Reporting Interest and Dividends on Joint Accounts While Divorce is Pending

While a divorce is pending, there is often confusion as to which spouse is required to report on his or her income tax return the interest or dividends earned on joint accounts. This issue was recently addressed by the Tax Court in Jean C. Rosenbaum v. Commission (Tax Court Memo 1992-287, filed May 18, 1992).

W and H were in the process of a divorce during the years 1986 and 1987. W filed timely tax returns for 1986 and 1987, claiming the status of married filing separately. She and her husband owned accounts in the Keystone Custodian Funds as joint tenants with rights of survivorship. The dividends on the Keystone accounts were $14,414 in 1986 and $10,888 in 1987. The dividends were automatically reinvested. H’s social security number was the only one on the accounts, and he received the Forms 1099 and the account statements from Keystone.

For 1986 and 1987, H’s accountant furnished W with Forms 1099-MISC., stating that an amount equal to 50 percent of the income from the accounts was received by H as nominee for W. H requested that W report 50 percent of the income from the Keystone accounts and supplied her with copies of the Keystone statements.

In 1990, the Keystone accounts were divided equally between W and H pursuant to a court order granting them a divorce. The IRS determined that W failed to report her half of the dividends from the Keystone accounts. They also determined that W had failed to report interest credited to her account in 1987 by American National. W argued that she is not taxable on the dividends from the Keystone accounts because H’s social security number was the only one on the account. She also argued that she is not taxable on the interest income from American National because the account was under court control.

Section 61 of the Internal Revenue Code requires a taxpayer to include in gross income all income from whatever source derived. Taxation of the income from jointly-held property is determined in accordance with state law for deciding who is entitled to the income from the property. If each spouse has an equal right to the income from the property, the usual rule is that one-half of the income from the property is properly taxable to each spouse. Thus, each spouse is obligated to include in his or her gross income any amount which he or she received, either actually or constructively, as income from mutual funds and interest on bank deposits.

Under the doctrine of constructive receipt, actual, physical receipt of cash is not necessary for income to be taxable. When income is credited to a taxpayer’s account and is available so that the taxpayer may draw upon it, the taxpayer is taxable on the income constructively received.

W was in constructive receipt of the income from the Keystone accounts, and she did not produce evidence that she was in any way barred from withdrawing her share of the income. Therefore, the IRS ruled that she should have included in her income in each year one-half of the income from the Keystone accounts. W was also ordered to pay negligence penalties since she had been provided with a 1099 and knew that H was only paying tax on half the interest income from the accounts.