Form 942

[Christian]

I am working on a client's return who became insolvent in 2014. His son was now has Power of Attorney and is handling the client's affairs. He received a notice from a credit card company indicating some $17,000 in cancelled debt. I am attempting to complete a Form 942 for the client trying to keep the $17,000 of cancelled debt from being included in his dad's income for 2014. I have completed parts 1 and part 2 of the form but am unsure of what to put in the explanation section of the form or for that matter which of the three sections to enter what info I have. His son has no detailed accounting of his father's assets and liabilities on the date of insolvency and can only advise his dad's assets on that date were about $150 and owed over $30,000.

I am wondering if I indicate this in one of the three sections in the explanation part of the form if this will suffice. I am not familiar with this form having encountered this only once before and would appreciate any input from anyone who has dealt with this particular issue before.

 

 

 

[Terry D EA]

You do have to identify the assets and liabilities on form 942 to prove insolvency. If the only assets your client has is $150.00, then the 17,000 cancelled debt in and of itself proves insolvency. Does your client own a home, care or other asset that has value to determine insolvency? Need to gather more information.

[Christian]

The son had the family home transferred into the client's wife's name. The credit card debt was in the husband's name only. My guess is his son got legal advice from an attorney since he could see what was coming. The home was sold but all proceeds were paid to the client's wife. The date of insolvency was 9/24/2014. The husband died in November last year. The son states his father basically owned only his personal clothing when he became insolvent. Apparently the credit card company could not fall back on the wife for payment of the debt and wrote it off. Whether the Service would require the widow to add the $17,000 to their income on review I simply don't know.

It's pretty clear the son had joint assets moved into his mother's name to avoid payment of the credit card debt.

My guess is the return would go through routinely but if subjected to review I am not certain that the exemption would be allowed being myself not familiar with this aspect of tax law. I plan on stressing this to the son so he clearly understands what is involved. If he is not comfortable with it then I will simply add the debt to the couple's income and go from there.

 

 

[Jack from Ohio]

To qualify for the insolvency exemption. the person must have been insolvent on the DAY BEFORE the debt was cancelled.  This is a very key matter.  The date of the debt cancellation will be on the 1099-C.  Nothing that happens before or after that date has any effect.

Be careful not to get drawn into an attempt to avoid paying tax that is owed.

[rfassett]

I am confused in the facts.  If the husband died in November, the POA died with him.  The executor, representative, or estate administrator would be responsible for the filing of the income returns for the husband.

The timing of the transfers to which you speak are critical.  If the timing is not right, the transferred assets could be pulled back into the estate (and therefore into husband's assets before death) thereby most likely making him NOT insolvent.  I do not know your state law, but that is something that you and/or the attorney of the estate should look into.

[Christian]

Thanks for all of your input. As I said earlier I will explain the situation to the son with the clear understanding that the exclusion may be denied. If so, his mother will simply have to pay some additional tax. If he is not happy with this he can take it to someone else.