Help & Opinions Please

[Terry D EA]

I do apologize for the lengthiness of this post but this situation is driving me crazy to say the least. In an earlier post that involved a couple who had recently gone through a divorce and at one point in the marriage, the husband invested an inheritance his ex-wife, (my client) received and lost $67,000.00. To add some additional information, the husband is required by the court and had to relinquish his retirement benefits to my client in the amount of roughly $428,000. Part of that settlement identified the $67,000 loss to be repaid to my client with the remaining amount as alimony and cash to reinvest. No other mentions of what the retirement funds were to be used for.  Due to this fact, I feel my client is not entitled to claim a loss on her tax return as she has been or will be repaid from the retirement benefits. All is well to this point. My client provided me with the 2012MFJ tax return and a loss over and above the 67,000.00 was reported and carried over. I do not know the sources of all of the loss only the $67,000.00. There were both LT and ST loss carry forward in 2012. The difference minus the 67K is $47K. No mention of this loss in the divorce decree or financial settlement statement. If this was indeed part of the marital estate prior to the divorce shouldn't my client be entitled to claim one half of the remaining total loss which would be 23,500.00 taking 3000.00 per year for the next 7.5 years? Opinions and guidance will be appreciated.

[Catherine]

I think that before you can make that determination you need more information on the source of these losses.  

 

Even assuming the divorce decree says nothing (and be careful there; there might be wording somewhere about "assets purchased by mr X with non-joint funds will be retained by mr X" which could well affect this assumption) -- what if that loss was (at least in part) the $67K?  Your client, mrs X, will be made whole, so she does NOT have a carry-forward loss in that case; only mr X does (but he doesn't get to double-dip and claim the repayment is an additional loss but that is not your concern).

 

If the remaining 47K was all jointly purchased and held assets, then yes, half the carryforward loss is hers.  

 

This really should be covered in the divorce decree.  That's what those horrific financial statements are supposed to be FOR; complete disclosure of all interests and facets, so things can be divided appropriately.

[Gail in Virginia]

And you also have to be careful about how the funds are given to the ex-wife.  If she has to pay taxes on all of the money that she gets from the retirement plan because it is reported on a 1099R, then I don't think I would consider it a repayment for tax purposes and I think that she should be able to go ahead and deduct the loss.  This one sounds like it is a little sticky with alimony, property settlement and repayment of losses all tied to the same marital asset.  So i am with Catherine:  somebody has to wade through all the financial information relating to the property settlement and figure out what goes where for how much and why and .....

You get the picture.

[jklcpa]

Dividing the loss carryforward IS a sticky situation and goes back to whether state law, the divorce agreement, and settlement interpret that carryforward to be property of the marital estate.  Then, there's also the consideration whether state law preempts Federal law, the tax code, that says that the loss follows the legal title of the account and transactions that gave rise to the loss in the first place.  It can be further muddled if separately owned assets generating losses are used to offset gains from jointly held assets, and that may have been claimed over years.  At least this case involves only the wife's inheritance and one tax year.  There have been cases about this that go both ways, so the answer isn't always clear at all.

 

I don't know if these will help.  The first one has some cases cited and a concluding section (that doesn't really reach a conclusion we want) that mentions valuing the loss carryforward by the future tax benefits that it will produce.  That probably wasn't done in the case with Terry's client since the wife got $67K more because of the husband's mishandling, so not sure if the loss itself was considered a marital asset. It doesn't sound like it.

http://www.divorcesource.com/research/edj/tax/05nov121.shtml

 

The second link is about a particular case in MD where a divorcing couple had jointly held investments that generated cap losses. The wife relinquished any right to the jointly held account, and then used ~ 50% of loss c/f on her next return. Husband sued that she didn't have the right to the loss c/f and court held in his favor. Wife appealed and the appeals court reversed the decision in favor of the wife stating that the carryforward was not an interest in the investment account itself.

http://www.marylanddivorcelawyer-blog.com/2015/02/12/maryland-court-interprets-settlement-agreement-dividing-marital-property/

 

That's a long-winded way to say "it depends."

[Terry D EA]

So much for hoping for a slam dunk answer which I really didn't plan on getting. I will read the two cases but as I said in my original post, I think it is imperative to know if there were jointly held assets that generated the loss and were part of the marital estate. I know one thing for sure, I have advised my client as to what my fees have totaled so far. She keeps giving me various amounts of information which is indeed helping with how to accurately prepare her return. Each time I think I have it correct, she sends me, via e-mail, more documents, changes her mind regarding claiming her son which we are now not doing and only using him for HOH purposes which I have researched and she can do this and give the exemption to her ex. I only found out last evening about the divorce agreement and settlement sheet that is very vague and contains none of the language Catherine spoke of and yes, I have combed over it several times. She is still afraid of his retaliation in some manner. I've told her that her return is none of his business and that her return will be prepared accurately and according to the law and to not share anything with him other than the 8332 form. What he does is his business and none of mine and I don't want to know.

[Catherine]

I'm then surprised that there is no provision to trade tax returns every year.  I have seen that provision more times than not. 

[Terry D EA]

Nope, not a thing about that at all.

[SaraEA]

And of course this is the kind of problem they bring to you during the mad rush of tax season. They probably divorced months ago when you had the time to read through all their crap, court cases, state law, etc. (when you weren't learning about the ACA and repair regs). Now of course they want to get THEIR refunds so it's YOUR problem. I don't think so. Suggest an extension.

[Randall]

As for the money coming to her from the spouse's retirement plan, make sure she understands that if it comes to her, it's taxable with an exemption to the 10% penalty.  However, if she doesn't need this money, she can have a direct transfer to her own IRA which will defer tax.  But once transferred to her own IRA, any further distributions will be taxable and subject to the 10% penalty.  The transfer must be direct, not coming to her first.  If she needs some of the money, she can receive an amount subject to tax but exempt from the 10% penalty and have the plan custodian directly transfer the remaining balance into her own IRA account.  If she's already done this, it's a moot point.

 

As for the capital loss, I agree with the other comments.  If account was a joint account and divorce agreement doesn't mention it, I would think she's entitled to half the loss.  But the spouse is likely taking the full loss on his return.  You did mention that in the settlement, the loss was to be repaid to the wife.  If that $67,000 loss was considered part of the $428,000 payoff, then I would think she's not entitled to a loss writeoff.  But as jklcpa points out, there could be more to it.