Discussion:1099 C Cancellation of Debt

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Wheatley1 (talk|edits) said:

20 December 2006
I have a client who filed Chapter 7 bankruptcy. A second mortgage was included in the bankruptcy. The client received a 1099 C for the second mortgage. They didnt include this in their tax return. They received notice from IRS that it is income. Can't they just send a copy of the bankruptcy papers to the IRS? Should this have been income? I say no. Any suggestions on what to do withe the notice from IRS? Thanks in advance....Rena

DZCPA (talk|edits) said:

20 December 2006
Tell IRS client was insolvent at time of debt cancellaiton with appropriate documents. This should clear it up.

Lhhesscpa (talk|edits) said:

20 December 2006
Wheatley: Take a look at Sec. 108(a)(1)(A) that provides that cancellation of indebetness income is not includable in taxable income if the COD income is from discharge during a bankruptcy. Assuming that you're responding to a CP2000 notice, I would fax the IRS a copy of the bankruptcy filing that shows the debt listed & the discharge order. -- Larry Hess, CPA | Albuquerque, NM - Talk to me


Taxworld2 (talk|edits) said:

1 February 2008
My client had over $900,000 of debt cancelled in 2007. We have not received a 1099-C. I guess it will need to be issued before 2/29? OK, so for bookkeeping we debit the N/P and credit cancellation of debt income. How is this to be reflected on his LLC return if he has filed under Chapter 7? The return needs to balance. Specified other income which flows through to his 1040 and then is excluded??

Thanks TW

Warrencpa (talk|edits) said:

20 March 2008
I have a client who is a limited partner his K-1 included COD income. Shouldn't this debt be considered non-recourse since he his a limited partner. Therefore this income would be part of the capital gain

RoyDaleOne (talk|edits) said:

21 March 2008
http://www.taxalmanac.org/index.php/Discussion:Cancelation_of_Debt_Income

Dan's Tax Service (talk|edits) said:

13 February 2009
== Headline text ==

My client presented me with a 1099-C for credit card debt. No bankrupcy involved. I'm not sure that they are not technically "insolvent". So, I'm planning on requestimg them to complete the IRS "Statement of Insolvency" to support exclusion of what is now current taxable income on my return.

However, I am unsure of the meaning of a few lines of the form, and may be making some incorrect assumptions. They are: LIABILITIES Line 3e, Real estate loans, nonrecourse; and, line 3f Real estate loans, recourse; and, ASSETS Line 5i Real estate.

Where would my client find the type of mortgage loan they have - recourse/nonrecouse?

Since my client has a home mortgage and real estate is included under liabilities and assets, should I assume that their liability is their balance on the date of debt cancellation; and, their assets is the remaining principal on the loan or the appraised value (whatever that is these days)?

Is there a simpler way - am I all wet on having my clients complete the form?

Needing enlightenment - thanks

Riley2 (talk|edits) said:

13 February 2009
Assets - fair market value of property of the taxpayer immediately before the discharge.

Liabilities - amount taxpayer owes on all debts immediately before the discharge.

I believe that Pennsylvania allows deficiency judgments, making most mortgages recourse.

Ddoshan (talk|edits) said:

13 February 2009
No you are not all wet having clients complete the form. Have learned from experience one should not do or file form 982 with the insolvency exception unless you have the client fill out the statement of insolvency an asset and liability worksheet. If you do not it will could very well come back to haunt you when 2 years later the client gets a letter from the IRS wanting them to pay tax because they had cancellation of debt and or provide them with documentation as to why not.

I just did one the other day and sent in form 982, statement of insolvency, and the detail of. Although I don't think the IRS actually wants all of that, I figure why not send with the return anyway. Just might keep them off your clients back in the future.

1040taxpro (talk|edits) said:

13 February 2009
Where can I find the statement of insolvency form? What form number is it?

I already submitted the form 982 (via efile). Should I get the client to complete the statement and mail that in as well?

Thank you for your help.

Kevinh5 (talk|edits) said:

13 February 2009
a personal financial statement as of the date of debt cancellation should suffice

Dan's Tax Service (talk|edits) said:

13 February 2009
Riley and Ddoshan - thanks.

1040taxpro - I use Intuit Pro Series software. If you do also, Go to the "Where do I enter" (green box) and enter "Statement of Insolvency" It will pop up! I wouldn't mail it since; however, I would have your client do one and sign it for your records. (Can't beat a solid audit trail)

Dmurraycpa (talk|edits) said:

4 March 2009
I have a client with cancellation of debt in an LLC that qualifies for the insolvency exception (foreclosure), another LLC that had cancellation of debt that was in Chapter 11, and individually cancellation of debt that was a Chapter 7. Three questions:

Is the insolvency and the Form 982 at the partnership level or on the 1040?

Also, do I have to file a 1041 for the personal Chapter 7 or can it all be done on the 1040?

Do you have to reduce tax attributes for Chapter 7 cancellation or is that just a freebie?

