I have a client (person A) who received a 1099-S for proceeds on a property he sold in a 1031 Exchange.  He had another investor (person B) in the property who did not receive his share of the 1099-S.  Person A paid Person B 1/3 of the proceeds (what he was entitled to) and issued a 1099-Misc for the Nominee Distribution.  So far so good.

When I prepared the return, I showed the proceeds paid to Person B as a Nominee Distribution on Person A's return.  This resulted in a negative amount on Line 13 of Schedule D.  When the return was filed, the return was rejected.

The question I have is if there is a better way to enter this payment.  If not, then Person A will have to file a paper return.  Am I correct here?