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Bob Parrish CPA:

Recent Tax News

S Corp Shareholder gets increased stock basis from Cancellation of Debt

QUESTION PRESENTED: Petitioners are shareholders in an insolvent Subchapter S corporation. During 1991, that corporation obtained a discharge of certain indebtedness. That discharge would have been treated as an item of "[i]ncome from discharge of indebtedness" (26 U.S.C. 61(a)(12)) except that, because the discharge occurred when the corporation was insolvent, the item is expressly "not include[d] * * * in gross income" under 26 U.S.C. 108(a)(1)(B). The question presented in this case is whether the amount thus expressly excluded from "income" is nonetheless to be treated as if it were an item of "income" which, under 26 U.S.C. 1366(a)(1)(A), flows through to petitioners as the shareholders of the Subchapter S corporation, thereby increasing their basis in the stock of the corporation under 26 U.S.C. 1367(a)(1)(A), and thereby allowing them to deduct losses they were previously unable to deduct because they had exhausted their basis by prior deductions.

The ANSEWER was yes. This case came from the 10^th Circuit. I have included the links to the case as follows:

Service’s Authority of Set-off ~ Chapter 7

Debtors filed a tax return (with a refund) after the Chapter 7 Petition filing. Judge ordered discharge. Debtors claimed the refund was a post-petition asset. Found for Internal Revenue Service — the individual’s interest in the refund arises at the end of the tax year. I have not read the entire case – only the annotation. Caveat From Bob Parrish CPA: I would also consider the due date of the tax return as an important factor to consider in this issue. WHY? Because the Tax Code usually will consider the liability to be established at the due date and consider any refund for the bar dates listed in the Tax Code to be measured from the due date — not the end of the tax year.

Are Federal Income Taxes Dischargeable ~ Not Always!

There are many hoops a taxpayer and bankruptcy counsel must jump to be certain his or her client is represented professionally whenever a taxpayer is insolvent and federal taxes are owing. I will not list all the dates that must be adhered to, nor will I list the taxes that are not dischargeable in this note. I will cover only the fact that if a taxpayer files bankruptcy simply to discharge the taxes s/he is out of luck — those taxes will not be discharged.

If your client is insolvent because of the tax bill, then a red flag should immediately be waving at you as the legal counsel. Recently a federal bankruptcy judge granted summary judgment to the government that a Chapter 7 Debtor’s tax liability was non-dischargeable because the taxpayer willfully sought to evade the taxes. Granted, this taxpayer had a less than desirable track record of paying taxes, timely filing, and full disclosure on the tax returns. In this specific case, the taxpayer had a previous guilty plea to criminal conspiracy charges that prevented him arguing he did not willfully attempt to evade the taxes (previous tax returns, however relating directly to this debt). Therefore — insolvency or other financial problems were existing but there was no discharge of the tax liability. United States v. Hugh D. Summers 87 AFTR2d Par. 2001-430 Jan 11,2001.

Internal Revenue Service Actions To Levy on 401(k) Plans

The Chief of Collection, Bankruptcy and Summonses has directed the Internal Revenue Service should refer cases to the Department of Justice for lien foreclosure against an individual’s interest in a 401(k) plan that was treated as exempt in a bankruptcy discharge, but was a valid pre-petition tax lien.

Bob Parrish CPA PC

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Bob Parrish, CPA