Tax on profit from stocks that I never owned.

You report it on your tax return using Form 8949 (this form feeds Form

1040 Schedule D). Use Part I Box C for short-term transactions. Use Part II Box F for long-term transactions. The "C" and the "F" signify that no 1099-B was received.

Now I'm cashing out. I'll make a few thousand in profit.

However I never had the stocks in my name, I have no documentation other than a record of me wiring him the money. Now he will wire the money with profit back to me.

So either he can declare that profit, pay the capital gains tax on it, and I give him that amount of money back.

Or I somehow declare the profit as a capital gain on my own tax return. But as I said, I have no documentation to go along with it.

What is the best way to deal with this messy situation? =================== File all the form 1065s for your PARTNERSHIP. Your share of the gain will show up on your copy of the 1065 Schedule K-1.

As pointed out, the correct procedure would have been to have the (informal but real) partnership file 1065s all those years, in which case you'd get a K-1 showing your profit.

At this point, you might want to read the instructions for nominee gains. Basically, the named owner of the stock will receive a 1099-B from the broker. He reports that 1099-B on HIS Form 8949, but zeros out the gain by using code "N". He then send YOU a 1099-B (with a copy to the IRS) showing the sale, which you report on your 8949 and pay the tax.

[Complications - either the broker or the named owner must know the basis of the stock. Depending on when the purchase was made, the basis may or may not be on the 1099-B. The instructions for the 1099-B say only brokers must send out 1099-Bs, but the General Instructions for 1099s extends that obligation to nominee recipients as well.]

Don EA in Upstate NY

[...]

Both Stussy and Alan have given you good answers. This investment partnership should have been filing partnership returns all along, and still can file late returns (and pay the penalties involved). That is the correct way to clean up the mess, but it doesn't sound likely to happen.

You can always claim income and pay tax that has not been reported to the IRS under your name, they will never give you a hassle about that. This may create a problem for the lead guy (with the income in his name), as he will have a harder time convincing IRS the income was not all his. He might be able to get away with a issuing a nominee 1099-B to you, but that's not common.

Reimbursing the other guy for his tax on your income could be good or bad for you, depending on whether his tax rates are higher or lower than yours (although still incorrect way to do it). This matters especially in a state like CA which has no special capital gains rate. This is precisely why the arrangement should have been handled as a partnership from the beginning, so that each partner is taxed at their own rate.

As it is, you are somewhat fortunate. If your buddy had become incapacitated or worse, how would you have gotten your money back? What if there had been a loss on the investment, and you buddy wanted to use it all himself to lower his taxes?

But then do you have to pay the California $800 minimum tax on corporations?

The corporation does if it wants to continue to transact business. The individuals do not owe the corporations tax normally.

But then do you have to pay the California $800 minimum tax on corporations?

========Why? Partnerships are NOT corporations.

Neither are LLC's, but they pay the tax in California anyway. Oh, and limited partnerships also pay it.

Back a couple of centuries ago, when I started doing taxes, there was an exception to the partnership-required-to-file-return rule for really simple "investment clubs." It sounded like the IRS was trying to be kind to the folks who sat around in their back yards in the '50s and dabbled "communally" in the stock market. The exception was in the Section 761 regs, and was *very* carefully defined. I wonder if possibly it's still there...?

Just as an aside (i.e., I'm not trying to answer any questions, really) here's what the IRS has to say about this, in their Pub 550 "Investment Income and Expenses": "Generally, an investment club is treated as a partnership for federal tax purposes unless it chooses otherwise." Boy, that really helps, doesn't it?

The 761 regulations have the procedure for electing out. I can't figure out why a club would want to opt out as the cons out way any pros. E.g., if the club is not a partnership then it must mean that each member is a co-owner. As such, the member owns a piece of each asset. If the club sells stock in 50 different companies, then each member has to report 50 stock sales. This would be true of bond interest and dividends. It would also be true for expenses. Partial withdrawals could not be tax-free. It would have to represent a the sale of the members ownership in an asset to the other members. As a partner, you just report your share of the above and you can take partial withdrawals tax-free until basis is recovered.

And in fact IIRC sometime in the past 10 or so years the National Association of Investment Clubs switched its position from recommending that clubs opt out to recommending they do not do to.