Help sorting out the COD options

[BulldogTom]

Client is in the business of providing half way home care. Provides half way houses for individuals coming out of various government programs. Had 6 homes in the business. All were purchased under varialble loans with low interest only teasers. All were foreclosed on. Client declared BK and lost his home as well.

Here is the twist - the business is still operating in leased properties. The IRS instructions say that the COD income must go to the activity that generated it. But I think exclusion under the BK exception can be elected and that trumps any other election.

But wait - there is more. 4 of the loans are recourse and three are non recourse.

I just need some clarity on how to proceed. There are not and will not be any 1099C's coming from the lenders. I know KC prefers to wait, but the banks are not following the reporting rules. If the banks are not going to produce the 1099C's, what are you supposed to do?

Thanks for letting me vent.

Tom

Lodi, CA

[Bart]

I know KC prefers to wait, but the banks are not following the reporting rules.

Tom

Lodi, CA

I am with KC and I would wait.

[BulldogTom]

Here is how I am thinking of proceeding:

All 6 properties on business balance sheet "sold" back to bank as of date of BK (same as foreclosure date). Recourse loans "sold" for FMV listed on the 1099A, non recourse "sold" for outstanding loan amount listed on 1099A. Cancelled debt included on Sch. C. Gain or loss on 4797. Cancelled debt excluded under BK exception less amount of tax attributes decreased (small NOL) included on Sch. C. Explanation of each calculation attached to return.

Personal residence listed on Sch. D.

Does this treatment sound correct?

Tom

Lodi, CA

[LindaB]

... Cancelled debt included on Sch. C. Gain or loss on 4797. Cancelled debt excluded under BK exception...

Tom

Lodi, CA

Are you going to include canceled debt on Sch. C or can you exclude it all under bankruptcy exclusion? And were these debts all included in the bankruptcy?

[BulldogTom]

All Debts included in Bankruptcy.

I guess my real question is do I reduce the basis in the assets by the amount of cancelled debt prior to "selling" them on the 4797?

I know what the final answer is, I just don't know for certain how to get to it on the tax return. The lack of 1099C's is throwing me for a little loop. The taxpayer qualifies under 2 separate rules for exclusion (business property & bankruptcy) and I don't know the order to apply them. So I don't know for sure if I should reduce basis and then sell or not reduce basis, sell, and exclude debt.

I do know that cancelled debt is to flow to the activity that generated it. So all the business debt cancelled should go on the C. Do I show it, and then cancel it on the same form with an explanation refering to the 982 form?

I keep coming up with too many ways to do this and not enough certainty on if I am on the right track.

Thanks.

Tom

Lodi, CA

[kcjenkins]

Tom, in this case I think you are on the right track. I'd do it that way, and keep good notes, and if he does get 1099Cs next year, you just deal with them then by zeroing them back out, and refer back to the 09 return. It may generate a letter later, but it may not, given that there are so many of these situations, especially out in CA where you are. The IRS may give a lot of them a pass, and you may get lucky. If not, you still are on solid ground.

[LindaB]

All Debts included in Bankruptcy.

I guess my real question is do I reduce the basis in the assets by the amount of cancelled debt prior to "selling" them on the 4797?

I know what the final answer is, I just don't know for certain how to get to it on the tax return. The lack of 1099C's is throwing me for a little loop. The taxpayer qualifies under 2 separate rules for exclusion (business property & bankruptcy) and I don't know the order to apply them. So I don't know for sure if I should reduce basis and then sell or not reduce basis, sell, and exclude debt.

I do know that cancelled debt is to flow to the activity that generated it. So all the business debt cancelled should go on the C. Do I show it, and then cancel it on the same form with an explanation refering to the 982 form?

I keep coming up with too many ways to do this and not enough certainty on if I am on the right track.

Thanks.

Tom

Lodi, CA

"The taxpayer qualifies under 2 separate rules for exclusion (business property & bankruptcy) and I don't know the order to apply them."

I'm pretty sure the bankruptcy is used before anything else.

"Do I show it, and then cancel it on the same form with an explanation refering to the 982 form?"

You don't have to do this, it might confuse the IRS into thinking there are more of these than you actually have. It should either go on the Sch. C if it's going to be taxable or on 982 if it's excluded.

"I guess my real question is do I reduce the basis in the assets by the amount of cancelled debt prior to "selling" them on the 4797?"

No

"The lack of 1099C's is throwing me for a little loop."

If you haven't looked at it already, there's a section in the instructions for form 1099-C titled 'When Is a Debt Canceled.' You might get some insight from this, but a lot of it refers to state or local law. I've been looking and looking at this stuff, and there are inconsistencies. In the instructions for 1099A & C it's clear that if there is canceled debt, the lender should use 1099C. But in all the pubs. talking about foreclosures they only consider whether it's recourse or nonrecourse debt to determine whether there is COD income and how to determine the 'sales price' of the property. I think you're right to report the sales and calculate COD as you described.

"I keep coming up with too many ways to do this and not enough certainty on if I am on the right track."

You're on the right track. List each sale as you describe: Recourse loans "sold" for FMV listed on the 1099A, non recourse "sold" for outstanding loan amount listed on 1099A. (Recourse loans 'sold' for FMV if FMV is less than outstanding loan amount) Then total the COD from the recourse loans on line 2 of form 982 and check box 1a. Then go through the tax attributes in part II of form 982 and use up all the excluded COD income that you can.

Good Luck!