Tricky tax question, might need to call IRS...

[Tom_Mi]

Hi All,
I'm wondering if any of you are familiar with insolvency/982 stuff.

I was discharged in Apr '09, and included in the bankruptcy 3 apt buildings. The bldgs are long gone, and that's all fine with me.

I have an llc (now just an empty bank account) which had 30k in it before BK. My plan was to make loans to myself as needed, deposit rents, and hopefully grow it. Unfortunately it was wiped out to pay mortgages.

I should add that I live conservatively...there were no vacations or toys or crap purchased during that period. That money was spend staying alive, and paying bills.

During BK, I never thought of that money as 'loans to myself'. Was just using the cash to pay expenses until I hit zero. Hence, it didn't occur to me to report that debt (to myself) in my Bankruptcy.

So, Question 1: Can my LLC write a formal 'discharge of debt', and can I include it on my 982, such that all that money isn't recorded as income?


Question2: That llc was funded by a self-directed IRA I created to invest in what I thought was a safe investment. Would the above 982 cover any issues that may arise from this capital having come from an IRA?


My accountant is nice, but he's a deer-in-headlights on this one. Not sure what to do.

[AngelinaCatHub]

Hi All,
I'm wondering if any of you are familiar with insolvency/982 stuff.

I was discharged in Apr '09, and included in the bankruptcy 3 apt buildings. The bldgs are long gone, and that's all fine with me.

I have an llc (now just an empty bank account) which had 30k in it before BK. My plan was to make loans to myself as needed, deposit rents, and hopefully grow it. Unfortunately it was wiped out to pay mortgages.

I should add that I live conservatively...there were no vacations or toys or crap purchased during that period. That money was spend staying alive, and paying bills.

During BK, I never thought of that money as 'loans to myself'. Was just using the cash to pay expenses until I hit zero. Hence, it didn't occur to me to report that debt (to myself) in my Bankruptcy.

So, Question 1: Can my LLC write a formal 'discharge of debt', and can I include it on my 982, such that all that money isn't recorded as income?


Question2: That llc was funded by a self-directed IRA I created to invest in what I thought was a safe investment. Would the above 982 cover any issues that may arise from this capital having come from an IRA?


My accountant is nice, but he's a deer-in-headlights on this one. Not sure what to do.

Well I'm not a CPA either but I would suspect that your discharge paper from the LLC is not needed that all debt in a C7 (except those that are exempt from discharge) is forgiven. Even unsecured debt you forgot to list. Now the IRA is a different situation as that is IRS debt and cannot be discharged. Liquidating an IRA (unless Roth) has tax consequences. A penalty and income tax. Have you paid that? If not, the EI number of the account may be looked at and you audited. Perhaps let it lay and you could skim by, but be prepared to fork over what you would owe them upon a questionable inquiry. If admitted you possibly could work out a payment schedule. 'Hub

[Tom_Mi]

Hub thanks for the reply. I guess one of the pivotal questions I don't know is: 'did I liquidate an IRA'?

My IRA bought documented shares in my LLC, which is now defunct. Had my LLC bought shares of Enron, there wouldn't be any distributions...So did I liquidate, or just buy stock that went to zero?

Of course there's always the question of intent. I could be a snake trying to cash out a 401k tax-free...but I'm not. I just lost my butt investing in real estate.

[helpmeout]

Hub thanks for the reply. I guess one of the pivotal questions I don't know is: 'did I liquidate an IRA'?

My IRA bought documented shares in my LLC, which is now defunct. Had my LLC bought shares of Enron, there wouldn't be any distributions...So did I liquidate, or just buy stock that went to zero?

Of course there's always the question of intent. I could be a snake trying to cash out a 401k tax-free...but I'm not. I just lost my butt investing in real estate.

The difference between Enron stock and the stock in your LLC is that you were the sole owner of the LLC and had complete control over the funds disbursed. And you further lose the argument if you used any of the funds on personal living expenses. Which further points out the vast difference between Enron stock and the stock in your LLC. You wouldn't have been able to use operating capital of Enron for personal expenses.

A disqualifier here, I am not a CPA. And the one you consulted with clearly isn't as knowledgeable as what you need. My suggestion is find another one. And start gathering proof of how the funds from the LLC were spent. You will need it for the tax return for the LLC. Did you legally close the LLC?

[Flamingo]

To the OP - to protect yourself against a possible audit (filing insolvency with the IRS is a big audit trigger), get yourself a tax expert in this area...