 38 recap potential passes to transferee. I understand there is no GATP but why would 280F recap be treated differently than rest of the gains/ losses and recap pertaining to the property?

Dan

[Bees Knees]

Pub 504 also says any Sec 38 recap potential passes to transferee. I understand there is no GATP but why would 280F recap be treated differently than rest of the gains/ losses and recap pertaining to the property?

It should be treated the same as the investment tax credit recapture under Section 38. All I'm saying is you haven't provided a citation yet that says it is treated the same. The only citation so far in the regs is that Section 38 is still subject to recapture. Section 38 is not the only thing that every gets recaptured. Why didn't the Reg just say any and all things that could be recaptured are subject to recapture after a Section 1041 transfer?

[cpadan]

Maybe they wrote it on a Monday mourning,.....right after the Holidays.