Estste tax return 1041 or personal 1040 to report 1099c income

What is the name of your state (only U.S. law)? North Carolina

The estate is settled and only needs to file the final return of the deseased and the estate return. In administering the estate that started out under water some credit card debt was negotiated and settled for an agreed to amount. I am now as the administraitor receiving the 1099c forms for the income of the canceled amount of debt from several card companies. These are addressed to the deceased and not the estate of the deceased. Where is it proper to report the income? Would this be income to the estate or to the deceased individual. In negotiating the debt after the date of death the income seems to belong to the estate and not the individual income but the debt was created by the individual. I do know that if an individual who recieves 1099c can prove insolvency at the time of the debt cancellation then this income does not have to be included as income on their tax return to the extent that they were insolvent. My question here is twofold:

1. Is this insolvency treatment available to estate tax returns?

2. If so then how do you figure the assets? The house passed intestate to the father outside the probate estate and was not part of the estate. The pension and 401k accounts passed directly to named beneficiary outside the probate estate. I know that these assets would be used normally to calculate insolvency if the deceased were still alive and recieving these 1099c forms since they would be assets to pay the tax liability if needed. The estate however does not have access to these assets and was insolvent to the extent of the canceled debt. In so many words the estate doesnt have excess funds left over to pay the tax on this if it becomes income to the estate. This being the case it would seem to me that the estate would not have to show this as income.

Is this correct? If not please advise how this matter should be handeled.

At first I thought it might be IRD and should go on the personal return, but then thought cash basis and go on the 1041. Then I thought it wouldn't matter as the tax would be paid (probably at a higher rate if considered in the estate) and the house available for the tax. Then I recalled the ripening of the claim with the negotiation and the house passing as a matter of law at the date of death and the estate available would be that, on a cash basis, was available with the house not there and, if insolvent, would not pay COD on any amount above that which is available. Then I thought, with the debt being a credit card was there a ripe claim during life, or was it only made certain after negotiations?

Then I thought, what a perfect question. A really, really, complex and perfect question. A simple set of facts which affect subtle and substantive matters of law in which some parts have different interpretations depending on the circut one is in. It's almost like it was written by a person so knowledgeable in the law so as to teach it in a graduate level course or something.

If a real question, see a tax professional. While the answer may end up to be quite simple, all the assumptions and arguments leading up to it will require research and discussion.

I agree that it is complex

and that is precisely why I pose the question here hoping that someone more versed than I in these matters could shed some light on this matter out of their own expertise or experience. I certainly did not put this forward as any contest for student examination. I am simply administering this estate and hope to do the right thing here and close the estate out soon. I can say that there was no clame while the decedant was still alive. The credit cards only became delinquent after the passing of the card holder when the payments stopped being made. The facts are as presented without any mystery involved or intended although there is always grey area involved in taxes it seems. Yet another reason for my inquiry into this matter. Maybe you see the engineer in me poking through. I have tried to present all of the facts that are pertinentand pose the questions in an understandable fashion in hopes that someone could understand and see the answer for me.

I can say that there was no clame while the decedant was still alive. The credit cards only became delinquent after the passing of the card holder when the payments stopped being made.

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You can't say this. Part of the problem in determining if IRC 2053 applies is the answer to this question. Just because a later negotiation reduced the amount paid does not mean there was not a ripe claim in life. Even after we determined the answer there, we still have many issues to resolve.

I accept that you have a genuine question. It would take a lot of research in many areas to determine the result and if the house is available to pay the tax. In my gut, I'd say you put it in the estate and find insolvency as the house passed at death. But, that is just an educated guess. As the executor/administrator you need to know. You're going to have to see a tax professional and you may have to pay him more than a few dollars. Some of the issues have a circut split.

There is some discussion on the internet. On just the "claim" issue, see:

http://www.allbusiness.com/business-finance/equity-funding-private-equity-venture/1125058-1.html

I dont see why this should be a consideration.

The debt did exist prior to death and was being paid off according to required monthly billing statements by the card companies. I simply want to know how to report the income and if it is indeed reportable without having to go to the supreme court. If the decedant had lived we would not be having this discussion because she would be still paying the bills and not defaulting on them as she had the means to do so and there was no reason for that to change.It seems to me the facts as presented are sufficient to arive at the proper conclusion. I do not foresee anything in the future changing the facts surrounding this estate issue as they are stated here already. I guess you are telling me that this issue is something that is without precedence and I therfore have to pick a course and take my chances? I guess it really doesnt matter where I file the income as long as I file it somewhere. I would like to not pay the taxes if I do not owe them and it seems to me that I should be able to declare insolvency on this one because the estate was insolvent to pay these bills in full. Im just looking for confermation that my thinking is right or do I have to pull out some money from my pocket to pay the taxes on the 1099c income since I apparently paid too much to the credit card company in settlement of this debt and now have a higher priorty bill to pay and not enough money to pay it in the estate. It seems that I first need to know if it has to be income and if so where to report it.

Then go to a professional and pay him to do the research. The answer isn't clear.

I simply want to know how to report the income and if it is indeed reportable without having to go to the supreme court.

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I'd probably put it on the 1041 although it could be IRD. Does that help? Now what?

