At risk - as of what point in time do you calculate?

[KJ Judd]

Working on preparing a 2007 tax return for an LLC which has ceased operations due to significant losses. LLC Loan is guaranteed by two members (now divorced). Last year (2006 return) we concluded they (husband & wife then) were "at risk" for the loan & used it to deduct losses.

I just found out my client (individual) is going to declare bankruptcy after the 2007 returns are filed. Does this impact my determination of "At-Risk" for the return?

At December 31, 2007 they were still liable for the loan although they were delinquent on payments.

With the new preparer penalties, would I need to disclose this on the return? At-risk is NOT my favorite topic.

[taxmandan]

I just found out my client (individual) is going to declare bankruptcy after the 2007 returns are filed. Does this impact my determination of "At-Risk" for the return?

At December 31, 2007 they were still liable for the loan although they were delinquent on payments.

I don't think it so, you have heard a rumor that one of the parties may file BK doesn't change the liability situation on Dec. 31st. Since no BK filing has occurred yet, I don't see how potential future action makes any difference.

[KJ Judd]

Actually he told me his bankruptcy hearing is on September 4th, so I'm considering it a fact.

[Snaggletooth]

Two topics

Mr. Judd, I believe you are involved in two separate and distinct topics:

First, the "at risk" situation, and 12/31/07 is premature to deal with this topic since nothing has happened by that date.

Second, "discharge of indebtedness." This could result in income depending on what happens. But it won't happen until it occurs.

[KJ Judd]

Snag -

That helps. I was wondering if I look at the facts as of December 31, 2007 or if I consider the events from that time until the return is filed when I make my conclusions if my client is at-risk.

If I understand you correctly, I just need to look at what was known at December 31st. Do you have a cite for that?

[Nashville]

No cite

Snag - If I understand you correctly, I just need to look at what was known at December 31st. Do you have a cite for that?

Mr. Judd, this is Snag at his Nashville client's computer. You might be a CPA, where the environment and the effect of subsequent events on financial statements is much more prodigious than for taxes.

I don't think a cite is necessary if we simply report each year as it occurs. For tax practitioners, anticipatory reporting for subsequent events is not very common, but it does occasionally happen. Best example I can think of is a casualty loss occurring in one year and insurance proceeds occuring in the next year -- you report only that portion of loss for which no reimbursement is forthcoming. Obviously if you are aware of subsequent events, they can have a substantial effect on tax planning, but in general not for tax reporting.