Insolvency and cancellation of debt income

[mgmea]

Taxpayer is a beneficiary in a deceased relatives will of a bequest of a specific amount of money. While the estate is being probated, but before any check is issued to the beneficiary, is this bequest considered an asset of the taxpayer for purposes of calculating insolvency for determining taxablity of cancellation of debt income?

[jainen]

>>is this bequest considered an asset of the taxpayer<<

Thank you for a very satisfying question. No, I don't think he can count money that he might receive if the will is upheld sometime in the future. Of course, if he is the executor and deliberately delays the probate for his own personal reasons, I wouldn't stand behind that answer.

[kcjenkins]

When you have a clear expectation of receiving an inheritance or a court settlement, you have to disclose that fact, if you are asking for an installment agreement, for example. But as for the question of whether you are insolvent at a point in time, only an asset that has an actual determinable value at that point is considered. So if there is a serious question about the amount he is due to receive, he could not, at that point, convert it to cash by selling the future stream, for example. So it would not make him solvent, at that point, unless the amount is 'reasonably certain'.

So the real question is, is there any question that he will, in fact, receive the amount, or is there serious doubt as to the amount? If so, it does not count. But if in fact there are plenty of assets to be distributed, and there is no real question as to his being able to collect, he's merely having to wait for the process to be completed, then you do. If there is any doubt, you need to CYA with a letter from the attorney or executor as to his status and expectations.