PURPOSE: This rule sets forth the method to be used by married persons filing joint federal income tax returns in allocating capital gains and losses between the spouses for Missouri income tax purposes.

Editor’s Note: The secretary of state has determined that the publication of this rule in its entirety would be unduly cumbersome or expensive. The entire text of the material referenced has been filed with the secretary of state. This material may be found at the Office of the Secretary of State or at the headquarters of the agency and is available to any interested person at a cost established by law.

1. (1) The following general rules have been issued by the Missouri Department of Revenue and should be used in arriving at Missouri adjusted gross income (MAGI) of each spouse in situations involving gains or losses from sale or exchange of capital assets, but only if the husband and the wife file a joint federal income tax return for the year. The rules presume the applicability of the Missouri Income Tax Law of 1973 (Senate Bill 549).

2. (2) Losses: General Rule. If the losses from the sale or exchange of capital assets exceed the net gains from the sales, so that line 14, Schedule D, Form 1040 is a loss, then, subject to the limitation provided for in Internal Revenue Code (IRC) Section 1211, allocate the excess to the spouse responsible for the excess. If both spouses are responsible for the excess, then allocate the excess, subject to IRC Section 1211 limitation, between the spouses on a pro rata basis. Allocate excess short-term capital losses before allocating excess long-term capital losses.

   1. (A) Example No. 1: Assume the following facts on the joint federal income tax return for 1973: Husband Wife Total

Wages $10,000 $5000 $15,000 Short-Term Gain (Loss) 0 0 Long-Term Gain (Loss) ($2000) ($3000) ($5000) FAGI *$14,000 *Section 1211 Limitation of ($1000). Missouri Answer: The amount of the excess is (5000) but, because of the limitation of IRC Section 1211, the deductibility of the loss is limited to (1000). Since both spouses are responsible for the excess, then allocate the (1000) on a pro rata basis, that is—husband (2/5 x 1000) and wife (3/5 x 1000).

MAGI is therefore—

Husband Wife Total

Wages $10,000 $5000 Less Section

Deduction ($400) ($600) MAGI $9600 $4400 $14,000

1. (B) Example No. 2: Assume the following facts on the joint federal income tax return for 1973:

   Husband Wife Total

Wages $10,000 $5000 $15,000 Short-Term Gain (Loss) ($200) ($300) ($500) Long-Term Gain (Loss) ($8000) ($3000) ($5000) FAGI *$14,000

*Section 1211 Limitation of ($1000).

Missouri Answer: The Section 1211 limitation of (1000) should be allocated as follows: a) Allocate excess short-term losses of (500) first and, since both spouses are responsible for the excess, it should be allocated on a pro rata basis, that is—husband (2/5 x 500) and wife (3/5 x 500); b) Allocate the remaining (500) of the limitation from excess long-term losses and, since the husband is responsible for the excess, the remaining (500) should be allocated entirely to him. Note that husband must use $2 of net long-term loss to offset $1 of ordinary income.

MAGI is therefore— Husband

Wages $10,000 Less Section

Deduction ($700) i.e. S.T. ($200)

x + L.T. ($500) MAGI $9300

1. (C) Example No. 3: Assume the following facts on the joint federal income tax return for 1973:

   Husband Wife

Wages $10,000 Short-Term Gain (Loss) ($1000) Long-Term Gain (Loss) ($8000) FAGI

*Section 1211 Limitations of ($1000).

Missouri Answer: Since there are no net short-term losses, all of the IRC Section 1211 limitation of (1000) should be allocated from excess long-term losses. Since the husband is responsible for the excess, the entire amount of the limitation is allocated to him.

MAGI is therefore:

Husband Wife

Wages $10,000 Less Section

Deduction ($1000) MAGI $9000

1. (3) Gains: General Rule. If net gains from the sale or exchange of capital assets exceed net losses from the sales, so that line 14, Schedule D, Form 1040 is a gain, then allocate the excess short-term capital gain to the spouse(s) responsible for the gains, and allocate the excess long-term capital gain to the spouse(s) responsible for the gain and allocate the IRC Section 1202 deduction in the Wife Total

$5000

($300) i.e. S.T. ($300) +

$4700 $14,000

Total

$5000 $15,000

($1000) (0)

($3000) ($5000) *$14,000

Total

$5000

$5000 $14,000 same manner and to the same spouse(s) to whom excess long-term gains are allocated. If both spouses are responsible for the excess short-term (long-term) gain, then allocate the excess of short-term (long-term) gain on a pro rata basis.

1. (A) Example No. 4: Assume the following facts on the joint federal income tax return for 1973:

   Husband Wife Total

Wages $10,000 $5000 $15,000 Short-Term Gain (Loss) 0 0 Long-Term Gain (Loss) ($3000) ($8000) ($5000) FAGI *$17,500

*$5000 net long-term gain less IRC Section 1202 deduction of $2500.

Missouri Answer: Since the excess gains are all net long-term gains and since the wife is responsible for the excess, then allocate the entire amount of the excess to the wife and also allocate the entire IRC Section 1202 deduction to the wife.

