NOL/Bankrupcy

[rkamp]

I have a client who had 10 rentals foreclosed in 2008 and currently he has a 96,000 NOL carryover from 2010. On August 24, 2011, he went through Chapter 7 backrupcy and was told by the judge his NOL ended. For 2011, can I take any NOL? Is it prorated for 2011?

Thanks for your assistance.

Regards,

Rick

[Koss]

NOL in Bankruptcy

The NOL is one of the tax attributes that has to be reduced or eliminated when the taxpayer is in bankruptcy. I don't think it is prorated by the number of months or days in the year. In some cases, a taxpayer in bankruptcy may have to reduce the amount of an NOL carryover, without necessarily losing the whole thing. But the amount is based on how much debt is discharged, among other things. It is not a proration based on a partial tax year.

I'm a bit skeptical that your client was really told by a judge that his NOL "ended."

It is certainly possible, especially if the guy somehow managed to file a bankruptcy and manage the case without an attorney. But it is more likely that he heard this from his attorney, or from the bankruptcy trustee.

He may not be able to use any of the NOL. But to be sure, you'll have to dig for more info. I understand why you think it might be prorated. To say that the NOL "ended" is ambiguous. If it "ended" in 2011, does that mean that it is no longer available at all in 2011, or does that mean that 2011 is the last year in which it is available?

You won't get a concrete answer without asking more questions, or a least looking at some of the bankruptcy papers. If he has an attorney, I'd give her a call.

Has the bankruptcy been discharged? If so, in what year?

BMK

[Gary2]

The first question to ask is whether or not a tax return for the bankruptcy estate has been or will be filed. The bankruptcy trustee should be able to answer that question.

The client's NOL, as with all assets, was transferred to the bankruptcy estate. The estate's 982 will show whether any NOL is left to be transferred back to the taxpayer when the estate terminates. If there was no tax return prepared, the trustee should still be able to tell you what reductions must take place.

As far as I know, the reduction does't actually occur until 1/1 of the year after the year in which the debt cancellation occurred (assuming the client files on a calendar year).

Was any of the debt from the foreclosures cancelled before the bankruptcy? If so, was the NOL properly adjusted?

[rkamp]

Thanks Koss and Gary for your suggestions. After more research, I finally was able to determine that I'm not able to take any of the NOL on the 2011 return. The bankrupcy estate was closed in August 2011. I could have filed a partial tax year return and taken advantage of the NOL, but the return had to be filed by December 2011. It might have saved him about $1000, but it is too late now.

This message board is the best!

Rick

[Gary2]

Thanks Koss and Gary for your suggestions. After more research, I finally was able to determine that I'm not able to take any of the NOL on the 2011 return. The bankrupcy estate was closed in August 2011. I could have filed a partial tax year return and taken advantage of the NOL, but the return had to be filed by December 2011. It might have saved him about $1000, but it is too late now.

I'm not following this. A partial tax year return for whom? When the bankruptcy estate closes, the remaining NOLs transfer back to the taxpayer.