1099C and Repo of deceased spouse vehicle

[Jesse]

My clients wife died in 2006 and in 2007 he received a 1099-C for automotive finance debt. The vehicle was actually worth more than the cancelled debt of just under $4,000 and the vehicle was taken back by the finance company. My first question then is would this be treated as a sale of the vehicle? or entirely taxable?

This is an elderly person w/ a small pension and social security. If included as income on his tax return he will have a balance due of $65 so if indeed it is entirely taxable he can deal with that.

My second question is how to report?

Community property state - the 1099C came in deceased spouses name and # which will not be on 2007 return as he is now single since spouse died in 2006. I want to avoid applying for an FEIN and filing form 1041 if possible so can I put any income on his 2007 tax return?

My final question is should I be asking more questions or missing other alternatives?

[Jesse]

Follow up – client brought more information to me. Wife died in June 2006. Attorney’s corresponded and in July of 2006 Affidavit signed and delivered for surrender of vehicle. In August of 2006 with original balance due of approx $4,200 vehicle dropped off to dealership.

In November of 2006 nasty letter received from a collection agency asking for balance due of $4,700.00. More correspondence sent copy of Affidavit signed and confirmation of surrender of vehicle. Client thought that was the end.

Then in January 2008 Form 1099C received with date cancelled of June of 2007.

If there was any taxable income due to the cancellation of debt shouldn’t it have been included in 2006? It seems like a case of the left hand doesn’t know what the right hand is doing.

Any opinions as where to proceed from here?

[WhiteOleander]

Whose Soc. Sec. number is the 1099C issued in? If it is in the deceased wife's number, he would not include that income on his return.

[Jesse]

His wife's name and number. This is really bothering me and I don't know what to do to help this man out. Should not a 1099-A been issued for 2006 when the vehicle was voluntarily given up?

It seems nothing should have been issued in 2007, but someday, somewhere I would suspect the IRS is going to be looking for where the income was reported.

[Y2KEA]

You don't say how much the 1099 is for. If it is below the filing threshold then no return is required.

[Jesse]

1099C was just under $4,000.

[WhiteOleander]

The income does not belong to the husband. It would go to the deceased spouse. It is not an option of his to decide who will report it.

Since the wife was deceased in '06, the income technically goes to the decedent's estate Form 1041. The filing requirement is 600/year. So, he can file that return and pay the tax or wait to see if the IRS writes for the 1041 return.

[Jesse]

The income does not belong to the husband. It would go to the deceased spouse. It is not an option of his to decide who will report it.

Since the wife was deceased in '06, the income technically goes to the decedent's estate Form 1041. The filing requirement is 600/year. So, he can file that return and pay the tax or wait to see if the IRS writes for the 1041 return.

But in 2006 husband filed as surviving spouse, so MFJ, so if indeed this is income for 2006 I can amend 2006 tax return correct?

Only if it is income for 2007 do I need to file a 1041 if the income is $600, correct?

Which brings me back to the 1099C vs. 1099A, the debt was not cancelled, the property was voluntarily abandoned so if the FMV of the vehicle was greater than the amount owed would there be any taxable income?

[WhiteOleander]

Just because the car was turned in in 2006 does not mean that that is the year that the debt was forgiven. If the finance company says that they forgave the debt in 2007, you are stuck with that. They have a certain amount of time (varies by state) to forgive a debt. They chose to forgive it in 2007.

So, you cannot include the income on 2006.

[Jesse]

Just because the car was turned in in 2006 does not mean that that is the year that the debt was forgiven. If the finance company says that they forgave the debt in 2007, you are stuck with that. They have a certain amount of time (varies by state) to forgive a debt. They chose to forgive it in 2007.

So, you cannot include the income on 2006.

Okay, I concede to your point - this is income for 2007.

If this were your client would you just concede the entire $4,000 is taxable because that is the amount on the 1099C or can the estate take into account the value of the vehicle that was given up?

[WhiteOleander]

If a debt is forgiven, then you have to decide if the taxpayer was insolvent when the debt was forgiven or in bankruptcy. This involves the forgiven debt, not the "sale" of the car.

I do not know if the estate can claim insolvency to make the debt nontaxable. That would have to be researched.

[Jesse]

If a debt is forgiven, then you have to decide if the taxpayer was insolvent when the debt was forgiven or in bankruptcy. This involves the forgiven debt, not the "sale" of the car.

I do not know if the estate can claim insolvency to make the debt nontaxable. That would have to be researched.

The property was voluntarily abandoned and the FMV of the vehicle was greater than the amount owed. So I respectfully disagree with you as far as the transaction not involving the "sale" of the car.

[WhiteOleander]

The property was voluntarily abandoned and the FMV of the vehicle was greater than the amount owed. So I respectfully disagree with you as far as the transaction not involving the "sale" of the car.

I am not saying that there was not a "sale". But, at this point, you are dealing with the canceled debt. So, the finance company says that they canceled 4700.00 worth of debt.

You posted that the FMV was more than the canceled debt. Is this number in Box 7 of the 1099C? Otherwise, how will you prove that?

Read page 14-11 of the Tax Book under property secured by a recourse debt. It helps sort it out.