My question is somewhat confusing. I had a client come to see me regarding a 1099 that he received on 4/17 for $11,200. He and his spouse are separated and living apart, they filed a joint return in 2010 and HE assumed the same would occur for 2011. However, the Spouse decided to file separate, took all three children as a dependents.

The husband and spouse jointly own a commercial building and property. The spouse owns an LLC that "leases" the building and property for a bar business. There is NO formal lease agreement that the husband is aware of.

The LLC issued on 4/17 a 1099 for rental income in the name of the husband only. This income was NEVER RECEIVED by the husband (or paid by the LLC).

How do I guide my client? Is this fictious income to the husband taxable? I strongly suspect that the LLC needed to show a rental expense to reduce the Spouses taxable income.

Can someone guide where where to find the answer.. Thank you in advance!

There is NO formal lease agreement that the husband is aware of. The LLC issued on 4/17 a 1099 for rental income in the name of the husband only. This income was NEVER RECEIVED by the husband (or paid by the LLC). How do I guide my client?”---> 1099s should only be issued if the transaction relates in some way to your client’s business or trade. The tenant-landlord relationship needs to arise out of a formalized rental agreement known as a lease. The lease establishes how long a property may be rented, the monthly price, what services the landlord is to provide, what responsibilities for the maintenance of the property fall on the tenant, and how expenses related to the property’s use, such as utility bills, are to be divided. A tenant,his spouse, should issue a 1099 to her landlord if the underlying lease is commercial and is related to her business. The appropriate 1099 to provide is a 1099-MISC. The tenant must provide a 1099 if she paid $600 or more in rent. Basically you will need to issue a 1099 to all service providers who you pay $600 or more within a year and who are not employed by you and already receiving a W2.An exception to this rule is if the rent payments were made to a real estate agent. The amount of rent paid is listed in box 1 of the 1099-MISC. When completing the 1099, the landlord’s address and tax identification number is required. If the landlord is an individual, this will be his SSN#.To obtain this information, she must provide the landlord with a Form W-9 to complete. This form provides the identification information necessary to complete the 1099.
“Is this fictious income to the husband taxable? I strongly suspect that the LLC needed to show a rental expense to reduce the Spouses taxable income.”---->I guess it is taxable, as long as the husband intentionally accepts and reports it as his taxable income on his return(the IRS doesn’t even know if he actually received the rent on 1099 from his spouse, the tenant), even if there is no actual payment to him; I mean she sends a copy of1099/1096 to the IRS and it goes into their computers. At some point, the computers match all this info up with what was filed on returns. and then, the husband may(if he wants) be able to report it on Sch E of 1040 and on his 1040 on his separate return. However, there is no reason for him to do this. why does he want to report the fictitious income on his return as his taxable income? That means that he should pay tax on the fictitious income that he didn’t even receive.In general, taxpayers must report all income from any source and any country unless it is explicitly exempt under the U.S. tax code. There may be taxable income from certain transactions even if no money changes hands.Generally, the IRS considers all income received in the form of money, property or services to be taxable income unless the law specifically provides an exemption.
“ Can someone guide where where to find the answer”---->You can visit the IRS website : http://www.irs.gov/pub/irs-pdf/i1099msc.pdf