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
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Report on the 1040.
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).
https://www.law.cornell.edu/uscode/text/26/108
I also believe that it would be incorrect to issue a 1099-C to a guarantor as per 1.6050P-1(d)(7)
https://www.law.cornell.edu/cfr/text/26/1.6050P-1
Substantial authority is hard to come by, but this letter from the IRS references the relevant case law:
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