Bankrupt -removing business property

[carolynm]

I have a Schedule F farm client. This client declared personal bankruptcy in 2008, which was discharged in 2009. He filed bankruptcy due to an impending foreclosure on his farm which included his principal residence, farm land and buildings. The bank took possession of the real estate 02/01/09.

I'm doing the 2009 1040 and am wondering how I handle this?

My questions:

a) Should the assets be removed on the 2008 or 2009 return (bankruptcy filed in 2008...title transferred in 2009)

b ) I need to remove the property from the Schedule F depreciation. How? What are Proceeds? I don't believe there is a gain or loss (due to insolvency) but I'm not sure how this is reported?

c) The client did not lose all his business assets and continued the business after bankruptcy.

Can someone point me in the right direction?

Thanks

Carolyn

[RoyDaleOne]

Generally, Section 108 and the Pubs covering same.

[carolynm]

I get lost in the reduction of tax attributes part...

The client had about 1 million in debt...bank sold foreclosed property for $550,000. My client however didn't get any 1099-A for this (perhaps because bankruptcy already filed?)

I just don't know how to get the assets that were given up off of the return -and if any of the other assets basis is affected.

[samingeorgia]

Why not just show the assets as sold for adjusted basis on the date the bank took possession? That will show no gain or loss, right?

[TaxmannEA]

If the assets were sold in the bankruptcy, then there is no tax effect on the TP. The bankruptcy estate deals with all that. TP will only have gain on discharge of indebedness for assets disposed of outside the bankruptcy.

[carolynm]

Why not just show the assets as sold for adjusted basis on the date the bank took possession? That will show no gain or loss, right?

But is that the correct treatment?

[carolynm]

If the assets were sold in the bankruptcy there am I correct in my understanding that a 1041 will have been prepared? And that will deal with the disposition of the assets? And if they are disposed of on the 1041 I can delete them from my 1040 as they no longer belong to the taxpayer?

Now with all that said, when does the reduction of tax attributes come into a play?

[TaxmannEA]

It's my understanding that the bankruptcy trustee is supposed to prepare a return for the bankruptcy estate. In practice, many of these are never filed as there are no funds left at the termination of the proceedings. The estate is a separate taxpayer from the individual. I have always simply deleted the assets disposed of from the records and kept notes as to their disposition in my file.

[carolynm]

It's my understanding that the bankruptcy trustee is supposed to prepare a return for the bankruptcy estate. In practice, many of these are never filed as there are no funds left at the termination of the proceedings. The estate is a separate taxpayer from the individual. I have always simply deleted the assets disposed of from the records and kept notes as to their disposition in my file.

I'm afraid in doing this that the reduction in tax attributes won't be correctly calculated. This client paid in some money to the estate to keep some assets. I'm going to get what paperwork I can but if no 1041 has been filed I guess I just have to calculate the reduction as if one had been prepared.

The reduction in tax attributes rule is there so that the client doesn't get double benefits ie debts written off and keep tax basis -don't you worry about this aspect?

[TaxmannEA]

I was referring to the assets disposed of in the bankruptcy. If the TP paid to retain some assets, then a new basis would need to be computed for those assets. The reduction in tax attributes would only apply for debt cancelled outside of the bankruptcy. Any debt cancelled or reduced in the bankruptcy is considered to occur with a separate entity, not the TP. I would think that the form and\or substance of the transaction with the estate would determine your client's treatment.

[carolynm]

I'm reading PUb 908 PG 24 "reduction in tax attributes"

f a debtor excludes canceled debt from income because it is canceled in a bankruptcy case or during insolvency, he or she must use the excluded amount to reduce certain “tax attributes.” Tax attributes include the basis of certain assets and the losses and credits listed later. By reducing the tax attributes, the tax on the canceled debt is partially postponed instead of being entirely forgiven. This prevents an excessive tax benefit from the debt cancellation.

If a separate bankruptcy estate was created, the trustee or debtor-in-possession must reduce the estate's attributes (but not below zero) by the canceled debt./quote]

I read this as to apply to debt cancelled via the bankruptcy. The sample in the guide shows form 982 being completed to reduce tax attributes...I plan on reducing my clients basis in any assets by the cancelled debt income.

[TaxmannEA]

Is this a Chapter 7 or 11 filing, or is it a Chapter 13 ? If it's a Chap 7 or 11, the estate reduces the tax attributes. If it's a chap 13, then the individual does so. That's been my understanding up to now. (Anyone PLEESE feel free to correct me if I'm off track here.)

[carolynm]

This is a chapter 7. Here's the rest of the story. I received this from the attorney this am:

I do not think a "separate" bankruptcy estate was created. In every case upon the filing of the petition by the consumer or business a theoretical bankruptcy estate is created and in your case all property vests in the trustee unless we are able to exempt it or the trustee abandons it/quote]

The client had 4 secured assets listed on his petition. The property (he surrendered), a tractor (he reaffirmed), a truck (surrendered) and a trailer (reaffirmed). The COD income within the trust would have been about $550,000 so I imagine that the reaffirmed assets come out at zero basis?

How about assets that weren't fully depreciated that nobody wanted? The client has about $10,000 in basis in these...do assets outside of the bankruptcy estate get basis reduced?

I'll be so glad when this one is done but I"m sure more like it are coming...