Dmurraycpa (talk|edits) said:

4 March 2009
I have a client with cancellation of debt in an LLC that qualifies for the insolvency exception (foreclosure), another LLC that had cancellation of debt that was in Chapter 11, and individually cancellation of debt that was a Chapter 7. Three questions:

Is the insolvency and the Form 982 at the partnership level or on the 1040?

Also, do I have to file a 1041 for the personal Chapter 7 or can it all be done on the 1040?

Do you have to reduce tax attributes for Chapter 7 cancellation or is that just a freebie?

Riley2 (talk|edits) said:

4 March 2009
1. Partner level.

2. Income to which the estate was entitled is reported on the 1041. Also, consider electing to terminate the debtor's year on the date of the petition.

3. Yes, reduce attributes.

Kevinh5 (talk|edits) said:

4 March 2009
Riley, then could you check out this discussion from a week ago: Discussion:S-Corp Cancellation of Debt the difference being S Corporation instead of partnership. Thank you.

Rellis (talk|edits) said:

4 March 2009
1. Agreed, end of Pub 908 pg 22.

2. Forgive me if I'm wrong... As far as a personal Chapter 7 goes, I was under the impression that the bankruptcy trustee files the 1041 if there is a filing requirement; I didn't think the taxpayer or their tax preparer files it. I thought the taxpayer only files a 1041 if they are a debtor-in-posession which would happen in a Chapter 11. I also believe the 1041 only needs to be filed if the estate has gross income that meets the filing requirements. (Pub 908 pg 4) Some Chapter 7 bankruptcies (especially no-asset cases) won't meet the filing requirements. I believe that if there is no 1041 filed by the bankruptcy trustee, then the 982 goes with the 1040.

3. Agreed, you can never skip attribute reduction (they do stop at zero though, they don't go negative; but if there are attributes, they must always be reduced.)

Dmurraycpa (talk|edits) said:

10 March 2009
Thanks for the information. But since the 1099C was issued to the LLC (via foreclosure), I guess I include it on the K-1 as income and then exclude it on the 1040 via Form 982. But for the other LLC that is still operating in a Chapter 11, I would think I need to reduce my depreciable basis inside the LLC. I might get a better overall tax effect if I pass it through since the tax attritubutes only go to zero. The LLC is 99.0% owned by one person that has some basis at the LLC level but not a lot of tax attritutes at the individual level.

RoyDaleOne (talk|edits) said:

10 March 2009
Insolvency exception is tested at the partner level, not the partnership level, therefore one partner maybe insolvent while another is not insolvent.

S Corporation insolvency is tested at the corporate level. However, COD does not increase the shareholder's basis.

RoyDaleOne (talk|edits) said:

10 March 2009
Because the insolvency is tested at the partnership level there is no choice but to pass out the necessary information on the K-1.

RoyDaleOne (talk|edits) said:

10 March 2009
Although income resulting from a discharge of a partnership debt is partnership-level income, the exclusion from income provided under Code Section 108(a) where the taxpayer is involved in a bankruptcy or is insolvent applies only at the partner level. Code Section 108(d)(6).

COI income is reported separately as Other income on Schedule K of the partnership's Form 1065, and each partner's share of the income is reported as Other income on the partner's Schedule K-1. A schedule must be attached to Schedule K and Schedule K-1 that identifies the items included in Other income. The partnership should also include in the Supplemental Information section of Schedule K-1 any information regarding the COI income that is necessary for the partner to correctly report the income on the partner's income tax return. Instructions to Form 1065.

Dan's Tax Service (talk|edits) said:

15 January 2010
My single-parent client received a CP2000 yesterday. Client received two 1099-C's in TY 2008. I use ProSeries. My records show that I entered the 1099-C info; and, completed a 982 and Statement of Insolvency for transmission with client's e-filed return.

The IRS Notice states that the 1099-C information was not reported; and, of course. . .

My Statement of Insolvency shows client is insolvent by $18.5K; and, has approx $84K in assets (ahome which the parents purchased and titled in her name).

Earlier, I noticed the 982 which resulted after I completed the ProSeries worksheet does not have entries on either line 2 or 10a.

I'm a bit confused at this point. Was I to dependent on the software calculations; or,. . .?

Thanks

KurtA (talk|edits) said:

3 February 2010
I have a client with a 1099-C from a real estate loan. The loan is in his personal name, but the property is held and reported in an LLC (2 person, 50/50). I would like to reduce the tax attributes on form 982 under the "qualified real property business indebtedness" exemption, but the loan was refinanced to a higher loan amount some time after the original acquisition. I understand this disqualifies the debt from being "qualified real property business indebtedness." Any insight here would be appreciated.