MAGI is therefore—

Husband Wife Total

Wages $10,000 $5000 Plus Excess Gains 0 $5000 (L.T.) Less Section

Deduction 0 $2500

Gain (Loss) ($8000) ($3000) ($5000) Long-Term Gain (Loss) ($3000) ($8000) ($5000) FAGI *$22,500

*IRC Section 1202 deduction of $2,500.

Missouri Answer: Since the husband is responsible for the entire amount of excess short-term gains, the excess is allocated to the husband. Since the wife is responsible for the entire amount of excess long-term gains, the excess, as well as the IRC Section 1202 deduction, should be allocated to her.

Missouri AGI is therefore:

Husband Wife

Wages $10,000 $5000 Plus Excess Gains $5000 (S.T.) Less Section

Deduction 0 MAGI $15,000 $7500

1. (C) Example No. 6: Assume the following facts on the joint federal income tax return for 1973:

   Husband Wife

Wages $10,000 Short-Term Gain (Loss) ($4000) Long-Term Gain (Loss) ($2000) FAGI

*IRC section 1202 deduction of $2500.

Missouri Answer: Excess short-term capital gains are allocated to the spouses on a pro rata basis, that is—husband (4/5 x 5000) and wife (1/5 x 5000). Excess long-term capital gains are allocated to the spouses on a pro rata basis, that is—husband (2/5 x 5000) and

Wages $10,000 $5000 Plus Excess Gains $4000 (S.T.) $2000 (L.T.) Total

$5000 (L.T.)

$2500 $22,500

Total

$5000 $15,000

($1000) ($5000)

($3000) ($5000) *$22,500

$1000 (S.T.) $3000 (L.T.) 12 CSR 10-2

Less Section

Deduction $1000 $1500 MAGI $15,000 $7500 $22,500

1. (4) The following three (3) examples are designed to show that, for allocation purposes, the primary focus is on the gain (loss) shown on line 14, Schedule D, Form 1040:

   1. (A) Example No. 7: Assume the following facts on the joint federal income tax return for 1973:

      Husband Wife Total

Wages $10,000 $5000 $15,000 Short-Term Gain (Loss) ($3000) ($8000) ($5000) Long-Term Gain (Loss) ($6000) ($4000) ($10,000) FAGI *$17,500

*Excess of net long-term capital gain over net short-term capital loss is $5000, less IRC Section 1202 deduction $2500.

Missouri Answer: Since net long-term capital gains exceeds net short-term capital loss, the 5000 figure reported on line 14, Schedule D, Form 1040 is an excess long-term gain. Since both spouses are responsible for the excess, then the excess long-term capital gain, as well as the IRC Section 1202 deduction, are allocated to the spouses on a pro rata basis, that is—husband (6/10 x 5000) and wife (4/10 x 5000). The IRC Section 1202 deduction of 2500 is also allocated on 6/10—4/10 basis.

MAGI is therefore—

Less Section

Deduction $1500 $1000 MAGI $11,500 $6000 $17,500 (B) Example No. 8: Assume the following facts on the joint federal income tax return for 1973:

Husband Wife Total

Wages $10,000 $5000 15,000 Short-Term Gain (Loss) ($14,000) ($9000) ($5000) Long-Term Gain (Loss) ($12,000) ($2000) ($10,000) FAGI *$17,500

*Excess of net long-term capital gain over net short-term capital loss is $5000, less IRC Section 1202 deduction of $2500.

Missouri Answer: Since net long-term capital gain exceeds net short-term capital loss, the $5000 figure reported on line 14, Schedule D, Form 1040 is an excess long-term gain. Since the husband is responsible for the excess, then allocate the entire amount of the excess to the husband and also allocate the entire IRC Section 1202 deduction to the husband.

MAGI is therefore:

Husband Wife Total

Wages $10,000 $5000 Plus Excess Gains $5000 (L.T.) 0 Less Section

Deduction $2500 0 MAGI $12,500 $5000 $17,500

1. (C) Example No. 9: Assume the following facts on the joint federal income tax return for 1973: Husband Wife Total

Wages $10,000 $5000 $15,000 Short-Term Gain (Loss) ($20,000) ($9000) $11,000 Long-Term Gain (Loss) ($28,000) $22,000 ($6000) FAGI *$20,000

*Excess of net short-term gain over net long-term capital loss is $5000.

Missouri Answer: Since net short-term capital gains exceed net long-term capital loss, the $5000 figure reported on line 14, Schedule D, Form 1040 is an excess short-term gain. Since the husband is responsible for the entire amount of excess short-term gain, the excess is allocated to the husband. MAGI is therefore—

Husband Wife Total

Wages $10,000 $5000 Plus Excess Gains $5000 (S.T.) 0 Less Section

Deduction 0 0 MAGI $15,000 $5000 $20,000

AUTHORITY: section 143.961, RSMo 1986.* This rule was previously filed as Income Tax Release 73-11, Jan. 29, 1974, effective Feb. 8, 1974. *Original authority 1972.