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PDtax, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 4673
Experience:  35 years tax experience, including four years at a Big 4 firm.
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Unusual situation. I have tried IRS, they no longer answer.

Customer Question

Unusual situation. I have tried IRS, they no longer answer. I went to IRS office, and a tax problem solving office. Last said I need a tax Lawyer. I have been searching.
Two business deals going back 30+ years.
1) Person invested money in my business. Amount may have been $2500K. I was to pay a monthly amount. I did. Then sold part of business and returned their money. He said I should pay more for value of business or something along that line. I didn't understand. His wife said to HIM: 'forget it.' I should not have. It was dropped. It started bothering me. I borrowed money and paid $8K. for whatever it may have been and interest.
2) I was loaned $10K 30+ years ago. I was to pay monthly interest payments at rate of 18% APR. Then at end of year I was to pay back the $10K. I didn't have it and continued for some time paying the monthly. Things changed. She sued and it was dismissed. Later I filed personal bankruptcy. This was included. I felt obligation. With money I had and borrowed, I paid $27K. $10K principle plus interest for this.
Now, where do I stand? (1)Do I report this is some fashion? (both were for business) (2)Is it any business deduction for me?
Submitted: 1 year ago.
Category: Tax
Expert:  PDtax replied 1 year ago.

Hi from Just Answer. I'm PDtax. I can assist.

Expert:  PDtax replied 1 year ago.

The first debt sounds like you paid after they pursued and won a judgment. I suspect this would be discharged in your bankruptcy if claimed. If not, I suspect the judgment would have expired worthless after all this time. Creditors have a finite amount of time to pursue collection, so the debt might have expired anyway. Can't tell from the facts you have given, but I suspect this is uncollectible and not an issue, whether included in your petition or not.

The second debt was discharged as well.

Now to the tax treatment.

Expert:  PDtax replied 1 year ago.

The discharge of debts in a bankruptcy creates COD, or cancellation of debt income. This is taxable, but you can escape the tax by filing Form 982, Reduction of Tax Attributes, to exempt yourself from the tax on the income.

If you are insolvent at the time of the debt discharge, then there is no income tax to pay on the discharge. Since you filed for bankruptcy, that is sustainable proof of your insolvency.

You should report the debt forgiveness on your 2015 Form 1040, and use Form 982 to remove those 'gains' from your taxable income.

Your original reporting from years ago should have claimed the deductions in the year they were paid.

Thanks for asking at Just Answer. Please rate my assistance when we are done, as it closes out your question and credits me with assisting. I'm PDtax.

Expert:  PDtax replied 1 year ago.

I see you just posted this question again. Please review my response. If not meeting your needs, please advise and I will have site management process a refund.

Customer: replied 1 year ago.
My questions are completely misunderstood and this is not an answer to my questions at all.
Customer: replied 1 year ago.
I am going to bed. I will call back and ask for a refund, as this is not working. Page froze earlier. Had no idea what happened. Went to 2nd computer and tried to get back on track. Now hours later I find this, but it is of no value at all. Randy
Expert:  Miel-cssm replied 1 year ago.
We received your customer service inquiry, however, we are unable to respond to you because we do not have your email address. Please contact customer support at***@******.*** and provide us with your email address and a link to this question page so that we can help you. Thank you, ***** ***** Customer Support Team.
Expert:  PDtax replied 1 year ago.

PDtax again. I see from your questions that you are hoping for a tax deduction in 2015 for items you paid years ago. I thought you were looking for the bankruptcy tax treatment of the unpaid portion of the debts.

Since these debts were incurred many years ago, and you are a cash basis taxpayer, the deduction, if any, would have been in the year the amount was paid. Unless you paid any in 2015, there is no current tax deduction.

Sorry for the confusion. Positive feedback will be appreciated. I'm PDtax.