Reduction of Tax Attributes

Technical topics regarding tax preparation.
#1
MWEA  
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Trying to understand Form 982, never had to complete one before. Client had 1099-C debt income of $15,000 (student loan debt), that client was insolvent by $20,000. Now I’m in Form 982 trying to figure out how to apply to reduction of tax attributes.

Fact pattern:
-Married couple, wife has a small Sch C business with a minimal amount of inventory. No depreciable assets in the business.
-Small net capital gain on Sch D for this tax year of $300.

Going through the tax attributes in order (Pub 4681, Pg. 11):
1.) NOL – not applicable
2.) General business credit – not applicable
3.) Minimum tax credit – not applicable
4.) Net capital loss and capital loss carry-forward: no capital loss carry forward into tax year and as stated above, small capital gain in tax year.
5.) Basis – this is where I get further confused:
A&B). No asset was secured by the cancelled debt, not applicable.
C.) Any other property used in trade or business or held for investment (not inventory):
The client owns stocks in a brokerage account – do we have to reduce the basis in those stocks first?
D.) Inventory/Receivables: Would we then reduce the basis in inventory to zero for the following tax year?
E.) Personal Use Property: not used in trade of business. My understanding is any remaining amount would be proportionally allocated to personal use property.

Primary Concern: Please help me understand how to allocate the basis reduction with the above fact pattern.
 

#2
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If they are insolvent are you sure you even have to adjust the basis of any property?

Did you see this in Pub. 4681:

No tax attributes other than basis of personal-use property.
If the canceled debt you are excluding isn't excluded as qualified principal residence indebtedness and you have no tax attributes other than the adjusted basis of personal-use property (see the list of seven tax attributes, later), you must reduce the basis of the personal-use property you held at the beginning of 2019 (in proportion to adjusted basis). Personal-use property is any property that isn't used in your trade or business or held for investment (such as your home, home furnishings, and car). Include on line 10a of Form 982 the smallest of:
1. The bases of your personal-use property held at the beginning of 2019,
2. The amount of canceled nonbusiness debt (other than qualified principal residence indebtedness) that you are excluding from income on line 2 of Form 982, or
3. The excess of the total bases of the property and the amount of money you held immediately after the cancellation over your total liabilities immediately after the cancellation.
 

#3
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Nightsnorkeler wrote:If they are insolvent are you sure you even have to adjust the basis of any property?

Did you see this in Pub. 4681:

No tax attributes other than basis of personal-use property.
If the canceled debt you are excluding isn't excluded as qualified principal residence indebtedness and you have no tax attributes other than the adjusted basis of personal-use property (see the list of seven tax attributes, later), you must reduce the basis of the personal-use property you held at the beginning of 2019 (in proportion to adjusted basis). Personal-use property is any property that isn't used in your trade or business or held for investment (such as your home, home furnishings, and car). Include on line 10a of Form 982 the smallest of:
1. The bases of your personal-use property held at the beginning of 2019,
2. The amount of canceled nonbusiness debt (other than qualified principal residence indebtedness) that you are excluding from income on line 2 of Form 982, or
3. The excess of the total bases of the property and the amount of money you held immediately after the cancellation over your total liabilities immediately after the cancellation.


That’s a good point, it would reduce the total, which brings up a second issue. Not all the other spouses assets were included in the insolvency calculation, but I’m assuming on a MFJ return they would all count for this calculation. If that’s wrong, I would love to be corrected.
 

#4
Nilodop  
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Although the court in Coerver addressed the question of whether the filing of a joint return effects the allowability of a deduction, and here we address the question of whether the filing of a joint return effects entitlement to an exclusion, the reasoning of the court in Coerver is instructive in the present case. While section 6013 requires the aggregation of income and deductions, the determination of a taxpayer's entitlement to the insolvency exclusion under section 108(a)(1)(B) is based on all the assets reachable by the individual taxpayer's creditors. The filing of a joint return, pursuant to section 6013(b) of the Code, does not affect whether a spouse's separate assets will be used to determine the insolvency of the taxpayer.
. PLR 8920019
 

#5
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Thanks Nildrop - I feel comfortable taking the exclusion based on the one spouse's insolvency, the question is more how it relates to the reduction of tax attributes. First, does the reduction apply to all the assets owned by the married couple filing MFJ return, even though the exclusion was determined based on the spouse's qualifying assets/debt only? Second, I'm still confused on how to allocated the tax reduction attributes.
 


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