For a quick discussion on an easier matter and some of the problems, see:
http://www.taxalmanac.org/index.php/Discussion:Debt_Cancellation_of_Deceased_Taxpayer_year_after_death

They're usually pretty good. But, beware. They're not signing the return, you are. Little facts can make a big difference. My experience is that engineers think they know things outside of their expertise. Smart is not always wise.

(I just looked and the happy face is not intentional. In the URL, instead of the face, put in a : D without the space.)

Not trying to be smart here

"My experience is that engineers think they know things outside of their expertise. Smart is not always wise."

Perhaps I opened myself up for that one by mentioning my profession but the fact that I am here asking this question which would seem to me an admission that I dont know the answer to this thing that is outside my profession. I dont know why you felt a need to broad brush the engineering profession in your answer but in spite of the irrelivance of that I do appreciate the input and the link. It seems that not even the tax professionals can nail this down with any definitive certainty so what is a person to do. I either hire a professional and let them guess or guess myself? In either case the IRS will either allow it or disallow it. Legally I as the administraitor of the estate can be held liable for the tax by the court should the IRS deem it income and not allow the insolvency in the estate due to the reasons stated earlier. It is my duty to administer the estate according to the law and I have paid a least status debt in front of a higher priority for payment debt, that being the TAX on the income that I created when I negotiated the credit card debt. A smarter person, perhaps a non engineer, would not have found themselves in this situation as they would have anticipated the need to have funds left in the estate to pay the TAX that they were creating, but my thought process at the time was simply that I only had so much money to pay all the debts with and I was able to negotiate the credit cards down to a break even point for the estate and was pleased with that outcome at the time. Had the credit card companies refused to settle with the estate the administraitor after paying all the other debts of the estate would be left with deviding up the money left in the estate and distributing it to the credit card companies. It would have been the same outcome I guess. Maybe my only mistake is that I did not forsee the creation of income and plan for it. So what do you think? Should I go for it and try for the insolvency or just pay the tax and be done with it. I dont know what to do at this point.

I do people's taxes. I have many engineers as clients. They tend to be a certain way. They're intelligent, precise, read their return when they get it and question everything they don't understand. I like that. At the same time, they also often want the logical reason why something is treated in a certain way and hate that sometimes there isn't really an "answer". (And, they're not always sure why the fee for completing the tax return doesn't include an hour lecture on why the AMT applies to their situation and how it's different from regular taxation.)

Taxes are not math. The concept of income is flexible and the interaction of many different legal concepts. Sometimes the intersection of all those areas were not designed to be on the same plane but come together from different angles and directions. That's where the courts come in to help interpret varying concepts. However, to go to court, the question has to be worth a lot to a person who is motivated. There is not always a case which specifically has the same issues and anyone can distinguish the facts in any case. Zealous advocacy can be a bitch. It's hard to describe the whole of economic activity with the law. Most think of an employer giving an employee money and that's easy. The reality of the world past that can be much harder.

That's the problem here. Some of the issues I'm sure we can find an answer to and some we can't. We'd have to build up an argument based on the case law, code and regulations we think will apply. As I wrote at the beginning, the question was a very good one. It's of the type where a person in a class on taxation would get as a research paper or take home test. While the professor may have a model "answer", like all good legal questions, it is the discussion which would be graded and not the answer. Sad to say, in tax compliance, we need an answer. Since there does not seem to be a case, (Or, here, the more likely major issues we could get this down to, three cases.) precisely on point, we don't really know what comes after the equals sign. Maybe the answer is clear, but especially when the treatment will substantively change the amount of tax owed, there's a lot of work I'd have to do before being able to sign the return and sleep well at night.

However, you're even more twisted. As executor, you not only have a duty to the IRS, you have a fiduciary duty to the beneficiaries. You can't really round towards paying as that would be a breach of duty to the beneficiaries. Round the other way and the IRS can go after you personally. I do a bit of fiduciary work too and feel for you. I do not deny the "income" may go to the estate as the claim ripened after death, the house may pass at death and not be in the estate, you do the estate fiduciary return and find the estate insolvent, wipe your hands on your pants and move on. I like it. It makes me happy. Is it right?

It doesn't seem to be that way. I'm not sure why and would need to research. One way I try to logic through a problem to come up with a gut answer is to say, if the way we want to do things is the law, how could we manipulate things to cheat the government out of money? That's not to say you're trying to cheat, it's just that, how could we cheat if that were true? If we can come up with scenarios where we can get around the law, odds are some people smarter than us have already come up with them and we'd know about it or the law would change or be different. This COD income issue is problematical, in part, because of the concept of an SCIN and estate taxes. You see, the income may not just be from a third-party credit card debt but through interactions with a related party I'm trying to give a gift to, take it out of my estate and the taxation therein and also avoid gift taxes. If the treatment which we want to wipe our hands on our pants on is true, setting up a trust and throw around some debt instruments and, like magic, it all goes away. That makes me doubt the answer we want is correct. But, I don't KNOW without more work.

About this time of year every year I for some reason think..."Wonder why this tax thing has to be so complex". If you enjoy a challenge then I'm sur you like your profession as I do. Problem solving is our life but just in different professions. I dont particularly enjoy the challenge if it isnt right up my alley though. I would rather solve a physical engineering problem personally. There is not near so much grey area. We still have to make assumptions to the best estimate of reality though to get to the end. Oh well.... what to do here is still a quandry.

Speaking from a fiduciary angle, you get a lot of protection from a successful fiduciary breach suit by seeking out the advice of a professional.