DaveFogel (talk|edits) said:

4 February 2010
The refinance doesn't completely disqualify the debt from the QRPBI exclusion, but it does impose some limitations. Assuming that I don't get "bashed" for this, I suggest you read my article on this subject. Here's a link: http://fogelcpa.com/Documents/FogelRentalForeclCSEA.pdf

KurtA (talk|edits) said:

8 February 2010
Thanks DaveFogel, your article was very helpful. My clients purchase loan amount was $170,000 in 2005, refinanced later to $188,000. The amount of debt cancellation in 2009 was $40,000. He told me the FMV of the property is approx $125,000; therefore, the entire $40,000 could be excluded, correct? ($170,000 minus 125,000 = 45,000). 2 quick questions:

1. How is the FMV of $125,000 determined? How would I substantiate and document this? 2. The operating loss for 2009 was about $8,000. Does that have to be reduced first? Or can the entire $40,000 be used to reduce the cost basis of the property, and use the NOL to reduce partners income on K-1?

Thanks again; your advice is very much appreciated.

DaveFogel (talk|edits) said:

8 February 2010
Need more info. What kind of transaction resulted in the cancellation of debt? Was it a loan modification? Was the property transferred, e.g., foreclosure or short sale? What was the principal amount of the debt at the time of cancellation? $188,000? Also, please provide the numbers that are shown on the 1099-C.

KurtA (talk|edits) said:

8 February 2010
The transaction was a loan modification; although it was technically a refinance to a different lender at a lower amount. As I understand it, the old lender basically offered to accept $148,000 in satisfaction of the $188,000 (I believe it was a hedge fund that had bought the loan and was looking to cash out). The new (refinancing) lender had contacted my client, said they were working with the existing lender, and underwrote the current loan for $142,000, with my client putting in $10,000 cash to satisfy the $148,000 plus closing costs.

The principal amount at time of cancellation was $188,000. The original refinance I mentioned (170,000 to 188,000) happened some time in 2007.

The numbers on the 1099-C: 1 - Date cancelled: 03/11/09 2 - Amount of debt cancelled: $41,021.23 3 - Interest if included in box 2: $0.00 4 - Debt description: MORTGAGE 5 - Was borrower personally liable for repayment of debt: YES 6 - Bankruptcy: NO 7 - Fair market value of property: $0.00

Do you need any other info from the 1099-C? Thanks.

DaveFogel (talk|edits) said:

8 February 2010
Here’s my analysis. Sorry, but it’s lengthy. If you had read my article and followed one of the examples, you probably could have done this analysis yourself.

Since this was a loan modification and there was no transfer of the property, the reduction in the principal amount of the debt represents cancellation of debt (COD) income. United States v. Kirby Lumber Co., 284 U.S. 1 (1931); Gershkowitz v. Commissioner, 88 T.C. 984 (1987); Rev. Rul. 82-202, 1982-2 C.B. 35, amplified by Rev. Rul. 91-31, 1991-1 C.B. 19. As a result, there is COD income of $41,021.

Here are the steps for determining whether the COD income is excludable under the Qualified Real Property Business Indebtedness (QRPBI) provision of IRC §108(c):

1. IRC §108(c)(3)(A) — was the debt incurred or assumed by the taxpayer in connection with real property used in a trade or business, and is it secured by such real property? Yes.

2. IRC §108(c)(3)(B) — was the debt incurred or assumed before January 1, 1993, or if incurred or assumed on or after such date, is it qualified acquisition indebtedness? Partly yes, and partly no.

IRC §108(c)(4) defines "qualified acquisition indebtedness" as "indebtedness incurred or assumed to acquire, construct, reconstruct, or substantially improve such property." The paragraph immediately after IRC §108(c)(3)(C) provides that "qualified acquisition indebtedness" includes refinance debt, but only to the extent that the refinance loan paid off the original loan. Therefore, assuming that the principal balance of the original debt was $170,000 at the time of the refinance and that none of the refinance proceeds were used to improve the property, only $170,000 of the $188,000 refinance loan is "qualified acquisition indebtedness."

Accordingly, only $170,000 of this $188,000 principal balance qualifies for the exclusion, but this is more than enough to absorb the $41,021 of COD income. As a side note, IRC §108(h)(4) (the principal residence provision) has an ordering rule that essentially requires the nonqualified debt to come "off the top." Under this rule, the principal residence exclusion applies only to the extent that the amount of debt canceled exceeds the amount of the loan that is not qualified principal residence debt. However, there is no such ordering rule under IRC §108(c) (the QRPBI provision). Instead, there are limitations on the amount that can be excluded.

3. IRC §108(c)(3)(C) — does the taxpayer elect to exclude the income under this section? Yes. The election is made by filing Form 982 with a timely-filed tax return (including extensions).

4. IRC §108(c)(2)(A) — is the excludable COD income limited by the excess of the qualified real property business indebtedness over the FMV of the property? No. This section provides that you must take the qualified debt ($170,000) and subtract the FMV of the property ($125,000), and the amount that’s excludable is limited to this excess. Since this excess is $45,000, this is the limitation put on the exclusion. The $41,021 of COD income is less than this limitation.

Accordingly, the $41,021 is excludable under the QRPBI.

You also asked if the 2009 operating loss of $8,000 must be reduced first, or whether the $41,021 exclusion reduces the basis of the property. IRC §108(c)(1) requires the exclusion to reduce the basis of the property.

