Linda Mathey

That is how I would treat it, much like allocating trustee fees between taxable and non-taxable income.

I have a client that previously purchased shares of their employer's stock. They also had ISO's they wanted to exercise. They paid cash for one block of ISO’s and used their previously owned shares in a "stock for stock" swap for the other block of ISO’s. The AMT adjustment is easy to compute on the ones paid for in cash. In the stock for stock transaction do I use FMV of stock traded in which results in no AMT adjustment or does their original basis carryover? On the date of ISO exercise FMV of stock was about 200% of the exercise price. They only received the same number of shares they traded in and no cash difference

Yes, you are suspicious. I believe in my earlier post I told you he retired in 2009 and moved from out of state to my area to be close to family. I already do one of his family members so that is how I ended up with him. I asked him how far back he kept his returns and he said he has over 25 years worth. He said he will bring them in if we need them to take a loss.

I am sure that was what happened. Now it really doesn't matter since there not only are no earnings on the money, he has a loss. Thanks everyone for your responses. It is nice to know that you are out there when I need another opinion!

I have reviewed the last two years tax returns and the 8606's are in line with what he is telling me. No idea why he did non-deductible vs Roth's. He retired and moved to be closer to family. I will ask how many years he has so I can make sure but I think he is legit. Thanks for raising an excellent question though.

Thanks KC I appreciate your input. He confirmed it is his only IRA and he has filed 8606's each year.

Thanks everyone for your responses. His contributions were non-deductible so he gets the loss. It will help to some extent to mitigate the tax on the conversion.

He contributed $60,000 in total to his IRA. The value of his account currently is $30,000 because the investments have lost $30,000. I am not sure if he filed an 8606 or not. I will check. If the contributions were non-deductible,am I correct in assuming he is entitled to the loss since he has basis in the losses? Assuming these were non-deductible contributions would the conversion to a Roth IRA trigger the losses?

KC, Thanks for the link. It is a good article however it does not address my question. If my client were to take the entire amount of his IRA out as a distribution with his basis being 200% of the FMV of the distribution two things would occur. First he would pay the tax on the FMV of the distribution and secondly he would be able to deduct a loss on Schedule A for the amount by which his distributions are less than his basis. This is because he totally liquidated his traditional IRA. My question is if he converts his total traditional IRA to a Roth IRA and pays the tax on the FMV of the total distribution is he entitled to take an offsetting loss on Sch A since his distribution is less than his basis?

I have a client with a traditional IRA valued currently at $30,000 however his basis is $60,000+. He wants to convert the IRA to a Roth. The rules on recognizing a loss on a traditional IRA require that all amounts in the IRA be distributed and if the total distributions are less than any unrecovered basis then a recognized loss is shown on Schedule A. My question is this...since a Roth conversion would require him to pay tax on the distribution and since it would represent a distribution of all amounts in his IRA is he eligible to take a loss upon conversion or does he have to wait until all amounts in the Roth are distributed?

Thanks Taxbilly I appreciate any help. From what I have read, it causes a technical termination and a short period return. I am assuming because a new partnership is presumed to be established that will use the old kship ID number they will file a short period return and their opening balance sheet will be the old kship's closing one. Just have not had this situation before.

I agree no need to file 706 but if you live in a state like I do, the threshold for filing the state inheritance return is much lower and that would document the basis.

I have an LLC with five equal members that has operated as a partnership since inception in 2005. Their only asset was a warehouse that they purchased for $410,000 which carried a mortgage for $410,000. The mortgage as of 11/13/09 was down to $305,000. The five partners each sold their 20% interest on 11/13/09 to another LLC which is owned by the same five partners for $100 each. I know this creates a technical termination of the original partnership but I am stumped as to how to report the ending balances on Sch L. Do I just enter all activity thru 11/13 and file Sch L showing the ending balances on that date? I assume the LLC that purchased them will show the activity from 11/14/09 thru 12/31/09? The partners are unhappy because they thought they would get a loss. I explained that it was a related party sale and therefore no loss was available to them. Any help would be appreciated.

