Discussion:COD subject to SE

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Discussion Forum Index --> Basic Tax Questions --> COD subject to SE


Discussion Forum Index --> Tax Questions --> COD subject to SE

Bushmaster (talk|edits) said:

28 January 2009
I have an LLC that is receiving a 1099C. It may be in their personal name, I am not sure yet. Anyway, the financing company liquidated a 30k truck with a tax basis of 70k and forgave 130k.

After reducing the truck to zero, I have 60k left (I think). Is the left over subject to self employment taxes? Seems pretty odd that it would be, but I don't have much experience with this and the search buttom here is not helpful. I looked it up on checkpoint and nada.

Kevinh5 (talk|edits) said:

28 January 2009
are we to assume that the truck was 100% business use?

Bushmaster (talk|edits) said:

28 January 2009
Yes. It was a tractor trailer used in a logging business.

RoyDaleOne (talk|edits) said:

28 January 2009
I don't see how COD is included in the definition of social security income. But, that is me.

For example, recapture of depreciation for Section 1245 assets is not included.

IDrinkYourMilkshake (talk|edits) said:

28 January 2009
I would put it as Schedule K income under "other income".

Kevinh5 (talk|edits) said:

28 January 2009
I think that Bushmaster is assuming the IRS will be looking for it on the 1040, line 21.

Riley2 (talk|edits) said:

28 January 2009
Definitely subject to SE tax. See Publication 525, page 19.

Nothing in Sec. 1402 would exclude this type of income from SE tax.

Riley2 (talk|edits) said:

28 January 2009
Incidentally, if this is full-recourse debt, the amount that is included on the Schedule C is $130,000.

MWPXYZ (talk|edits) said:

29 January 2009
I am not an expert in cancellation of debt issues. Fortunately this has not come up in my practice often; though that may change during the next couple of years.

But doesn’t the transaction, if recourse debt is involved, need to be divided into an exchange and a cancellation of debt transaction? I think this is the route to follow according to Reg 1.1001-2(c) and Rev Rul 90-16? There would be a taxable gain; and COD income that may or may not be excluded under Section 108?

And if the debt was non-recourse, the entire amount of the debt would be realized as income, but still create a gain on the sale of an asset?

If the above is true, another question may involve whether LLC debt is recourse or non-recourse. I have read that LLC debt is considered non-recourse, especially if the Section 752 regs definition of recourse/non-recourse is used. However, under Section 1001 regulations you may reach a different result. I have found nothing to indicate which Section takes precedence.

And could the reference in Pub 525 Page 19 refer to COD income from unsecured creditors relating to debts incurred in purchasing operating expenses?

Also I am assuming the 30k in the original post refers to the FMV of the logging truck.

Kevinh5 (talk|edits) said:

29 January 2009
Riley2, why wouldn't part (or all) of it go on 4797?

Taxman3132 (talk|edits) said:

29 January 2009
i dont think that it is subject to SE tax. i also use either 4797 or "other income" im sure that i will be seeing a lot more of these in the next 2-3 years

RoyDaleOne (talk|edits) said:

29 January 2009
The selling price is the FMV of the truck, the debt forgiving in excess of the FMV would be COD income.

So, the FMV, remaining basis goes on the 4797. The COD income, if associated with a trade or business would go on that Schedule (C, E, F), otherwise, on page 1 1040.

RoyDaleOne (talk|edits) said:

29 January 2009
I researched the point whether COD income is subject to SE tax or not. I found that the IRS position is that COD income, associated with a trade or business, is to be be reported where the trade or business is reported. Therefore, if that trade or business income is subject to SE tax, then, the COD income, also, will be subject to SE tax.

I could find no authoritative source that excessively requires such treatment. However, I did find a number of cases dealing with Section 1402 which were very, very close on point and caused me to believe that COD income will fall under Section 1402. Thereby, causing COD income to be subject to SE tax, if the associated trade or business income is subject to SE tax.

You need to know how to compute the COD income.

Kevinh5 (talk|edits) said:

29 January 2009
If this were a sale of a truck for $130k, the entire proceeds would go on the 4797.

Riley2 (talk|edits) said:

29 January 2009
Assuming the debt is full recourse, the selling price on Form 4797 would be the lower of the principal balance or the fair market value of the truck. Sounds like the fair market value of the truck was $30,000.

RoyDaleOne (talk|edits) said:

29 January 2009
If the principal balance is lower than the FMV, it would follow that there would be no COD income.

If the sale of the truck was for $130K, that is what goes on the 4797 as the sales price.

It appears that the exact facts for the situation as posted are not clear.

Riley2 (talk|edits) said:

29 January 2009
I read the OP as saying that the foreclosure auction brought in $30,000 and the principal balance on the note was $160,000, causing a $40,000 loss to be reported on Form 4797.

Kevinh5 (talk|edits) said:

29 January 2009
That still seems like a whipsaw tax result to me: 40,000 ordinary loss with 130,000 positive Sch C and SE effect. I wonder if Bushmaster is still viewing this fabulous discussion.

Death&Taxes (talk|edits) said:

29 January 2009
This is a fabulous discussion because we are going to see a lot more of this coming down the pike. I read it the same way as Riley, the note being 160K, the proceeds at auction being 30K. Situations like this might give pause to using the 250K 179 limits, or the 50% bonus depreciation.

Bushmaster (talk|edits) said:

29 January 2009
Yes. I am still viewing. What sucks about this is the client has been taking losses on this operation for the past 2-3 years and getting no benefit for SE purposes by doing so.

Now, it appears they will report income equal to those losses (in effect) and now get hammered by SS and Medicare taxes. I will post more on this later.

RoyDaleOne (talk|edits) said:

30 January 2009
The year of the 1099C is not contolling as for as the year of debt forgiveness, and therefore, the tax year in which COD income is reported. See:

Because the issuance of Form 1099-C was not an identifiable event establishing when a credit card company discharged a couple's debt, the couple was not liable for discharge of indebtedness income in the year Form 1099-C was issued where the company ceased collection activity in an earlier year. De Shon v. Commissioner, T.C. Summary 2005-117

In addition please see situation 6 in SCA 1998-039, as it is related to the question in this post.

[edited by Trillium, oct2010, to replace full content of SCA with a link to the SCA on irs.gov]

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