KurtA (talk|edits) said:

8 February 2010
Thanks very much for your analysis and clarity. Regarding the $125,000 FMV, my client has determined this based this on comparable sales, but if it ever goes to audit, what type of documentation will be required to prove the FMV?

DaveFogel (talk|edits) said:

8 February 2010
Comparable sales should be sufficient, an appraisal would be better.

KurtA (talk|edits) said:

8 February 2010
Thanks

SoCalEA (talk|edits) said:

10 February 2010
Dave - thanks for link and example. I have been working on a similar issue for a client that lost 4 rental properties last year and this gave me a nudge in the right direction.

Alexander15 (talk|edits) said:

12 February 2010
A question with respect to California loan modifications on a personal residence. The numbers on the 1099-C: 1 - Date cancelled: 09/24/09 2 - Amount of debt cancelled: $77,669 3 - Interest if included in box 2: $0.00 4 - Debt description: MAP MOD 5 - Was borrower personally liable for repayment of debt: YES 6 - Bankruptcy: NO 7 - Fair market value of property: $0.00

There was no refinance involved with the original loan. I understand that the taxpayer can exclude the COD income using Form 982. I also know that California does not conform to federal law with respect to mortgage relief. However, does the taxpayer have to pick up the income for California purposes even though the property was neither sold nor disposed of?

DaveFogel (talk|edits) said:

13 February 2010
Yes. Since California's conformity with Federal law regarding the principal residence exclusion of IRC §108(h) expired at the end of 2008, the $77,669 cancellation of debt (COD) income is taxable for California purposes unless the taxpayer qualifies for another exclusion to which California conforms. See if the insolvency exclusion can be used by completing the worksheet on page 6 of IRS Pub. 4681.

I have heard that the California legislature is working on a bill that would provide partial conformity to Federal law retroactively, but don't expect to see anything until much later this year.

Jconnermsa (talk|edits) said:

24 February 2010
Staying with the California discussion and 1099-C's. Am I correct in assuming if my client filed and had discharged a Chapter 7 bankruptcy in the same year the 1099-C was issued that a 982 insolvency form does not need to be completed because the bankruptcy trumps this?

In other words is the income (at the California state level) on the COD absolved by the Chapter 7?

DaveFogel (talk|edits) said:

24 February 2010
To qualify for the bankruptcy exclusion, the debt has to be discharged in the bankruptcy proceeding. See Sec. 108(a)(1)(A). California conforms to this provision.

Jconnermsa (talk|edits) said:

25 February 2010
Dave,

Thank you for the quick reply. I should have clarified that the Mortgage Debt (non-recourse) was discharged in the bankruptcy proceeding. In my previous reading of Sec. 108(a)(1)(A), I was unclear because they list Chapter 11 but do not mention Chapter 7 or 13. As I mentioned in my first post the client I'm referencing filed 7.

So I guess my new question is there an issue with the provision of the tax code only specifying Chapter 11?

DaveFogel (talk|edits) said:

25 February 2010
Sec. 108(a)(1)(A) refers to Title 11, not Chapter 7, 11 or 13. Title 11 is the title of the U.S. Code that includes all forms of bankruptcy, including Chapters 7, 11 and 13.

Jconnermsa (talk|edits) said:

25 February 2010
OK, I feel stupid. I misread that thing about 3 times. Thank you for the clarification, I seem to have Chapter 7, 11 & 13 on the brain.

I see a more experienced colleague of mine misread this in a similar manner on another 982 and checked the insolvency box instead of the TITLE 11 BOX, I now won't make the same mistake, I'm sure we'll see more of these.

Thank you for taking the time Dave.

DaveFogel (talk|edits) said:

25 February 2010
Don't feel stupid. This error happens all the time because of the "11." People see "11" and they think, "Oh, that means Chapter 11 bankruptcy" without realizing that there is both a Title 11 and a Chapter 11. Title 11 is less well known than Chapter 11.

Reyesjoe (talk|edits) said:

26 February 2010
I filed a 982 for a client and the IRS came back with a request for more information regarding the insolvency. They sent us an AUR Notice of Deficiency. Unfortunately my client took so long in responding to my requests for more data behind the insolvency that the 90 period allowed for petitioning the tax court expired. Expiration date was Nov 2009 and we still have not responded so the IRS is now asking for payment of taxes. Does anyone know if there is a way to still petition the court if my client now provides the data requested. The client's dad was diagnosed with late stage cancer around the time of the AUR and her life has been turned upside down as a result. We're talking about $1200 in taxes but the client is very low income....

Thanks folks!

DaveFogel (talk|edits) said:

26 February 2010
Once the 90-day period has expired, you cannot petition the Tax Court. See IRS Pub. 3598 for Audit Reconsideration. http://www.irs.gov/pub/irs-pdf/p3598.pdf

Reyesjoe (talk|edits) said:

26 February 2010
Thank you Dave!

Jconnermsa (talk|edits) said:

26 February 2010
Dave,

Thanks, I still feel a little silly for missing that but the encouraging words help. Hey, we live in the same town, classic.