In answer to the question regarding why he is short selling....when he bought the place he intended to use it as a rental. Then his son started a business in Vegas and he told him he could stay there until he got on his feet. The son needed the money so he rented part of it out to a friend. Now the son's business (landscaping) has gone belly up. He left Vegas and my client has no one close to monitor it and rents in that building have fallen to about $1,500 a month. The interest only payments on the $615,000 were over $39,000 last year not counting insurance, taxes and condo fees. Since the real estate market there has collapsed he feels he is throwing good money after bad to keep it, try to rent it and pay over $45,000 a year with nothing going to reduce the mortgage. He decided to walk away if the attorney's could make it possible. Jainen while I appreciate your comments and insight I do not appreciate your opinion of my response as "emotional". My job is to advocate for my client while preparing an accurate tax return. If anyone's response to this question is emotional, it is yours!

One final question, so I am clear on this.....if the property had been a rental property would it have fallen under the qualified real property business indebtedness exclusion for COD? If yes, then wouldn't the recourse debt be written off using Form 982 and the depreciable basis reduced by the debt forgiveness? If I am thinking about it correctly, the basis would be then reduced by the excess of the principal amount of the debt over the FMV of the property. Since the debt is $615,000 and FMV is $150,000 the exclusion would be for the $465,00. Since cost basis was $640,000 this would reduce basis to $175,000. Since the sale proceeds are $150,000 there would be an ordinary loss and no ordinary income? This is not his case but if it were, could this possibly be correct?

Thanks for the response. Unfortunately or fortunately depending on how you look at it, he has a lot of personal wealth so insolvency is not even an issue. Looks like he can expect a huge tax bill next year. No matter how much money you have losing this kind of money and then getting taxed on it is a big pill to swallow. I appreciate so much you taking your time to respond to me.

Here is the response from the Loss Mitigation Attorney working with my client. "It actually goes by State. Nevada IS a recourse state…..however……Troy’s job is to have the bank agree to issuing a 1099. Once the bank does that, they are done and will not pursue a deficiency judgment." Jainen my question is if the bank issues a 1099 do we still report the transaction on Sch D? The client confirmed that the actual cost was $640,000, $25,000 was the down payment. The loan is still $615,000 and the sale proceeds will be approx. $150,000. Would we still have a zero gain/loss situation? If yes then the Sch D would show basis of $640,000 proceeds of $150,000 and $465,000 COD for a total proceeds of $615,000 and a non-deductible loss of $25,000. What I was concerned about was that the $465,000 would be ordinary income.

Thanks Jainen, The only way the down payment would be relevant would be if he told me the cost was $615,000 (referring to his mortgage amount) and forgot that he also made a down payment. In that case the cost would be the mortgage plus down payment. Isn't the purchase of residential property usually non recourse debt? Is there verbage I should look for in the original loan docs?

Thanks Joel

Jainen, Thanks so much for your response. So just to make sure I am perfectly clear, in my situation I would show cost as $615,000 and proceeds equal to cost so that the gain/loss in column f is zero? The bank will write off whatever the difference is between proceeds and remaining mortgage(which has never changed and is still cost)so he will have no gain/loss. I assume that even if his cost had included a down payment we would still force column f to a 0 by making proceeds equal to cost? Or in that case would I show proceeds as COD plus sale proceeds and let there be a difference but force column f to a zero? Sorry to drage this out, but the whole thing was a surprise to me and I am just anticipating that he may say oh by the way I put $100,000 down too.

I have a very similar situation to Deb. My client bought a condo in Las Vegas which he paid $615,000 three years ago. His son lived in it for a while and rented part of it for $1,500 a month. He left his son keep the money and forgot about it and we never reported it as a rental property. Real estate agents have told him the current value of it is between $150,000-$175,000 and the bank is willing to cooperate in a short sale. Should we amend the old returns and now claim it as a rental property? How will the IRS view that? He had an interest only loan so he still owes the full $615,000 and will have COD income of abt. $465,000. He can sell it in 2009 or wait until 2010. Which would be better? Do we consider it a sale with proceeds of $150,000 plus the COD of $465,000 against basis of $615,000 so no gain or loss? How do we report it? Do we report anything if it is considered personal residence? What form do we use? Any suggestions or assistance with how to properly handle and report this would be greatly appreciated. I am at a loss and do not want to give him bad advice. Thanks in advance for your responses.

