Bankruptcy - what happens to tax carryovers???

[KJ Judd]

One client filed bankruptcy in 2008, another will probably file this year. Both are members in an LLC which ceased business in 2008. Both members have NOL carryforwards, capital loss carryforwards.

When the LLC dissolved in 2008 the outstanding liabilities were not all paid. All available cash was distributed to creditors but still sizable amounts owed to them. Both members (former husband & wife) had personally guaranteed the debt. Now one's filed bankruptcy & the other's on the brink.

When I file the final partnership return, do I account for the unpaid debt on the dissolution of the partnership? Or does it just go away?

With the bankruptcy filing, does my client lose his tax carryovers?

I've never had a bankruptcy return before.

[Bees Knees]

The procedure for reducing tax attributes is mentioned in TTB on page 14-10. Reducing the NOL is the first on the list. You must use Form 982 to do so. Also see the instructions for Form 982.

http://www.irs.gov/pub/irs-pdf/f982.pdf

[KJ Judd]

Thanks, Bees. Do I need to do anything on the partnership return regarding the liabilities that were not paid (but guaranteed by the members)?

Or do I account for all activity during the year and the liability balances go away on the final day of the partnership?

[Bees Knees]

Since it is the individual partners filing bankruptcy, it is the individual partners who are allowed the exclusion from cancellation of debt income. The partnership return should report income and expenses without any regards to what the partners do. For example, if the partnership itself has debt cancelled by a creditor, the partnership will pass through cancellation of debt income to the partners, who in turn, either pay tax on the cancelled debt, or exclude it under the bankruptcy rules. But if the creditor never forgives the debt by the partnership, then the partnership continues to show that debt as a liability on the balance sheet. It’s possible the creditor will continue to hold the partnership liable for the debt even after the partners file their own bankruptcy claims, which would be meaningless if there are no assets left in the partnership for the creditor to get.