Discussion:982 and bankruptcy

From TaxAlmanac, A Free Online Resource for Tax Professionals
Note: You are using this website at your own risk, subject to our Disclaimer and Website Use and Contribution Terms.

From TaxAlmanac

Jump to: navigation, search

Discussion Forum Index --> Basic Tax Questions --> 982 and bankruptcy


Discussion Forum Index --> Tax Questions --> 982 and bankruptcy

Szptax (talk|edits) said:

12 October 2009
I'm feeling like a complete numpty. I have a client who filed bankruptcy. I am doing the "post" bankruptcy period return. She has an NOL that is carried forward from 2007. This should be eliminated with the bankruptcy filing (form 982). Should I be filing this with the 1040 I am preparing or should it have been filed by the trustee with the 1041? My client and the attorney are making me feel like I am speaking a foreign language. Am I correct? Should I do the 982 with the 1040 I am preparing & reduce the tax attributes accordingly?

R2 (talk|edits) said:

12 October 2009
All of my comments are based on the assumption that the client filed bk in 2008 and was discharged in 2008.

The 2007 NOL should be used to reduce the tax for the 2008 tax year, then the unused balance of the NOL is subject to attribute reduction on Form 982.

The trustee will file Form 1041 to report the income to which the trustee is entitled under bk law. As a practical matter, because of Sec. 522 exemptions, most bankruptcies are "no-asset" cases and the trustee has nothing to report.

Szptax (talk|edits) said:

12 October 2009
bankruptcy was filed in 2008 and discharged in 2009. Does that change anything in your answer?

R2 (talk|edits) said:

12 October 2009
Yes, the 2007 NOL is used to reduce the tax for 2008 and 2009, then the attribute reduction is applied on the unused balance of the NOL.

Szptax (talk|edits) said:

12 October 2009
so the 982 attribution reduction applied to the 2009 taxes? I thought it would be 2008 since the bankruptcy was filed 10-6-08. I guess I misunderstood that. What you are saying is that I need to do nothing different with the 2008. Sorry, but the more I think this through, the more confused I make myself!

Michaelstar (talk|edits) said:

12 October 2009
Correct - what R2 is saying is that you will apply the NOL to the 2008 return. If there is still unused NOL that is a carry forward to 2009, you will again utilize the NOL against 2009 income. Any remaining NOL will then be an o/s tax attribute that will be taken to Form 982 in 2009 and be subject to reduction accordingly.

R2 (talk|edits) said:

12 October 2009
Correct. The net effect of the attribute reduction rules is that the attribute reduction occurs on January 1, 2010, but is reported on the 2009 Form 982.

Szptax (talk|edits) said:

12 October 2009
ahhh - thank you both for your help.

Michaelstar (talk|edits) said:

12 October 2009
R2 deserves all the credit on this one

Szptax (talk|edits) said:

13 October 2009
ok that takes care of the NOL, what about other attributes? I should report a 982 with the reduction of the home value for the mortgage amount and the reduction of her business liabilities. The mortgage forgiven was $110K and the SMLLC liabilities were $170K. Am I correct?

R2 (talk|edits) said:

13 October 2009
Reduce tax attributes in the order listed in Part II of the Form 982. The total attribute reduction should not exceed the total amount of debt discharged by the bankruptcy court. In other words, if the total debt dishcharged by the court was $280,000 and the NOL carryforward from 2009 to 2010 was $300,000, the only attribute reduction would be a $280,000 reduction to the NOL cf.

Szptax (talk|edits) said:

13 October 2009
and all that would take place in the 982 i would file in 2009 because the debt was discharged Feb of 2009?

Tonymontana (talk|edits) said:

13 October 2009
Similar question. Client filed for BK in 2008 and discharged in 2009. Has an NOL for 2008. I assume the NOL can be carried back 5 years. Am I correct or does the BK and discharge change things.

