Cancellation of Debt after Death of Taxpayer

[Howco]

Married taxpayer passed away in 2013. Later that year, approx. $68k student loan debt in the taxpayer's name was cancelled. Jointly, the taxpayer and spouse are not insolvent/did not file for bankruptcy/did not perform public service. I don't believe there are any exclusions to this COD income.

Since the debt was cancelled after the taxpayer's death, should it be reported on the estate income tax return of the taxpayer? All marital assets were either in a trust or JTWROS, therefore this estate would have no assets and could potentially claim exclusion of the COD income due to insolvency?

Alternatively, could the COD income be reported on the taxpayer's married-filing-separate return? It would yield a tax liability, but how could it ever be collected if the taxpayer/estate has no assets?

Thanks in advance for your assistance and comments.

[DonB]

I had a similar case except he was single and insolvent. The IRS computers will be looking for this COD income on the 2013 1040 and I believe it would avoid matching problems if it is reported on his final 1040 and backed out explaining it is being reported on his 1041 (this is what I did). The question of estate assets is a legal one and I believe you need a legal opinion on this. On the surface it looks to me as if one half of the marital assets were his and are a part of his estate. If there is a tax due, the beneficiary of his estate could be liable. Just my observation and opinion.

[Burke]

His estate had assets if they were jointly owned, just no probatable assets due to the survivorship clauses. It is a common misconception that there is no estate if nothing has to go through probate. That is not true. Probate is just a process where the courts/state determine the distribution of assets according to the will. Therefore, the COD income could go on an estate income tax return Form 1041. It will generate a tax due which would probably be more than if it were reported on the 1040 filing MFJ. Do the numbers. The executor could elect to file MFS. I would have to do further research to determine if this would work. I think the executor/administrator would still be liable for the tax based on the value of his ownership of jointly held assets.

[appelman]

A simple-minded approach?

If the 1099-C was under the SSN of the taxpayer, I would report the COD on the final 1040. If there was no 1099-C, you have more flexibility.