Discussion:Casualty Loss, Bankruptcy, 1099-C

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Discussion Forum Index --> Tax Questions --> Casualty Loss, Bankruptcy, 1099-C


Lmcdon9822 (talk|edits) said:

15 May 2007
My client was building a house where the builder skipped town on them after paying about $85,000 cash and taking a loan out of about $100,000. The house sat unfinished and weathering destroyed most of the house (roof was not installed). They hired a lawyer, filed for bankruptcy in 2001 which was finialized in 2004. The mortgage company issued a 1099-C for 2004. But never sent a copy to the client. So they have to amend.

Can they amened 2004 and included casualty loss/theft along with the 1099-C? The loss did happen in 2001, but it will not benefit them since the 1099-C for $100,000+ was issued for 2004 when the bankruptcy was finalized.

Thanks!

Riley2 (talk|edits) said:

16 May 2007
Depending on the client's state of residence, most of the amounts shown on the 1099-C could be excludible under Sec. 108 if the foreclosure occured during the bankruptcy. I see no casualty loss here unless there is some evidence of fraud or theft. However, if the client obtained a civil court judgment against the contractor, he may have a bad debt deduction in the year the judgment becomes worthless.

Lmcdon9822 (talk|edits) said:

30 May 2007
Thanks,

IRS sent a letter stating the 1099-C did not show a bankruptcy. The client just gave me the Final Decree. Seems like the bankrupcy lawyer filed Chapter 13 and the house shows "abandon".

I believe Chapter 13 is for folks who want to save their house? Will the IRS not count the 1009-C for the amount of the forgiven loan if the client filed for Chapter 13 instead of Chapter 11?

Riley2 (talk|edits) said:

30 May 2007
What was the date of cancellation? What was the date of discharge in the bankruptcy?

Lmcdon9822 (talk|edits) said:

30 May 2007
Bankruptcy started 6/01/01, ended 8/6/04.

Final decree was issued 8/15/05.

1099-C was issued in 2004.

Why the final decree was issued a year later is beyond me.

Riley2 (talk|edits) said:

31 May 2007
Ok, it looks like the Chapter 13 discharge was issued in 2005, and the cancellation of the mortgage debt was not ordered by the court in 2004 (or any other year). Therefore, the bankruptcy exception to the COD income rules does not apply since the 108(a)(1)(A) exclusion only applies if the bankruptcy court ordered the cancellation of the debt.

Unless your client was insolvent at the time of the mortgage cancellation, it does appear that the $100,000 COD income should have been included in gross income in 2004.

I see no casualty loss since the event causing the loss was not sudden or unexpected. However, if the client obtained a legal judgment against the contractor, then the client would be entitled to claim a nonbusiness bad debt deduction if he is unable to collect on the judgment.

Lmcdon9822 (talk|edits) said:

14 June 2007
Thanks for the info!

From the documents the client gave me, it seems that they were insolvent when the COD was issued. During the period of 6/01/01 and 8/6/04, the client was making payments setup by the court. They were out of the house before the bankruptcy events started.

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