forgiven debt

[jimenright]

My client was carrying an installment sale. The contract price was 500K and the buyer paid about 14K in principle payments. The buyer got into financial trouble, there were lawyers involved. My client accepted a 352K payoff. There, apparently, was cancelled debt. Is my client required to initiate a 1099 for cancelled debt?

My client is an individual and not listed among the entities on the list of "who must file" in the instructions for the 1099-C. The property sold is business property.

[Roland Slugg]

That was not cancelled debt as the term is defined. It was a renegotiated sale. (Forms 1099-C are only issued for sums owed to banks and businesses that regularly loan money.)

What your client needs to do, however, is refigure the remaining profit on the sale, taking into account the amounts already reported in prior years.

[jimenright]

done that

Thank you for your input. We have reported the sale, calculating the basis using the method in pub 547 and reporting the sale on form 4797 (it was a loss).

It seemed to me that the buyer had an obligation to pay a particular amount and paid a lower amount that there was cancelled debt. I guess we can ignore that fact and just report it as a sale as we have done.

[Roland Slugg]

It seemed to me that the buyer had an obligation to pay a particular amount and paid a lower amount that there was cancelled debt.

It is true that the renegotiated sale may have resulted in the buyer receiving an economic windfall to some extent, but the restructured sale did not result in any recognized gain to him. Instead, he will simply reduce his basis in the property he had purchased from the seller.

[Snaggletooth]

Unrecognized Profit

It seemed to me that the buyer had an obligation to pay a particular amount and paid a lower amount that there was cancelled debt. I guess we can ignore that fact and just report it as a sale as we have done.

Jim, the buyer did have an obligation, but the revenue resulting from the original contract had never been recognized except through principal payments on Form 6252 in prior years. If there was any profit left, the percentage of profit should be recalculated and this total profit (less profit reported in previous years) should be recognized in the year of settlement. This should be true even if a loss results.

Not sure if a 4797 is the proper way to report a settlement. But then again, it might. I would think a straight reporting on Sch D might be easier to understand. Sluggo would probably know.