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Anne
Anne, Master Tax Preparer
Category: Tax
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Experience:  Enrolled Agent with 25 Years Experience specializing Individual and Small Businesses
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1099-C

Customer Question

In regards XXXXX XXXXX 1099-C, my clients had a partnership in 2004 & 2005. There was credit card debt in the name of the partnership. The partnership and the partners filed bankruptcy in 2005 and a final return was filed for the partnership in that year. They have now received a 2008 1099c in the name of the partnership for the credit card debt. Do I need to file any return related to the partnership for this? How should this be reported on the partners' return? One partner was active in the business and the other was not. There are passive loss carryforwards for the latter. Can these offset the cancelled debt on Form 982? Can the passive loss for the one spouse/partner offset the cancelled debt for both partners from the partnership?
Submitted: 2 years ago.
Category: Tax
Expert:  Anne replied 2 years ago.
Hi

Thank you for using Justanswer. Debts that are discharged in bankruptcy should not be taxable income.

If you filed bankruptcy and received a Form 1099-C from a creditor, speak to your bankruptcy attorney. If you did not have a bankruptcy attorney – or if you want a second opinion from another bankruptcy attorney – find lawyer near you by going over here, to the National Association of Consumer Bankruptcy Attorneys.

Another way to correct this is to put report the $ amount on line 21 (other income) , with a small note that will go something like this..."1099C discharged in bankruptcy," and to the right of the line 21, where you would normally enter $ , you will enter $0 ,

I hope this help.
Customer: replied 2 years ago.
Isn't there a requirement to file form 982 and affect tax attributes of the discharge? That was the other piece of my question. How should this be reported on the partners' return? One partner was active in the business and the other was not. There are passive loss carryforwards for the latter. Can these offset the cancelled debt on Form 982? Can the passive loss for the one spouse/partner offset the cancelled debt for both partners from the partnership?
Expert:  Anne replied 2 years ago.
Hi

The 982 form your are referring to is for debt canceled to the extent of a taxpayer’s insolvency which is not treated as taxable income. Generally speaking, this means that if all of your liabilities exceed the fair value of all of your assets (including exempt assets and retirement plans), cancellation of indebtedness up to the amount by which you are insolvent is not taxable (once rendered solvent, the balance would be taxable).

Since the Partnership is a "pass through" entity, and you filed the bankruptcy on both the business and personal side, there should be no difference when frilling the the 982 form .

I hope this helps.

Yes, you may certainly file a 982 to prove insolvency. You just need to check box 1a on the form (“Discharge of indebtedness in a title 11 case” — “Title 11″ being the Bankruptcy Code, then list the amount discharged on line 2, and then list it again on Line 10a to reduce the basis in your property.

However, a 1099C really shouldn't have been issued since you filed the bankruptcy.) The following list

• Debt discharged in bankruptcy is simply not income for cancellation of indebtedness purposes.
Customer: replied 2 years ago.
What property would we be reducing the basis of on line 10a on Form 982?
Expert:  Anne replied 2 years ago.
For the partnership, the basis would be whatever the partners had invested, less any of the investment that was paid back to the partners. For the partner who was not active in the partnership, its possible that he/she had already re-couped their investment, so there's nothing to reduce.

The same may be true for the other partner as well.


I hope this helps.
Anne, Master Tax Preparer
Category: Tax
Satisfied Customers: 1916
Experience: Enrolled Agent with 25 Years Experience specializing Individual and Small Businesses
Anne and other Tax Specialists are ready to help you
Customer: replied 2 years ago.
There are no partnership assets, they were all sold and the cash was distributed to creditors who chose to be part of the bankruptcy. Neither partner re-couped their investment, the entity was in a loss position when bankruptcy was filed. But, this still does not seem to answer the question/requirement that basis of some asset must be reduced due to the debt cancellation. Do the partners have to reduce the basis of personal property, such as their principal residence, to satisfy the IRS requirement that the debt cancellation must reduce tax attributes? Are you familiar with handling this sort of situation?
Customer: replied 2 years ago.
Please answer the questions sent at 7:06pm on 4/1/12. I pressed accept in error and am not yet satisfied with the answers I have received.
Expert:  Anne replied 2 years ago.
Thank you for the accept, but please know that I absolutely want you to be happy with your answer, so please keep asking questions until you're satisfied.

To answer your first question, yes, I am familiar with this type of situation. Since you filed bankruptcy on the Partnership, I would expect that basis to be $0, since any assets held by the partnership would have been liquidated to pay as many creditors as possible

Partners do not have to reduce the basis in their personal property, including their homes, unless they signed ownership over to the partnership. Part of the reason people form different tax entities (Partnerships, Corps, S Corps, etc) is exactly for this reason. If the business fails, then their personal property is not at risk.

I hope this helps. .
Customer: replied 2 years ago.
So, does the partnership (which is no longer in existence) need to take any action on the 1099c in the partnership's name?
Expert:  Anne replied 2 years ago.
No,. Since the partnership itself does not pay taxes (its a "pass through" entity, which means everything passes from the partnership to the partners) , insolvency is determined at the individual level.

You would put the pro rated portion of each partner's share of the canceled debt to each partner on the K1, line 11 Other income (loss) - use code "E" and then each partner would will report his/her share of the canceled debt on the form 1040 line 21 or will use the form 982 if he/she qualifies for exclusion.

I hope this helps.

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Anne
Anne
Master Tax Preparer
1897 Satisfied Customers
Enrolled Agent with 25 Years Experience specializing Individual and Small Businesses