Chapter 18: Debt Forgiveness and Foreclosures. 18: Debt Forgiveness and Foreclosures

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Ellen Fox
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Page 279-290 Chapter 18: Debt Forgiveness and

1 Page Chapter 18: Debt Forgiveness and Foreclosures 1 18: Debt Forgiveness and Foreclosures

2 Learning Objectives Page Upon completion of this seminar, participants should be able to Determine if debt forgiveness results in taxable income and calculate the gain or loss on foreclosed property. Calculate excludable income and reductions in tax attributes if required. 2 18: Debt Forgiveness and Foreclosures

3 Key Developments Page Not all 1099-Cs are taxable, they may report discharge that is either not taxable or not reportable. Page 280 CA 3 rd 05/05/2017, 119 AFTR , Giacchi, to be dischargeable in bankruptcy a tax return must be timely filed. Page 283 TC Memo , Schieber, determination of when a retirement payment is an asset. Page 284 The special exclusion for cancellation debt for a qualified residence expired on 12/31/2016. Page : Debt Forgiveness and Foreclosures

4 I. What s New This Year Page 279 An annual problem of expiration and extension, for the tax free debt forgiveness of home mortgage purchase money. The exclusion under IRC Sec. 108 for personal residence purchase money is currently expired 4

the signs They moved Collecting Unemployment Financial Stress

5 II. Reviewing Forms 1099-A 1099-A/C and 1099-C How do you get the client to tell you about their debt forgiveness, look for the signs They moved Collecting Unemployment Financial Stress Trouble with your Billing Due diligence requires persistence Page 279 5

6 II. Reviewing Forms 1099-A and 1099-C Slow down, not all reported amounts are: Apparent Taxable Is deductible interest included in the debt discharge amounts, could be. Page 279 6

7 III. Overview of Debt Forgiveness Page 281 D. Form 982 MUST be filed with return - Taxpayer meets one or more of the exclusions tests Any ordering election the taxpayer is made 7

8 III. Overview of Debt Forgiveness Page 281 E. The practitioner MUST be aware of? 1. Recourse or non-recourse. 2. Was there a bankruptcy or insolvency. 3. Nature and use of the property, personal or business. 8

VI. Bankruptcy Page 283 A. All discharges are exempt from inclusion in income under IRC 108(a)(1)(A). B. Title 11 of US Bankruptcy Code 1. Chapter 7 Liquidation 2.

9 VI. Bankruptcy Page 283 A. All discharges are exempt from inclusion in income under IRC 108(a)(1)(A). B. Title 11 of US Bankruptcy Code 1. Chapter 7 Liquidation 2. Chapter 11 Business reorganization 3. Chapter 12 Family farms and fisherman 4. Chapter 16 Adjustments of debt of an individual. C. The price of tax free discharge is the loss of tax attributes to the extent available. 9

10 Discharge of income tax debts in Bankruptcy The general rule is that if an income tax debt is greater than three years old at the time of the bankruptcy filing it will be dischargeable in the bankruptcy proceeding. By a show of hands: A.The rule is absolute, after three years the taxes may be discharged. B.Certain types of income taxes are not dischargeable. C.If the taxpayer fails to file a return timely no discharge in a bankruptcy is available : Debt Forgiveness and Foreclosures

VI. Bankruptcy Page 283 Giacchi (CA 3 05/05/2017) Was the

discharge the tax return must have been timely filed.

11 VI. Bankruptcy Page 283 Giacchi (CA 3 05/05/2017) Was the tax of the late filed returns dischargeable in a bankruptcy proceeding? General rule Tax returns filed three years or more prior to the filing may be dischargeable. However 9 circuit courts have found that to be eligible for discharge the tax return must have been timely filed. The Finding A late filed return does not meet the requirements of the Code (IRC 523(a)(1)(B) as defined by Title 11 of the bankruptcy code. 11

12 VI. Bankruptcy Page 243 Non-Attorneys should NEVER practice law ALWAYS indicate to the client that the decision to file bankruptcy is a LEGAL DECISION that can only be decided in counsel with an attorney who is qualified to practice in this area. 12

13 VII. Insolvent Taxpayers Page 284 E. Schieber v. Comm. TC Memo A taxpayer who is insolvent at the time of debt discharge may be eligible to exclude that discharge from taxable income, IRC 108. IRS Theory The present value of the right to receive retirement payments is an asset. Court Decision As the taxpayer had no ability to convert the retirement plan to a lump sum, the plan was not an assets. 13

14 IX. Qualified Real Property Business Indebtedness The reduction to depreciable property is accomplished in the same manner as other adjustments to property that is currently being depreciated. Page 288 Cost Basis $200,000 Less: Prior Depr $90,000 Basis Reduction Election Remaining Basis Years Remaining New Annual Depr -$20,000 $90,000 27yr 8mos $3,253 14

15 X. Interest Included in Cancelled Debt Page A. Interest due and forgiven should be included in Box 1 Verify Not all issuers of 1099C complete the form correctly. B. Personal interest (non-deductible) will be included in income subject to the allowances of IRC 108(a) C. Deductible interest would be excluded by the operation of IRC 108(a) or subtracted from the taxable amount. 15

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