Discussion:Deductibility of T/B Liability for Cash-basis Taxpayer in Year of Death
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Discussion Forum Index --> Tax Questions --> Deductibility of T/B Liability for Cash-basis Taxpayer in Year of Death
JohnMcG329 (talk|edits) said: | 3 November 2009 |
| A client of mine recently passed away. He was an attorney who filed a Schedule C as a sole proprietor on a cash basis.
His assets were included in a Revocable Trust. Upon his passing, I became Trustee. In the year before his passing, he settled a malpractice case under the following terms: My client was to pay $100,000 to the plaintiff (plus accrued interest) on the passing of my client. This $100,000 liability was secured by a lien on real property. My question: Can I take the $100,000 deduction on his 2009 1040 if the claim was paid during calendar year 2009, or is it necessarily a 1041 deduction as it was paid after the date of death? Generally, I would think it is deductible under the trust, due to timing of a cash basis taxpayer. However, I am not sure because of issues regarding legal judgements and liabilities existing when cash-basis trade/businesses terminate. Thanks in advance for your input. | |
KatieBrewer (talk|edits) said: | 3 November 2009 |
| It seems to me that this is a debt that existed upon his death. Therefore, his estate will have a liability for estate tax purposes (thus lowering his estate tax). It also seems to me that since payment occurs post-death, the deduction will be taken on the income tax return of the estate (eg the 1041) rather than the 1040. However, this is where you also have a potential IRD/DRD issue. In this case, you have a "deduction in respect of a decedent" (DRD) at the 1041 level (or passed through to one of the estate's beneficiaries) since the estate tax was altered (in this case reduced) by a debt that also was deductable for income tax purposes. I caveat this by saying that this requires a bit more thought, though, since there may be some case law out there that suggests the timing of the deduction to be immediately before death since it was a business debt. I just don't know of any off the top of my head. | |
| 4 November 2009 | |
| I agree with Kevinh5. If the settlement was not payable until the client died, then it cannot be taken on the 1040. It would be allowable on the 1041. See IRC ยง691(b)(1). | |
