Yeah, a lot of questions here. The relevant Regulation is 1.166-9. It’s not very long.
Don’t think we’d have any direct COD at the personal level as a result of the judgement exceeding $500k and then the balance of the judgement later being charged off. But the the guy died. Thus, any COD aspect associated with the excess judgement would be at the estate level, I’m guessing. But again, I really don’t think there would be any associated with the judgement. I think where the COD might hit is on a K1 and that would be unrelated to the guarantee per se. It sounds like the guy never received a single K1. And if COD were to hit on a K1, I really have no idea what the amount would be, if any. There’s a lot of accounting and analysis that would have to take place at the partnership level. Was there a foreclosure? What about partnership’s basis? Was the debt even forgiven as to the partnership? Was the debt recourse or nonrecourse to the partnership? Note that Sec 752 doesn’t govern this latter determination. If it was non-recourse to the partnership, then the partnership’s accounting would treat the debt as proceeds from a deemed sale. See this, as to that point:
https://www.thetaxadviser.com/issues/20 ... ncome.htmlAs you can see, I’m assuming this is a partnership, although you didn’t say.
So, as to the “partnership” issues, the attendant accounting and K1’s, etc…sounds like we have zero information. But who knows if the partnership even filed returns. Sounds like you’re completely ignoring the partnership aspect of things. It might be that we end up there, but I’m simply raising some questions, as others have done.
If we do end up ignoring the partnership aspect of things, the IRS would have to prove there is some income there.
JAD said this:
Does he have recourse against the other members? If so, how does that impact the timing and determination of the loss. What is the impact if W decides not to pursue the others?
That idea is part of the above referenced regulation in (e)(2). I have no idea if this guy has a claim against the other partners. Perhaps the attorneys know, since they received $400k from the guy’s wife. In addition, the IRS could say this: “You haven’t proven that the partnership had $0 assets. As a result, you haven’t proven that your debt is worthless.”
If you’re comfortable with proceeding, even though this line of attack is hanging out there, along with a lot of related unknowns, then it seems to me, you’d take a business bad debt deduction for the money that was seized from the client. The legal fees would follow that treatment. I think the issue there is whether or not any should be capitalized, but I doubt it. If that’s the case, and if wife paid the fees in more than one year, they would be deductible in those years.
You say that in a perfect world you would know all the details. You also need to realize that in an imperfect world, such as the one you’re apparently in, there are certain risks you run which will materialize if the IRS starts asking any questions.
I’m not sure what tax impact this big deduction, if you choose to claim it. Will it wipe out the couple’s 2017 income? You also need to think about what might happen if an NOL is created by a guy who died in 2017…and whether or not that NOL can be carried back and/or forward. You can go back. But if there is any carryforward coming into 2018, seems it expires with the husband.