Bankruptcy

[Calvin]

Had a client that filed for Chapter 7 in 2010. I understand that since these debts were discharged in bankruptcy, there is no income to report. Am I correct in understanding that their bankruptcy trustee should have filed a 1041? Do I need to request a copy of this, as well as the court documents? Is there anything else I need to be sure to ask about?

This is my first bankruptcy and I want to make sure I cover all my bases. Thanks!

[Nashville]

Hard to Answer

Calvin, the answer to whether bankruptcy results in income raises a complex topic -- so much so that I doubt anyone has time to give you an answer here. (Although others are certainly welcome to do so). The general answer is "no" but the involvement with certain business and investment transactions does not categorically confirm or deny taxable income.

I think I am correct in stating that bankruptcy by itself does not create the need for a 1041, unless the proceedings or order of the court create circumstances that might otherwise require a taxable fiduciary-type trust.

Most of us (myself included) love straight answers, and you won't find one in any of the above. Sorry.

[kpangelinan]

Had a client that filed for Chapter 7 in 2010. I understand that since these debts were discharged in bankruptcy, there is no income to report. Am I correct in understanding that their bankruptcy trustee should have filed a 1041? Do I need to request a copy of this, as well as the court documents? Is there anything else I need to be sure to ask about?

This is my first bankruptcy and I want to make sure I cover all my bases. Thanks!

Calvin, the answer to whether bankruptcy results in income raises a complex topic -- so much so that I doubt anyone has time to give you an answer here. (Although others are certainly welcome to do so). The general answer is "no" but the involvement with certain business and investment transactions does not categorically confirm or deny taxable income.

I think I am correct in stating that bankruptcy by itself does not create the need for a 1041, unless the proceedings or order of the court create circumstances that might otherwise require a taxable fiduciary-type trust.

Most of us (myself included) love straight answers, and you won't find one in any of the above. Sorry.

I agree, without more specifics, you won't get a definitive, but I can say, based on experience, more often than not, the income won't be "taxable as ordinary income", nor will a 1041 be required, however, you may need to report 1099C's that the financial institutions report to the IRS and file a Form 982 with your clients return.