Estate Question

[DaveinTexas]

I have a client whose father passed away May 2004. His final return(1040) and 1041 was filed by her brother last year.

Well, back in 1998, her father made an investment of $200,000 in a company that invests in home building. As it turns out the company was a sham; he and many others lost all of their money. His case to retrieve his investment was tied up for years, but the lawyers promised some repayment. On the hopes of his lawyers promise, my client's father never took the $200k loss on his 1040. Finally, this year 2006, the case was settled and her father's portion of the settlement was $50,000. The check was made payable to his estate. My client's brother re-opened the estate's bank account and deposited the funds.

My questions are:

Can the estate claim the capital loss to offset the retrieval of income from the lawsuit?
If that is the case, can the loss transfer to the beneficiaries?

If that can't be done; when should I consider the loss a capital loss on her father's past years returns? I suppose if this is done, then the loss can't carry past 2004 because of her father's death.

Am I asking the right questions? Do you need any more information?

Signed,

Confused and needs help.

[Bees Knees]

A nonbusiness bad debt must be totally worthless to be deductible. Since a $50,000 settlement check was eventually issued, you can’t go back to the final return and claim it was totally worthless. Even if it was claimed on the final return, you only get $3,000 per year, and a capital loss carryover cannot be carried over from the final return to the estate return.

So the only way to handle it is on the estate return. The problem, however, is that the fair market value of the investment at the time of death is probably closer to $50,000 than $200,000, since the $50,000 amount is what was actually received a few years later. So the estate’s basis in the bad debt is $50,000 (FMV), not $200,000 (cost), therefore, there is no loss at the time of settlement. Unfortunately in this case, the basis of inherited property is always the fair market value at the time of death.

Sorry, those are the rules.

[DaveinTexas]

Thank you very much

Do you know the IRC this originates from?


If you don't, thanks anyway---appreciate your time.

[Bees Knees]

Basis of property acquired from a decedent is Section 1014.

The deduction for bad debts is Section 166.

[DaveinTexas]

Ahh

Thank you very much!