Client personally guaranteed loan for a c-corp. A portion of the loan was discharged by the bank and the 1099-c was issued to the client PERSONALLY. How would we report this? Especially as a reduction in the basis is necessary. Would we report on 1040 or 1120 or both?!
Tags: Form 982, section 108, tax attributes, indebtedness, basis adjustment
I should add that the C-corp became insolvent (which is why the bank discharged a portion of the debt). However, the individual taxpayer is not personally insolvent. Does that mean the 1090-C income will be taxable? Can the insolvency exclusion still apply?
Taxpayer assumed personal responsibility for the loan, so I would see it as a 1040 income item. Since the corporation was insolvent, has it closed? Do you have a stock loss as at least a partial offset?
I do not believe that canceled debt is taxable to a guarantor. The reason being that, the guarantor would have recourse against the original debtor, and therefore the canceled debt would result in a deductible expense (bad debt) and therefore would not be included in income - see IRC 108(e)(2).
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