2007 tax return

[BearChaser303]

I have a very complex tax situation, and I wonder if anyone has thoughts on what direction I should take. I know this is not a tax forum, but the situation somewhat relates to my BK filing.

I was unemployed for 7 months in 2007.

When I saw the "writing on the wall" about being laid off, I took out credit card insurance on 2 cards with the highest balances.

This insurance made payments directly to the credit cards during the time I was unemployed, the the tune of nearly $21,000.00 (21 THOUSAND dollars) for both cards. This take place from May thru October 2007, until the insurance maxed out and it stopped paying.

I filed CH7 in December.

I received a 1099-MISC (want to make it clear it was a 1099-MISC, NOT a 1099-C) from the insurance company for the amount they paid, less the premiums paid by me to them.

This 1099-MISC is resulting in me having to pay around $5000.00 Federal, and $1600.00 State.

I am looking for possible ways to eliminate or reduce this tax liability. One thing I am considering is using IRS Form 982 due to insolvensy, or due to discharge of debt (despite the high amount paid by the insurance, there was still debt to be discharged on these cards).

Also I was reading IRS Pub 908, and found this:

Request for prompt determination of tax li
ability by the trustee. The trustee of the
bankruptcy estate may request a determina-
tion of any unpaid liability of the estate for tax
incurred during the administration of the case
by the filing of a tax return and a request for
such a determination with the Internal Reve
nue Service.

Does anyone have an opinion on what direction I should go with this. I am trying to hire a tax professional, however having trouble finding one who wants to deal with me during this busy season. I have always prepared my own taxes, however this year I think it will be over my head. Also I don't think that H&R Block or Jackson Hewitt type firms will cut it...

Also - I am an ASSET case if that makes a difference. Also trying to decide if it is in my best interest to end my tax year on the day before my bankruptcy filing, since the credit card insurance payments took place prior to my filing.

Thoughts?

[Flamingo]

Did you read the fine print in the insurance documents you signed before you took out this credit card insurance? If not, review it now to see what clauses it may have in there as to your situation and circumstances and any clauses as to you filing bankruptcy the same year it paid the insurance. Because you included those cards in your bankrupty (whatever balance was left), they are treating the amount paid out as forgiven debt thereby generating the 1099 to you. Your payments must have been enormous for them to have covered $21,000 for two cards in a six month period. You may not need a tax professional; contact the attorney who handled your Chapter 7 and see what he/she suggests you do.

[SUB]

Because you included those cards in your bankrupty (whatever balance was left), they are treating the amount paid out as forgiven debt thereby generating the 1099 to you.

Is it considered forgiven debt or income?

[BearChaser303]

Did you read the fine print in the insurance documents you signed before you took out this credit card insurance? If not, review it now to see what clauses it may have in there as to your situation and circumstances and any clauses as to you filing bankruptcy the same year it paid the insurance.

Yes I read the documents, there is no mention of anything related to bankruptcy filing. Also no mention that the payments would be considered taxable.

Because you included those cards in your bankrupty (whatever balance was left), they are treating the amount paid out as forgiven debt thereby generating the 1099 to you.

I'm a little confused by this, can you clarify? I don't think the 1099-MISC has anything to do with me filing bankruptcy, or forgiven debt. Are you suggesting they would not have sent the 1099 had I not filed bankruptcy? Remember, it is NOT a 1099-C that I received.

Your payments must have been enormous for them to have covered $21,000 for two cards in a six month period.

Actually, to my surprise, the insurance paid a lot more than the minimum payments. I dont understand how they calculated it, because they paid roughly 4 times the minimum payment. This is another issue, if they had only paid the minimum payment each month then I would not be in the bind that I am in now.

You may not need a tax professional; contact the attorney who handled your Chapter 7 and see what he/she suggests you do.

I am doing that, unfortunately though he is not very helpful especially with something like this.

[rfassett]

I am thinking the income is showing up in Box 3, Other Income, of the 1099-Misc. Is that correct? A call may be in order to the insurance company to get an understanding of the motivation for issuing a 1099. Logic tells me that it is correct because you were relieved of having to pay that debt yourself because someone else (the "insurance company") paid your debt for you. It could not be 1099-C income because they did not forgive or cancel any debt. The Internal Revenue Code basically says all income from any source is include as income unless it is specifically excluded elsewhere in the Code or Regs. I can not think of any exclusion for your income, so your best shot may be the one you describe - building your case around being insolvent. But then, I do not believe that applies to 1099-Misc, but rather only 1099-C or 1099-A.

I know this doesn't help much, but don't give up on a tax professional to help you out. Yes, appointments are hard to get right now, but not impossible. Contact the local CPA offices in your area and ask for the first available appointment. It most likely will not be in the next couple of days, but you should be able to get in and talk before the fifteenth of April. They may want to extend your return so they can take a closer look - and that should be OK with you! You want to get this right.

[Flamingo]

My thinking was since you included the remaining balance of those two cards in your bankruptcy, the insurance company, upon finding that out, treated their disbursement of funds (which appear to be over and above the minimum payment as most credit insurance would pay) as taxable income. That is why I asked you to review the small print in any thing you may have signed. Is there anything in the small print that states amounts paid on your behalf would be taxable? Amounts paid as benefits under insurance should not be taxable to you. I would not second guess anything as to your situation and get the correct tax advice you need. Yes, it does appear to be a complicated situation. Let us know what you find out.

[BearChaser303]

Any thoughts on this?

Also I was reading IRS Pub 908, and found this:

Request for prompt determination of tax li
ability by the trustee. The trustee of the
bankruptcy estate may request a determina-
tion of any unpaid liability of the estate for tax
incurred during the administration of the case
by the filing of a tax return and a request for
such a determination with the Internal Reve
nue Service.

Trying to understand if this is something that could potentially help me.

[rfassett]

I am trying to understand why that would help you. The paragraph quoted says the the trustee may request a determination of any unpaid liability of the estate for tax INCURRED during the administration of the case. That tells me the income would have been earned after the filing of the BK but before the discharge. In your case, the income, if that is what it is, was received prior to filing.

And just for clarification on Flamingo's comment about the insurance benefit not being taxed to you, that is not always the case. It is usually true with health insurance and life insurance, but not always. And any other area gets iffy.