Where in 1231(c) does it say "the taxpayer's loss"?
Ok then, if my brother has a Sec 1231 loss in Year1 and then you have 1231 gain in Year2, you have to recapture my brother’s loss. That’s based on your understanding of things. After all, if the Code Section doesn’t say “the taxpayer’s loss” then we’d have to recapture anyone’s loss. Not sure why you’d limit the reach to a spouse’s loss on a joint return. Hence Nilodop’s comment about “my loss or Jeff’s loss.”
If that were true, then spouses could file a joint return and report a 1231 loss attributable to one spouse, then a couple years later when the other spouse had a 1231 gain, they could file a joint return and avoid the 1231(c) recapture.
Not likely. Your example doesn’t involve a death. But playing along, if we’re talking about a capital loss carryforward by Unmarried Person #1, who in a subsequent year gets married to Unmarried Person #2, and #2 separately has a capital gain in the year of marriage, and they file a joint return in the year of marriage, it all gets netted. This is a function of the “combination” aspect of a joint return, as per Regulation, when it comes to capital losses. But this is not the issue at hand. We are talking about the possible expiration of a tax attribute when the taxpayer expires.
If the cap loss carryforward parallel is appropriate for the 1231 situation, then in your example, we’d have netting all the same. The concept of “whose loss is it?” doesn’t matter on a joint return. The joint filing trumps what would otherwise be separate losses. Now, if they file separately in the year of the marriage, #2 would get no benefit from #1’s capital loss carryforward. In the same vein, if we change the facts so that #1’s capital loss carryforward is instead a prior 1231 loss tax attribute, that would get pulled into the marriage and would be subject to recapture on a joint return even if the 1231 gain was solely attributable to #2. Again, this a function of the “combination” aspect of a joint return, assuming we’d apply capital loss logic. As Nilodop says, this doesn’t change whose loss it was. That inquiry merely becomes moot on a joint return. Again, your example doesn’t involve a death. When we insert a death, then the “whose loss is it?” inquire becomes highly relevant. At least it does when figuring out capital loss carryforwards.
I still believe that the IRS could make a viable argument.
I think any argument they make would be tongue in cheek.