Take care.

Jconnermsa (talk|edits) said:

26 February 2010
Correction, I live in the town you work.

BrodySlater (talk|edits) said:

4 March 2010
Hi Dave - This is a very helpful discussion, though I feel like I might be joining a little late.

My question is in regards to California's treatment of COD and non-conformity. I have a client who received a 1099-C for a short re-fi (basically this is a short sale back to them). Anyhow, here are the numbers on the 1099-C: 1 - Date canceled: 08/31/09 2 - Amount of debt canceled: $167,766.77 3 - Interest if included in box 2: $1,945.03 4 - Debt description: MORTGAGE MOD 5 - Was borrower personally liable for repayment of debt: YES 6 - Bankruptcy: NO 7 - Fair market value of property: $0.00.

I understand that since CA isn't conforming at this time they do owe the taxes, unless they qualify for another exclusion. You actually bring this up in one of your previous posts above, so I was hoping you could elaborate on exactly what those "other exclusions" might be and what we'd use to backup our return?

There is no doubt in my mind that my client was insolvent at the time of the loan mod, but I want to be sure using this exclusion to prevent them from having to a very significant phantom tax payment to CA won't come back to haunt them. Also, if it matters this was--and still is--there principle residence and was a non-recourse.

Thanks in advance.

Note - Brody has also posted a follow-up question here: Discussion:Loan modification.

Trillium (talk|edits) said:

4 March 2010
Here are two recent discussions where the status of California conformity, and the resulting importance of your client's insolvency, were discussed:

DaveFogel (talk|edits) said:

4 March 2010
BrodySlater, what you describe is not a short sale, but a loan modification. The COD income is taxable unless one of the exclusions under Sec. 108 applies, such as insolvency or principal residence. To qualify for the principal residence exclusion, the debt must constitute acquisition indebtedness under IRC §163(h)(3)(B). Due to current California nonconformity to the principal residence exclusion, you might use the principal residence exclusion for Federal and the insolvency exclusion for California.

Fmcpa (talk|edits) said:

5 March 2010
Fmcpa has now started a new discussion to ask the question originally posted here: Discussion:Chapter 7 Bankruptcy and NOL.

Sallyp (talk|edits) said:

5 March 2010
I have a client with 2 mortgages on a foreclosed home. The first is the original nonrecourse 1st mortgage. The second is a 2nd mortgage on purchase which has been refinance and increased. The basis in the house is less than the outstanding debt. How do I calculate the COD? It is supposed to be the excess of recourse debt over FMV, but can I use the entire FMV or do I have to consider part of that to be allocated to the basis of the nonrecourse debt relieved?

DaveFogel (talk|edits) said:

5 March 2010
Since you need to calculate COD by taking the debt and subtracting the FMV of the property (Frazier v. Commissioner, 111 T.C. 243 (1998); Treas. Reg. §1.1001-2(a)(2); Example (8) at Treas. Reg. §1.1001-2(c); Rev. Rul. 90-16, 1990-1 C.B. 12), a problem arises when one debt is recourse and another is nonrecourse.

My solution to this problem has been to allocate the FMV to the debt in the order of priority of the debts, i.e., which one would legally be paid off first.

For example, suppose the first mortgage (a nonrecourse debt) is $300K and the second mortgage (a recourse debt) is $100K, and the FMV of the property is $320K. I would allocate $300K of the $320K FMV to the first mortgage to "pay it off," then allocate $20K to the second mortgage, leaving $80K of debt, and therefore, $80K of COD income.

BrodySlater (talk|edits) said:

5 March 2010
Thanks for the quick reply, Dave.

Will "the tax guy" (talk|edits) said:

13 March 2010
Very good discussion on this topic as I have two returns on my desk each with 1099-C's. One was a short sale and one was a deed in lieu of foreclosure. I think I understand the recourse/non recourse discussion but is the 928 mentioned always necessary since these were both personal properties? Also from what I read I am only listing the amount of COD income as other income on the 1040? Thanks for the help.

DaveFogel (talk|edits) said:

14 March 2010
Where there has been a transfer of the property (short sale, foreclosure, deed in lieu of foreclosure), Form 982 is only needed when the debt is recourse and you are excluding some or all of the COD income under Sec. 108.

If the COD income is fully excluded, it is reported on Form 982. If only part of the COD income is excluded, and the property was a personal residence, report the non-excluded COD income as "other income" on Form 1040, line 21.

Bigman (talk|edits) said:

6 April 2010
Any help will be greatley appreciated.

First time for filing a F982.

TP got a 1099C with $ 86007 in box 2. It is related with a margin account with a stock broker.

TP has a NOL of 14641 from 2007. TP also has a net capital loss carry-over of $110000 from 2007 and 2008.

