My client filed bankruptcy this fall and had a land contract receivable that was taken by the trustee to pay creditors. Would this be considered as final payment on the 6252 for the value of the land contract at the time it was turned over to the trustee?
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My post was lost in the mass message postings so I am just trying to bump it to the top again. -
If I understand your question correctly, your client was receiving payments under the installment method and paying tax on the gain portion of each payment. After filing for bankruptcy, a payment that he or she was supposed to receive got intercepted by the bankruptcy trustee and was used to pay creditors. What is the tax consequence?
For tax purposes, the only thing bankruptcy does is allow the taxpayer to exclude debt forgiveness from income. All other tax attributes are reduced in proportion to the amount that is excluded from taxable income. Your situation has nothing to do with debt forgiveness. It is no different than the bankruptcy court taking W-2 wages and using the money to pay off creditors. The taxpayer must still pay tax on the income, even though he or she was forced to use the money to pay off creditors.Comment
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Yes, you understand what I was asking and your answer is what I thought, but I wanted some reassurance. And the W-2 analogy makes sense. I will consider this as if the purchaser paid the land contract in full in 2006. Thanks for your help.Comment
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