Thanks KC for the cites. I will review them. Do you or anyone else have insight as to how to handle the compliance issues? Right now my thoughts are: 1. If they transfer their stock to the liquidating trust prior to 12-31 I will have to prepare both a final 1120 and an initial 1041. 2. If the transfer of their stock to the trust triggers a sale that must be reported in 2008 and since they will receive no cash in 2008, it would be a capital loss. Then in 2009 when the trust receives and distributes the four quarterly payments for the "retained gallons" that would be a capital gain with no basis and would be offset by the carryforward loss. 3. Any receivables that the purchaser refuses because they are older than 60 days will be distributed to the trust along with the right to receive the post closing payments. Am I correct in thinking that since the corporation already recognized the income from these sales, any collections received by the trust would be part of the capital gain since the A/R were received as part of the exchange for the shareholders stock? However, if the A/R prove to be uncollectible wouldn't that generate an ordinary loss? 4. Any ideas as to whether the corporation would have to report for tax purposes the receipt of all its shares in exchange for post closing payments and any refused A/R when the dollar amounts are yet to be determined? Sorry if it sounds like I am confused but I am. I may be getting so wrapped up in the "how to's" that I can't see the forest for the trees.

I have never dealt with anything like this before and hope someone can point me in the right direction. A client of mine owns 97.4% of a C Corporation which sells oils, lubricants, etc. The Corporation is selling it's assets, inventory, A/R etc. In addition, the purchaser will pay the seller for retained gallons (which refers to customers they retain and the total gallons those customers purchase during 2009.) The purchaser will pay the seller at closing for the assets, inventory and A/R so the seller can pay off all debts. If this amount is not sufficient, the purchaser has agreed to advance the seller enough money against future payments for retained gallons to cover all debt. The remaining part of the purchase price will be paid over the next four quarters and will be based on historical sales to these customers. After 390 days they will "true" up the payments based on actual sales and either the seller will owe them money or they will owe the seller money. In order to allow the corporation to liquidate by 12-31-08, the attorney will set up a liquidating trust and the shareholders will assign their shares to the trust. The trust will then transfer the shares back to the corporation in exchange for the right to receive the post-closing payments. By doing this, the corporation can dissolve before the end of 2008 since it will have neither shareholders nor assets. In addition, all of the rights to receive the post-closing payments will then be assigned to the two shareholders in proportion to the shares they currently own in the selling corporation.The trust will then have the right to receive the four quarterly payments and the final "true up" amount. In addition any A/R that are rejected by the purchaser will be distributed to the trust and attempts made to collect them. My questions are: 1. Do I report the assignment of post-closing payments on the corporation's final tax return? If yes, how do I assign a value since that will not be determined until the end of 2009? 2. What about the shareholder's basis and paid in capital in the corporation? 3. Is the assignment of their shares to the trust considered a sale of their stock to the trust? If yes since proceeds cannot be determined until the end of 2009, how and when do I report this sale of stock? 4. Is there anything else I need to be concerned about?

I know what you mean. We just got DSL albeit the slowest speed but that was all that was available. We live too far from the main "switch" to get the fastest speed. It is so much better than dialup and cheaper than Hughes.net which I had for last two years at $100 a month after paying $900 for install and dish. My daughter who lives not far from me in a small town where Verizon has exclusive coverage contacted Verizon and they informed her that her small town will never get DSL due to too few customers. She is really bummed. Isn't it amazing how quickly we adjust to DSL and how we cannot imagine ever going back to dialup? Congratulations!!!

KC, Yes, I did know that but apparently forgot it in my current "brain dead state". Thanks so much for correcting me so that I did not mislead others. I appreciate your comments not just on this but on all posts. It really helps to have all the folks on this board to share with, learn from and keep all of us on the right track. Happy April 15th.