The amount in 1b of F982 is $66069. The Income from 1099c excluding $66069 is $19938

When filing the part 2 of F982, My questions are:

1)Do I have to reduce the NOL tax attributes and net capital loss carry-over? 2)Do those reductions of the tax attributes affect the 2009 tax liabiliy or 2010 tax liability?

  Thank you in advance.

DaveFogel (talk|edits) said:

7 April 2010
From your message, it appears that the taxpayer's margin account loan owed to a stock broker was canceled in the amount of $86,007, that the taxpayer was insolvent just before the debt was canceled, that the extent of the taxpayer's insolvency at that time was $66,069, and that you are excluding $66,069 of the $86,007 cancellation of debt (COD) income using the insolvency exclusion of IRC §108(a)(1)(B).

When the taxpayer uses the insolvency exclusion to exclude COD income, the taxpayer's "tax attributes" are required to be reduced in the order specified in IRC §108(b)(2), and they are reduced after determining the tax for the taxable year of the discharge. IRC §108(b)(4)(A).

Assuming that your questions pertain to the 2009 return, then here’s what happens. The NOL carried over from the prior year may be used in 2009 in determining the taxpayer’s tax liability, but any unused NOL remaining is reduced first by the $66,069 exclusion. Similarly, the capital loss carryover from the prior year may be used in 2009 in determining the taxpayer’s tax liability, but any unused carryover remaining is reduced by the exclusion. As a result, the reductions should not affect the 2009 tax liability, but they could affect the 2010 tax liability.

Bigman (talk|edits) said:

7 April 2010
Thank you DaveFogel

I really appreciate it.

Alexander15 (talk|edits) said:

10 April 2010
A quick cancellation of debt question. The taxpayer received a 1099-A dated 8/7 showing a Principal Balance Outstanding of 239,068, an FMV of 105,000, with Personally Liable marked Yes. He also received a second 1099-A, also dated 8/7. This one shows a Principal Balance Outstanding of 59,052, but an FMV of 0, and Personally Liable is marked No. How do I process this second 1099-A? This was for a personal residence purchased in 2005, and their had been a refinance at one time.

Kevinh5 (talk|edits) said:

10 April 2010
treat it as a 2nd mortgage

DaveFogel (talk|edits) said:

10 April 2010
As I have said repeatedly on this board, DO NOT RELY SOLELY ON THE FORMS 1099-A AND 1099-C because the lenders are making a lot of errors on these forms.

For example, I just ran across a situation where the taxpayer obtained a refinance loan in 2006 for $220,000 because the property was appraised for $230,000, and then lost the property to foreclosure in 2009. The FMV of the property at the time of the foreclosure was $98,000, but the lender showed the FMV on Form 1099-A as $230,000 (an obvious error).

Ask your clients a lot of questions. You might discover where the numbers on the forms came from. If you can't figure it out, then obtain the correct facts, ignore the forms, and report the transaction correctly on the return, because that is your responsibility despite what the forms might say.

Alexander15 (talk|edits) said:

11 April 2010
DaveFogel - Thanks for the reminder. I wanted to make sure that there was not some typical situation that might explain why the numbers on these forms. And you're right that lenders are making errors on these forms. I've seen a number of corrected Forms 1099-A and 1099-C pop up the the last few weeks.

Actionbsns (talk|edits) said:

11 April 2010
"If you can't figure it out, then obtain the correct facts, ignore the forms, and report the transaction correctly on the return, because that is your responsibility despite what the forms might say".

That's an overwhelming statement,Dave. We aren't appraisers, we're tax preparers. If our job is not to be the tax police, why are we expected to be able to properly appraise property in order to properly prepare a tax return? Where do you look, you personally, to obtain the FMV of a foreclosed property?

DaveFogel (talk|edits) said:

11 April 2010
Actionbsns, you don't have to be an appraiser to know that when a Form 1099-A lists the FMV of the property as more than the principal amount of the debt, it bears closer examination. I ask the client what the debt and FMV of the property were at the time of the foreclosure. If the client doesn't know, then I use RealQuest.com to obtain a transaction history report and comparable sales. Someone told me that you can also find comparable sales using Zillow.com.

Actionbsns (talk|edits) said:

11 April 2010
Thanks for the websites Dave. I went to RealQuest and it looks like you need to sign up for a fee that sounds expensive. They are talking about payment plans etc. I have one 1099A giving me fits and suspect that I will have two or three more of these issues in the future. So spending a lot on a service like this isn't cost effective. I went to Zillow.com and had the same problem I usually have with cites like this, they have limited information about the Hawaii market, it's sort of a glorified multiple listing service. The property I entered isn't in their list of foreclosed properties and yet I know it is and in fact, they only list 10 foreclosed properties. Parts have Kona have been seriously hit with foreclosures and I would have expected more information on those properties.

Lady Lynn (talk|edits) said:

12 April 2010
I have a client that received a Form 1099-C on the foreclosure of his primary residence. Included in box 3 is $51,033.59 of interest included in box 2 Amount of Debt Cancelled. I am planning to take the box 3 amount as mortgage interest paid on Schedule A. I'm sure he did not pay this amount but it is being included in the amount of debt cancelled. Does anyone find a problem with this?

