cpabsd Posted September 7, 2011 Report Share Posted September 7, 2011 I have a corporate question. The entity is an S corp. They developed land but ended in a bad situation due to economic downturn. Land costs on books – 5.6 million 1099 A received for 2010 showing balance of principal outstanding as 2,620 ,000 and fmv listed as 2.6 million. Based on my calculations, they have potential cancellation of debt income of $20 k and loss on disposal of land of 3 million. Is this correct? Where does the cancellation of debt income go on the 1120S? I’m not sure if the bank will send a 1099-C or not. The folks basically stopped making loan payments and walked away from the project. The corp still exists because there are some rentals within the company. I have contacted the bank to see if there will be any future 1099-C filings but do not anticipate hearing from them. The loans on the books for this land was 3.7 million. I have tried to research this but to no avail. Where would I find information when it is within a corporation? Of course, this return is due 9/15/11. Any guidance would be appreciated. Quote Link to comment Share on other sites More sharing options...
Pacun Posted September 7, 2011 Report Share Posted September 7, 2011 I would add the 20K to other income and attach explanation. Keep in mind that that amount might change when the bank sells that land and maybe you will need to amend. Since you have a big loss, amending shouldn't be a big deal. You should ask your clients to keep an eye on the mail since the bank might or might not issue a 1099-C. I believe the bank will send that form when they sell the land. If the books were done correctly, you should have loans from the banks when the land was purchased. Maybe there was more than one loan. You should have the HUD-1 or similar document that will give you an idea how much it was borrowed. Quote Link to comment Share on other sites More sharing options...
OldJack Posted September 7, 2011 Report Share Posted September 7, 2011 Well... I believe the foreclosure is like a sale and the accounting sale price is $5,220,000 (2,620,000 loan+FMV 2,600,000), therefore the book loss on the S-corp form 4797 or Sch-D is $380,000 (5,600,000-5,220,000). Such loss then flows thru to the shareholders. Quote Link to comment Share on other sites More sharing options...
Pacun Posted September 8, 2011 Report Share Posted September 8, 2011 "1099 A received for 2010 showing balance of principal outstanding as 2,620 ,000 and fmv listed as 2.6 million" I am reading 1099-A the same way CPABSD is reading it. It reads, "We are giving you this 1099-A because we are repossesing our house. You owe us $2,620,000 and the FMV of the house is $2,600,000" Quote Link to comment Share on other sites More sharing options...
OldJack Posted September 8, 2011 Report Share Posted September 8, 2011 >> You owe us $2,620,000 and the FMV of the house is $2,600,000"<< That means "for your tax purposes you are selling the house to us for what you owe us plus the fair market value and we will resell it!" After we sell it we will issue a 1099C telling you any cancellation or forgiveness of debt. Quote Link to comment Share on other sites More sharing options...
Pacun Posted September 8, 2011 Report Share Posted September 8, 2011 >> You owe us $2,620,000 and the FMV of the house is $2,600,000"<< That means "for your tax purposes you are selling the house to us for what you owe us plus the fair market value and we will resell it!" After we sell it we will issue a 1099C telling you any cancellation or forgiveness of debt. I'll wait for others to give their opinion. Quote Link to comment Share on other sites More sharing options...
Jack from Ohio Posted September 8, 2011 Report Share Posted September 8, 2011 OldJack is correct. Corportation must treat the land as sold for the amount of the mortgage. If the mortgage was higher than the FMV, the Corporation will experience a gain and must report it so. When the bank sells the property, it will then issue a 1099C for the amount of the loss the bank writes off. This will be income to the Corporation. 1099A only indicates transfer of ownership due to abandonment or repossession. 1099C indicates the amount written off by the bank. Quote Link to comment Share on other sites More sharing options...
Pacun Posted September 8, 2011 Report Share Posted September 8, 2011 Let's say that the bank doesn't issue a 1099-C but the corporation knows that the debt was forgiven. The corporation received a 1099-A that reads: "outstanding loan 2,620 ,000 and FMV 2.6 million".... Are we in agreement that the amount of debt forgiveness is $20K? Quote Link to comment Share on other sites More sharing options...
Bart Posted September 8, 2011 Report Share Posted September 8, 2011 If the bank does not issue a 1099-C then they have not forgiven the debt. How does the corporation know that the debt was forgiven? Quote Link to comment Share on other sites More sharing options...
Gail in Virginia Posted September 8, 2011 Report Share Posted September 8, 2011 Let's say that the bank doesn't issue a 1099-C but the corporation knows that the debt was forgiven. The corporation received a 1099-A that reads: "outstanding loan 2,620 ,000 and FMV 2.6 million".... Are we in agreement that the amount of debt forgiveness is $20K? Until the property is sold, I don't think that you know what the forgiveness is. If they sell if for the FMV, then yes the forgiveness is $20K. However, if they bank only nets 2 million, then the forgiveness would be 620,000. At least that is the way I think that it works, and that is why you don't know until you get the 1099C what the forgiveness of debt is going to be - you have to find out how much the bank actually wrote off for the customer. I am not expert on this, but before this "downturn" is over, we all might have to become experts. Quote Link to comment Share on other sites More sharing options...
Pacun Posted September 8, 2011 Report Share Posted September 8, 2011 If the bank does not issue a 1099-C then they have not forgiven the debt. How does the corporation know that the debt was forgiven? There must be a time limit for this. I do believe is no longer than 3 years. Let's say that I lended that money to the corporation above and the corporation is now in default, I repossesed the land and I issued a 1099-A listing how much the corp owes me and what's the FMV of the land at the time I repossesed the land. The corporation should report the sale/abandonment of the land and whatever else is required. I believe that there is a time limit because: What will happen if I decide to sell the land right away at FMV? I will issue them a $20K debt forgiveness. What if I decide to sell 5 years from now and sell it for $3,620,000? Will I tell the corporation, here is a million dollars after I recovered my money? What if I have it on the market for 10 years and it doesn't sell and then I decide to leave as inheritance to my children and I die 50 years later? Imagine that that the 1099-A was given in 2005 and I didn't sell the land right away while the FMV was close to the money the corporation owed me. 5 years later, I decide to sell the land for $1,620,000. and I send 1099-C to the corporation showing a $1,000,000 debt forgiveness. Don't you think that the lawyers from the corporation will argue that I didn't sell while the prices were high and that the 1099-C is not valid? Quote Link to comment Share on other sites More sharing options...
Pacun Posted October 3, 2011 Report Share Posted October 3, 2011 As I stated above, there is a time limit and it has to to with an "identifiable event". In tax court the IRS has lost because the banks issued the 1099-C too late. go to www.ustaxcourt.gov and click on "opinion search" and type 1099-c on "text search". Then click on the last name and look for the hyperlink to the decisions. T.C. Memo. 2011-233UNITED STATES TAX COURTTHOMAS AND MONICA L. KLEBER, Petitioners v.COMMISSIONER OF INTERNAL REVENUE, RespondentDocket No. 1545-09. Filed September 28, 2011.and please read this other case. T.C. Summary Opinion 2009-180 UNITED STATES TAX COURT THOMAS JOSEPH LINKUGEL, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent Docket No. 28895-08S. Filed December 1, 2009. Quote Link to comment Share on other sites More sharing options...
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