R2 (talk|edits) said:

13 October 2009
Completely different issue. Under IRC Sec. 1398(j)(2)(B) the debtor may not carry back to a taxable year before the debtor's taxable year in which the bankruptcy case commences any carryback from a taxable year ending after the case commences. Since 12/31/08 is after the petition date, you cannot carry that loss back to any year before 2008.

My answer would change if the taxpayer made a timely election to divide the 2008 tax year into two taxable years (pre-petition and post-petition), in which case, the refund from the carryback claim would presumably be property of the bankruptcy estate.

Tonymontana (talk|edits) said:

13 October 2009
Interesting. So if I'm reading this correctly.

He cannot or should not do a carryback to 2003 or 2004 and instead elect a carryforward to 2009 and beyond. If he elects a carryback, any refunds become part of the bankruptcy estate to satisfy debts.

Right?

Szptax (talk|edits) said:

13 October 2009
Think about it this way - pre-bankruptcy is in one bucket and post is in another. The bankrupt individual starts fresh post petition, so there is no pre-petition return to carry back to. If the tax year is divided then the pre-petition activity that gives rise to the NOL would apply to pre-petition income. If no bifurcation of the year occurs - keep going forward, subject to the attribution rules.

R2 (talk|edits) said:

14 October 2009
Right. Since you cannot make an election to bifurcate in a "no-asset" case, most debtors cannot make this election.

A carryback from 12/31/08 is out of the question. However, a carryback from a short-year ending on the day before the petition can be carried back, and yes, this would be property of the estate.

Tonymontana (talk|edits) said:

14 October 2009
Thanks guys.

I pulled out my NOL book and read up on this last night and it makes sense now.

Walnut123 (talk|edits) said:

11 February 2010
I need help-bad.

I just got off the phone with Intuit (90 minutes) and the IRS (45 minutes) No satisfaction. I have a client who received a 1099-C for credit card debt. The debt was discharged in bankruptcy. This client had a capital loss carryover and a net capital loss in 2009. The clients schedule D on line 15 shows $5,898 as a net LT capital gain loss. Before I can adjust basis as a reduction in tax attributes on the form 982, the ordering rules drive me to line 9 (Applied to reduce any net capital loss for the tax year of the discharge including any capital loss carryovers to the tax year of the discharge). I should be entering the capital loss on this line before I handle basis on any non-depreciable assets. I enter the loss on line 9 of form 982 (thru an entry on a worksheet). The end result is that nothing happens to the loss on line 13 of the Schedule D. Intuit tells me everything is correct and overide if I think different. The IRS said that although the 982 does say to report it first, no instructions are given for the schedule D as to how to handle it so I could just adjust basis first. He said it's up to the service center to decide how to handle it. I'm an optimist. Has anyone encountered this situation?

R2 (talk|edits) said:

11 February 2010
The reduction is made after the tax for the current year is calculated.

Walnut123 (talk|edits) said:

11 February 2010
Does that mean that the T/P gets to keep the $3000 loss on line 13 of the 1040 for 2009 and the carryforward to next year just disappears from the Schedule D in 2010?

Szptax (talk|edits) said:

22 March 2010
I have a client with a ch 13.... Therefore the bankruptcy isn't discharged and won't be until 2013. The 982 would therefore be completed in a future year, correct? My other question is, what about the payments they are making to the bk court. Some are for debt related to a now defunct s-corp. Would this add to basis and would they then be able to free up suspended losses through period of the ch 13?

Dennism (talk|edits) said:

23 March 2010
There's a pretty good example on p6-7 of IRS Publication 908... kinda takes you through a hypothetical bankruptcy case, who does what, and what (if anything) comes back to the Debtor after the bankruptcy case is dismissed.

Let me splain a couple of things. You can forget about the bankruptcy discharge. It's meaningless taxwise for all practical purposes. (I hate to say "all.")

The bankrutpcy trustee files Form 982, not the bankrupt Debtor.

And taxwise, a Chapter 13 filing is meaningless to the Debtor for all practical purposes. (I hate to say "all.")

To join in on this discussion, you must first log in.
Personal tools