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I have a note from a company I sold. I will get a check every

month as payment against the...
I have a note from a company I sold. I will get a check every month as payment against the note for my stock for the next 8 years. I pay federal income tax every year. I am in the middle of a divorce and they want to call the note an asset. How can I fight this? I live in PA and that doesn't help at all......
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Answered in 2 minutes by:
9/5/2013
Lev
Lev, Tax Advisor
Category: Tax
Satisfied Customers: 30,130
Experience: Taxes, Immigration, Labor Relations
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Lev :

Hi and welcome to Just Answer!
The first issue - if shares are sold - that transaction is not eligible for installment treatment - thus the gain or loss is recognized in the year of sale.

Lev :

That is - your gain or loss is reported in the year shares are sold and if you had a gain - for income tax purposes that is included into your taxable income for that year.
On the note - as payments are comming every year - you are liable for taxes on interest, but not on principal payments.

Lev :

Income on the sale of shares is regognized in the year the sale transaction is completed.

Lev :

The note indeed is your asset - that is regardless how income is realized or recognized.
The right to receive an income on the note is your asset.

Lev :

From a state standpoint but the federal government doesn't recognize the income until I get a check.....
That is not always correct. Income from tax prospective is recognized when it is constrictively received.
If you receive another asset in exchange for the asset being sold - income is constructively received - and generally is taxable.
Another issue - because the sale transaction is financed in some situations we may use installment method reporting the income. However not all assets are eligible for installment method. In particular - if shares are sold - they are NOT eligible for installment treatment.

Lev :

However if the real property is sold on installnments - the installment method may be used to report taxable income.
That seems is not your case because as you mentioned - the company stock was sold - please verify if that is correct.

Lev :

As your assets are divided in divorce - the note is your asset and should be evaluated. Its FMV value may be less then the amount on that note.
If the note will be owned by you - payments on that note will be YOUR income.
Based on your information - these payments are partly taxable - principal part is not taxable, but interest is taxable.
However from child support or alimony prospective that would not matter - still that would be your income.

Lev :

If the note will be owned by you AND your spouse (or ex-spouse) - payments on that note will be your and your spouse's income - and generally must be divided equally unless the divorce decree rules differently.
Correspondingly - each of you will be responsible for taxable portion of that income.
If the note will be transferred to your spouse (or ex-spouse) as a settlement in divorce - she will receive that income and will be responsible for income taxes on the taxable portion.

Lev :

For additional information, refer to Publication 537, Installment Sales - www.irs.gov/pub/irs-pdf/p537.pdf‎

Lev
Lev, Tax Advisor
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Customer reply replied 4 years ago

From a state standpoint but the federal government doesn't recognize the income until I get a check.....

Customer reply replied 4 years ago

So from an alimony standpoint in PA the monthly proceeds cannot at all be considered income and take care of the alimony needs?

Customer reply replied 4 years ago

The shares are sold.....

Customer reply replied 4 years ago

It was sold to an individual that is paying me over the next 8 years

Customer reply replied 4 years ago

her name is XXXXX XXXXX note also...

Hi and welcome to Just Answer!
The first issue - if shares are sold - that transaction is not eligible for installment treatment - thus the gain or loss is recognized in the year of sale.
That is - your gain or loss is reported in the year shares are sold and if you had a gain - for income tax purposes that is included into your taxable income for that year.
On the note - as payments are coming every year - you are liable for taxes on interest, but not on principal payments.
Income on the sale of shares is recognized in the year the sale transaction is completed.
The note indeed is your asset - that is regardless how income is realized or recognized.
The right to receive an income on the note is your asset.
Lev : From a state standpoint but the federal government doesn't recognize the income until I get a check.....
That is not always correct. Income from tax prospective is recognized when it is constructively received.
If you receive another asset in exchange for the asset being sold - income is constructively received - and generally is taxable.
Another issue - because the sale transaction is financed in some situations we may use installment method reporting the income. However not all assets are eligible for installment method. In particular - if shares are sold - they are NOT eligible for installment treatment.
However if the real property is sold on installments - the installment method may be used to report taxable income.
That seems is not your case because as you mentioned - the company stock was sold - please verify if that is correct.
As your assets are divided in divorce - the note is your asset and should be evaluated. Its FMV value may be less then the amount on that note.
If the note will be owned by you - payments on that note will be YOUR income.
Based on your information - these payments are partly taxable - principal part is not taxable, but interest is taxable.
However from child support or alimony prospective that would not matter - still that would be your income.

If the note will be owned by you AND your spouse (or ex-spouse) - payments on that note will be your and your spouse's income - and generally must be divided equally unless the divorce decree rules differently.
Correspondingly - each of you will be responsible for taxable portion of that income.
If the note will be transferred to your spouse (or ex-spouse) as a settlement in divorce - she will receive that income and will be responsible for income taxes on the taxable portion.

For additional information, refer to Publication 537, Installment Sales - www.irs.gov/pub/irs-pdf/p537.pdf‎
Ask Your Own Tax Question
Some additional information.
Please see IRS Publication 537, Installment Sales - www.irs.gov/pub/irs-pdf/p537.pdf‎ - page 2 - middle column
The installment sales method cannot be used for the following.
Stock or securities. You cannot use the installment method to report gain from the sale of stock or securities traded on an established securities market. You must report the entire gain on the sale in the year in which the trade date falls.

So if shares of your corporation are NOT traded on an established securities market - your sale is eligible for installment method reporting. Sorry for confusion.
In this case - you still need to report the total sale transaction in the year of the sale - but income will be recognized every year it will be received - if you choose an installment sales method for reporting.
For instance if your basis is $10,000, but assets are sold for $100,000 - the taxable income will be $90,000 - and will be spread over eight years.
Each payment must be divided into principal and interest parts. Then the principal will be divided as basis and taxable gain.
So - the basis recovery will be nontaxable part of proceeds and the gain and interest will be included into taxable income.
Let me know if you need any help or clarification.
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Lev
Lev
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