Also on March 4, 2010 there was a posting by Dave Fogel where he suggested that due to the California non-conformity you might consider the principal residence exclusion for Federal and the insolvency exclusion for California. I like this idea as the FMV and amounts used can't be challenged in an audit for Federal. My only question is how do I accomplish this using Lacerte? You can not create 2 Form 982's. Any help would be much appreciated.

Lady Lynn (talk|edits) said:

12 April 2010
I have a client that received a Form 1099-C on the foreclosure of his primary residence. Included in box 3 is $51,033.59 of interest included in box 2 Amount of Debt Cancelled. I am planning to take the box 3 amount as mortgage interest paid on Schedule A. I'm sure he did not pay this amount but it is being included in the amount of debt cancelled. Does anyone find a problem with this?

Also on March 4, 2010 there was a posting by Dave Fogel where he suggested that due to the California non-conformity you might consider the principal residence exclusion for Federal and the insolvency exclusion for California. I like this idea as the FMV and amounts used can't be challenged in an audit for Federal. My only question is how do I accomplish this using Lacerte? You can not create 2 Form 982's. Any help would be much appreciated.

DaveFogel (talk|edits) said:

12 April 2010
I don't think that the interest is deductible because the amount of debt canceled is the amount in Box 2 (debt canceled) minus Box 3 (interest included). See IRC §108(e)(2):

"(2) INCOME NOT REALIZED TO EXTENT OF LOST DEDUCTIONS.—No income shall be realized from the discharge of indebtedness to the extent that payment of the liability would have given rise to a deduction."

I don't use Lacerte, but some users have told me that they create two tax returns, one using the principal residence exclusion, the second that uses the insolvency exclusion, and they file the first with the IRS, and the second with the FTB.

Piedirt (talk|edits) said:

6 October 2010
I have a question that I'm not seeing the answer to in the discussion. My client had investment (not business or rental)real estate which he short-sold for about a $400,000 loss. He received a 1099C for approximately $280,000 and it was properly marked that he was not personally responsible for the debt. This doesn't fit 982 but I keep reading that non-recourse debt forgiveness is not taxable. How do I report this on his 1040?

Kevinh5 (talk|edits) said:

6 October 2010
DaveFogel has commented several times that the 1099-C and 1099-A documents are rarely correct. In your example, Pie, there is obviously a problem. Can you try (ha ha) to get the 1099 corrected?

Piedirt (talk|edits) said:

6 October 2010
The problem was probably mine in explanation. I don't think the 1099C was prepared incorrectly. More complete facts are that the property was sold for $600,000 with a basis of $1,100,000. Bank agreed to have the property short-sold and accept $280,000 less than their $880,000 loan. Since the forgiveness was listed as non-recourse, can we simply reduce the capital loss...? Again, it doesn't fit the criteria on form 982 for exclusion.

DaveFogel (talk|edits) said:

6 October 2010
If nonrecourse debt is canceled in exchange for transfer of the property securing the debt, the transfer is treated as a sale or exchange, i.e., there is no income from discharge of indebtedness, and therefore, there is no need to use Form 982 to exclude it. See 2925 Briarpark Ltd. v. Commissioner, 163 F.3d 313 (5th Cir. 1990). Instead, the “amount realized” is the principal amount of debt. Commissioner v. Tufts, 461 U.S. 300 (1983); Treas. Reg. §1.1001-2(a)(1); L&C Springs Associates et al. v. Commissioner, 188 F.3d 866 (7th Cir. 1999); Rev. Rul. 76-111, 1976-1 C.B. 214.

As a result, you would ignore the sales price of the property in the short sale and instead, treat the $880,000 loan as the sales price. If the property was held for investment, the sale of the property would be reported on Sch. D ($880,000 sales price minus $1,100,000 basis equals $220,000 capital loss).

  • Question from a non-tax-pro (no user info, etc.) has been moved to the discussion noted at the top of this page, in accordance with the various notices on the site, including the one in the pink box at the top of the tax forum.

Mwmogil (talk|edits) said:

6 February 2011
I represent debtors in bankruptcy cases. Its clear that a discharge of the underlying debt with also eliminate the tax liability occasioned by a 1099c if in the same year. The tricky issues are 1) if a 1099c is issued in January 2011 for income attributed in 2010, does the bankruptcy filing have to be in 2010 (before the 1099c) to eliminate the tax or before April 15, 2011 or any time in 2011. The timing issue is not clear.

2) if a creditor issues a 1099c, can it still collect on the debt. Attorneys, banks and judges I know are all uncertain on this issue. I understand that if the creditor then collected, it would have to report income, again, but can the debt still be collected or the account assigned to another entity to collect?

