1099-C not taxable

[jshtax]

Under what circumstances is a 1099-C not taxable? I think I know but when a client says their attorney said it wouldn't be makes me second guess myself. If it was primary residence or taxpayer is insolvent are 2 primary ways I know of. This client was told by attorney and bank agreed not to issue a 1099-C since property(vacant lot in FL) was foreclosed. I think its taxable personally and attorney was wrong.

[kcjenkins]

I'm confused, if no 1099-C was filed, it sounds like a wash? What did I miss?

[jasdlm]

I had the exact same situation happen last year. The attorney told the client that the debt forgiveness (on a rental property) would not be taxable and that the bank agreed in the negotiation not to issue a 1099C. First, I don't know under what legal authority a bank could 'agree' to not issue a 1099C. Second, sure enough, a 1099c came in the mail. I spent many extra hours working with the client, who was absolutely shocked to find out that the event had tax consequences. The attorney (who said the client 'misunderstood' - I wasn't involved in the negotiations, so who knows what was really said) agreed that it was taxable.

Very bad season for the clients.

[David1980]

"the bank agreed in the negotiation not to issue a 1099C"

That's the same logic behind cash income not being taxable, right? If I convince my employer to not issue a W-2, my wages are not taxable? Of course that's ludicrous. Doesn't matter what forms the taxpayer receives. Matters what actually happened.

Could be the taxpayer heard what he wanted to hear rather than what the attorney said. Or it could be there is a reason the COD is not taxable. Does taxpayer qualify for insolvency? The loss on sale of rental offset the COD?

[Pacun]

If client is insolvent, they can include primary residence and rentals too.

[jshtax]

this person makes 250K+ a year. they bought florida lot for 500K and its only work 200K now with the equity in home I am sure they were insolvent

[jshtax]

no rental it was worst case scenario RAW LAND

[jshtax]

"the bank agreed in the negotiation not to issue a 1099C"

That's the same logic behind cash income not being taxable, right? If I convince my employer to not issue a W-2, my wages are not taxable? Of course that's ludicrous. Doesn't matter what forms the taxpayer receives. Matters what actually happened.

Could be the taxpayer heard what he wanted to hear rather than what the attorney said. Or it could be there is a reason the COD is not taxable. Does taxpayer qualify for insolvency? The loss on sale of rental offset the COD?

I have seen 1099-A issued and the 1099-C was just forgotten

[Pacun]

I have seen 1099-A issued and the 1099-C was just forgotten

or lost on the mail.

[Pacun]

I will add that a lady was waiting for a 1099-C. Each year we had to ask the IRS for 1098s, W2s. For about 2 years, nothing. On the third year, the IRS had it. This is tricky because you cannot request 1098s and W2s from the IRS until Sept, you have to move quickly to get the return before Oct 15.

[Terry D EA]

<<<<<<<this person makes 250K+ a year. they bought florida lot for 500K and its only work 200K now with the equity in home I am sure they were insolvent>>>>>>

Insolvency is determined by the FMV of the assets directly prior to the issuing of the 1099C or prior to the event as compared to the liabilities. If the liabilities exceed the FMV of the assets then yes your client would be insolvent. This means all liabilities and all assets. I agree with David1980 on this. I am afraid somebody misunderstood something.

[Mr. Pencil]

This client was told by attorney and bank agreed not to issue a 1099-C

The only practical way to respond to a client who has 3rd party tax advice is to ask them if they trust me enough to continue the engagement--their choice. In the original post, whatever the bank "agreed" to could not have been good faith negotiations. It was not reasonable for the borrower to rely on a promise that the bank would violate its tax filing requirements.

[jshtax]

Client misspoke they actually received a 1099-A not C. So they have a sale price equal to the balance on loan since it was with recourse and a basis equal to what they paid. Based on facts it looks like they have a $30000 capital loss on the foreclosure.