Calculating insolvency

[fivetwos]

Hello all...this is my first post.

I would like to know which assets to use and not use in calculating insolvency. I've read that things like 401k and personal property (clothes, furniture) can be excluded since they are not subject to creditor attachment, and the idea behind 1099c is that assets have been cleared. Not sure if that's indeed the case......

Also, how exactly would I calculate the "fair market value" of my home. I know what I paid for it 2+ years ago and that the market has gone down considerably since, but how do I support my figure on the IRS form? Is it just and guesstimate on my part and they will either accept it or not accept it?

I'm kind of confused and any help is appreciated. Thanks......

[Roland Slugg]

The best way to determine the FMV of real estate is to get an appraisal. For a single family residence, however, a comparative market analysis would probably suffice, provided that there were good comps for similar properties nearby.

Code §108 doesn't say anything about leaving out certain assets such as an IRA or 401(k), clothing or furniture. It only refers to the FMV of a T/P's assets. It's possible that in a Title 11 Bankruptcy case a person could exclude some of these assets, probably with limits.

If COD income is excluded, in full or in part, due to insolvency, any tax attributes the T/P may have are reduced or eliminated. See Code §108.

Finally, there are two IRS Pubs that mention insolvency ... Pub 525 and Pub 908 ... but neither mentions any exceptions such as the ones you listed.

[JON]

Correct me

if I am wrong, but assets are given creditor protection, but not exempt from determining if your bankruptcy made you more than solvent.

[joanmcq]

I don't think that either personal assets or retirement assets are excluded for the insolvency equation. Since in tax law income is taxable unless specifically excluded, and deductions are disallowed unless specifically allowed, it stands to reason (I know I'm going out on a limb here) that assets are included unless specifically excluded. Since nothing appears to be specifically excluded, all assets would be taken into account for the insolvency calculation.

[fivetwos]

I got that idea from reading the link below. Maybe it's not true or doesn't apply in my case. Not sure.

http://www.allbusiness.com/accounting/debt/278880-1.html

[les grans]

I've read something quite recently that flatly contradicts what this article says. What I read said quite emphatically that even though assets "can't be reached by creditors" they must nonetheless be counted in determining a debtor's insolvency for section 108 purposes. Now I guess I'll have to go find the other article...

[Bees Knees]

TTB, page 14-10 says:

Insolvency. Cancelled debt is excluded from gross income up
to the amount by which the taxpayer is insolvent. A taxpayer is
insolvent to the extent that liabilities exceed the FMV of assets.
Insolvency is determined immediately before the cancellation of
debt. All assets must be included in the calculation, including assets
exempt from creditor claims under state law.

[fivetwos]

Using all assets, the numbers are close. It will depend on what the FMV of the house is. With the way the market is, using the number I feel it would sell for, I think I may be able to show insolvency.

Can anyone advise if I will need to include proof (like an appraisal) with the return, or is it similar to receipts in the regard that you'll only need to provide them if audited?

Also, at exactly which point in time do I pinpoint for insolvency? From what I can understand, it is at time of forgiveness, which is the date on the 1099. Is this true?

Thanks all for your help.......

[Bees Knees]

The rule says you use the FMV just prior to when the debt is forgiven.

As to what kind of proof you need, I suggest you hire a professional to do this for you. You are not qualified to guess the FMV of stuff. The IRS would eat you alive in an audit.

[fivetwos]

Yes, thanks. Does the "just prior" apply to checking and credit card balances also?

[les grans]

It's pretty clear that the article saying to disregard assets that "can't be reached under state law" in computing insolvency for section 108 purposes is obsolete. I found this in the Journal of Accountancy, dated 2000:

"In letter rulings 199932013 and 199935002, the IRS concluded that when computing insolvency, a taxpayer must include all assets he or she owns--even those exempt from creditor claims. This revokes PLR 9125010 and TAM 9130005."

The earlier rulings, PLR 9125010 and TAM 9130005, were mentioned in the article that the earlier post referred us to, in The Tax Advisor, January of 1992.

Of course, we all know that Private Letter Rulings can't be used as precedent, they only illustrate how the government is thinking. Or maybe, uh, whether the government is thinking??