Dolly215 (talk|edits) said:

20 March 2011
I thought that the amount realized with a 1099-C for non-recourse debt was the amount of the cancellation of debt, box 2, as opposed to the principal amount of debt. My client's situation is part rental/part personal use; received 1099-C with box 5 checked "no" (so assume non-recourse). With non-recourse I've read that Form 982 is not needed. Since my understanding was that the "sale price" is the 1099-C box 2 amount, I thought I would have to use the rental ratio applied against the box 2 amount from the 1099-C to determine the "sale price" for the rental portion. This produces a loss. For the personal portion, it would also be a loss so no Schedule D reporting needed.

Here is the cite from Pub 4681 that has me using the box 2, 1099-C, amount as the amount realized:

"Also, upon the disposition of the property securing a nonrecourse debt, the amount realized includes the the entire unpaid amount of the debt." Is this the cancelled portion?

This is a rental property transferred to client incident to divorce. His costs to "acquire" the property (i.e., buy her out as it was hers solely) were originally $160,000. He has since refinanced several times running mortgage up to $270,000 obviously taking equity out each time. In 2010, short-sold the property for $245,000. Amount of non-recourse debt cancelled is ~ $35,000. Using $35,000 and apportioning it using personal and rental percentages obviously produces losses on both sides with the rental being deductible.

Am I confusing "amount realized" with "sale price?" I obviously need to sell off this rental but am not quite sure what to use as the selling price.

DaveFogel (talk|edits) said:

20 March 2011
You can't even begin to address the income tax consequences of a short sale or foreclosure until you are certain that the debt is recourse or nonrecourse, and you certainly can't rely on the Form 1099-A or 1099-C issued by the lender to answer this question. In California, a refinance debt is recourse. I recommend that you or your client contact a real estate attorney.

As I have said in at least a dozen postings on this board, if, in fact, the debt is nonrecourse, then it's the total debt (excluding accrued interest and penalty) that is treated as the amount realized in the sale. See Commissioner v. Tufts, 461 U.S. 300 (1983); Treas. Reg. §1.1001-2(a)(1); 2925 Briarpark Ltd. v. Commissioner, 163 F.3d 313 (5th Cir. 1990); L&C Springs Associates et al. v. Commissioner, 188 F.3d 866 (7th Cir. 1999); Rev. Rul. 76-111, 1976-1 C.B. 214.

Anwalt (talk|edits) said:

21 March 2011
What Dave said. We do a lot of 1099 A/C work - and close to a majority of the 1099's we see from banks are flat out wrong. The banks did not know what they were doing when lending, and they really do not know what they are doing with 1099's.

And major kudos to Dave for his articles and comments. I have seen very, very few tax professionals who get the COD issue. Dave really, really gets it.

Foothills (talk|edits) said:

28 March 2011
Client has rental house in Ca (was personal residence originally), short sale for $228,000, outstanding debts of $240,000 on the 1st which was not refinanced, $59,000 on the second which I believe was part of the original 80/20 purchase (have requested additional information from client and confirmation from his bank. Short sale, after expenses of sale, paid original loan $211,000 and terms of the short sale agreement required a payment of $5,500 to the 2nd. 1099-c came for the second only with a COD of $54750 but was marked as nonrecourse. Client has checked with the 1st mortgage holder and they have said that a 1099c is unlikely. I would expect the first to be nonrecourse with no cancelation of debt. It is the 2nd that concerns me. Am I correct that if this loan was modified it could become recourse debt? If so, having both recourse and non recourse debt, do I use the FMV for the sale price or the forgiven debt (and then do I use the debt forgiven on both the non recourse and the recourse loans as the sale price)? Maybe I am making this too hard but am having trouble trusting the 1009C accuracy. I want to add that if this is recourse debt I will exclude the COD for insolvency but am struggling with what to use for a sale price if I wind up with both recourse and nonrecourse debt.

DaveFogel (talk|edits) said:

28 March 2011
I answered this question in Discussion: Quick ? for Mr. Fogel...


Please don't post to this discussion without actually READING it,
checking the Foreclosures, 1099-A, 1099-C, COD, 982, et al recap page,
and also searching for related discussions.

LisaEldred (talk|edits) said:

23 April 2012
I have a client that received a 1099C from the bank for cancellation of debt on a home equity line. The taxpayer did not lose his home in foreclosure or shortsale... he just managed to talk himself out of having to pay 70K on a 90K balance owed on the HELOC. It's my understanding that if he had used the proceeds of the loan to purchase or improve his primary residence then the cancellation of debt would qualify for exclusion of income but if he used the proceeds of the loan for any other purpose it would not qualify even though the debt was secured by his residence. Am I mistaken?

DaveFogel (talk|edits) said:

23 April 2012
It's not an "either-or" question due to the ordering rule in IRC §108(h)(4).

Let's say, for example, that the loan had an original balance of $100K and that the client used $40K of the proceeds to make improvements to his principal residence. $60K of the loan would then be non-acquisition debt that is not eligible for the exclusion. Under the ordering rule in IRC §108(h)(4), the non-qualified debt is treated as having been discharged first. So, if the lender discharged $70K of the debt, $60K wouldn't be eligible for the exclusion, but $10K would be.

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