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Lev, Tax Advisor
Category: Tax
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Experience:  Taxes, Immigration, Labor Relations
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I am the trustee of a family trust.One of the contingent

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I am the trustee of a family trust.

One of the contingent beneficiaries of the trust borrowed money from the trust in 1997 and never paid it back. The loan was actually made to a small subchapter s corporation owned by the beneficiary. That sub s corp is now supposedly inactive but is listed as an active corporation still by the state of Pennsylvania

I recently discovered the existence of this loan (made by the original testator--now deceased) and--in the process of providing an accounting--put the loan back on the books of the trust.

After discovering the loan I made a demand of the benficiary for payment and they refused. My attorney told me the loan itself was uncollectable.

After they refused payment I sent out a 1099c for the end of 2012. The original loan was for 150k. With interest and penalties (per the loan instrument) the loan is now at $385,000.

The beneficiary's attorney recently wrote me a letter complaining about the 1099c and attacking me as a trustee.

Did I do the right thing?

Will the sub s corp and it's stockholders be liable for taxes on the 1099c or do I just look like a bad guy?


Hi and welcome to Just Answer!
Several issues...
First of all - the recipient doesn't like 1099C - which generally means taxable income (unless exemption could be used) and has to be reported to the IRS.
As the loan is uncollectable - the form 1099C is issued in the year it became uncollectable - not when you decide to issue the form. Thus for instance - if the loan was taken in 1997 - and no collection efforts was made - the loan became uncollectable in 2000 (three years statute of limitation) - and the form 1099C should be issued for 2000.
Generally - you need to identify when the loan was due.


The testator who made the loan passed away in 1998 leaving his wife (who was ignorant of the details of trust activity) as successor trustee. In 2011 the testator's wife was declared incapacitated and I took over as successor trustee.


I read the trust and the trust seemed to require and accounting so I set out to provide it. I only discovered the loan had not been paid and had not been gifted in 2011.


Are you saying that if no-one sent out a 1099 c in 2000 then I cannot sent one out at a later date and the income should never get reported?


Reading the loan instrument the loan was due in 2000 but there was no one around to collect it--according to my reading of the original loan doc.


All these are internal circumstances on the trust. Regardless of these circumstances - the trust is a separate legal entity.
The first question - if the loan was a true loan - and it was originally intended to be repaid? If No - that was not a loan - but a distribution. While it was made back in 1997 - the statute of limitation is run out to report that as a taxable income unless that was a fraud.
If that was a true loan which was intended to be paid back - we need to verify when payments were due. If payments were due to start in 1997 - and were not demanded for three years - the loan became uncollectable in 2000 - and should be included into 2000 tax return as forgiven debt.
If however - the first payment was due for instance in 2000 - and was not paid - the statute of limitation started from that date - and run out in 2003.


The loan was a true loan and was supposed to be paid back.


So are you saying the unpaid loan became no longer taxable after the statute of limitations ran out? Seems like it would be uncollectible but why would it cease to be taxable if never paid back?


We would have reported it as a taxable event earlier had we know it was a true loan and never gifted. We became trustees in 2011 and did were not aware that it was a loan until we checked.


The unpaid loan doesn't became not taxable...
It is taxable, but you may you decide when it becomes taxable.
It became taxable in the year when it became obvious that the loan woudl not be paid back.
If the first payment was due for instance in 2000 - and was not paid - the trust should sue the debtor and try to collect - and if collection efforts failed - the statute of limitation run out in 2003 (three years later) - that means the loan became taxable in 2003 - and should be reported on 2003 tax return.


That is not your personal fault because you became trustees in 2011 - but that would not change anything - and issuing the form 1099C seems as not correct.


Does that mean there is no tax due? Can I get in trouble for issuing it even though I did it in good faith? What are the implications of "issuing the 1099c seems as not correct."?


There are tax due - but based on your information - for 2003 - not for 2012 or 2011.


Another issue - that you may not force someone to pay taxes. In additional - because of time period - the IRS may not collect such taxes - assuming the debtor timely filed his/her tax returns - the statute of limitation on assessment run out in three years or six years if missed income is more than 25% of total income. So generally the IRS may not assess 2003 tax liability after Apr 15, 2010.

Lev and 2 other Tax Specialists are ready to help you
Hi again,
there is another issue we need to cover related to form 1099C.
As you see in instruction who should file form 1099C -‎
File Form 1099-C if you are:
1.A financial institution described in section 581 or 591(a) (such as a domestic bank, trust company, building and loan or savings and loan association).
2.A credit union.
3.Any of the following, its successor, or subunit of one of the following:
a.Federal Deposit Insurance Corporation,
b.Resolution Trust Corporation,
c.National Credit Union Administration,
d.Any other federal executive agency, including government corporations,
e.Any military department,
f.U.S. Postal Service, or
g.Postal Rate Commission.
4.A corporation that is a subsidiary of a financial institution or credit union, but only if, because of your affiliation, you are subject to supervision and examination by a federal or state regulatory agency.
5.A Federal Government agency including:
a.A department,
b.An agency,
c.A court or court administrative office, or
d.An instrumentality in the judicial or legislative branch of the government.
6.Any organization whose significant trade or business is the lending of money, such as a finance company or credit card company (whether or not affiliated with a financial institution). The lending of money is a significant trade or business if money is lent on a regular and continuing basis. Regulations section 1.6050P-2(b) lists three safe harbors under which reporting may not be required for the current year.
As the trust most likely is not in any of these categories - that means - the form 1099C should not be issued by the trust.

There are penalties for failure to file correct information returns by the due date and for failure to furnish correct payee statements. See part O in the 2013 General Instructions for Certain Information Returns for details. -
As you see - the maximum penalty is $100 per information return filed incorrectly or late.
There are certain exceptions to the penalty - and based on your information the trust might qualify for the exception.
So penalty should not be a big issue for the trust, but reporting large taxable income does create a problem to the debtor.

Considering your information - you might want to re-classify the forgiven loan into distribution. You need to consult with your attorney if you as a trustee may do that.
Sorry if you expected a different answer.
Customer: replied 3 years ago.

You are incorrect.


See page one of this article regarding new IRS requirements for sending out 1099c.


Also see page 2 near top. There is no statute of limitations on a 1099c. Can be issued any time a recognizable event occurrs. I can say I thought the loan would be paid as the beneficiary has not gone away.

I am not going to argue with you...
As the article states - "There are so many reasons why a 1099-C can be wrong."
You are also correct - there is no statute of limitations on a 1099C - however - in your case - the form 1099C might be issued for 2003 - not for 2012 or for the tax year you would decide it to issue.
So - you are required to issue form 1099C for 2003 - you may issue it now. How the debtor will handle on his/her tax return - that is a different issue.

However - if you think that issuing a form 1099C for 2012 is correct - that is assumed true unless the court rules differently.
The debtor MIGHT go to the court if would not be able to resolve the issue with you and/or with the IRS.
Lev and 2 other Tax Specialists are ready to help you

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