Installment agreement from hell

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#1

So… This story is, like, five hours old.

sucks in air Ok. Wow.

So… Estate return. That’s an 1041 for those in the know. This guy, I’ll call him Adam, died in 2022. Adam had a trust from 2012. Adam had a company, a partnership, with his close blood relative and partner who we’ll call bob. Adam sold his house, and his company to bob in an installment agreement in 2020 and puts that installment agreement in the trust.

The installment agreement contains provisions for Bob to buy machinery, equipment, and the house for certain amounts of money, and for bob to also pay some of Adam’s medical debt as part of the price.

They had intended the installment agreement to have no profit and no loss and not to go on their taxes, but by including the medical debt the installment agreement has taxes. What’s worse, all installment agreements have interest, and if yours doesn’t, it has ‘imputed’ interest, which is nasty. If there is imputed interest, Bob needs to have been paying taxes on it.

Now it gets more complicated. Adam dies, and his remaining medical debt is canceled. Instead of Bob just… paying the remaining money from the debt to Adam’s estate, the executor decides to cancel that portion of Bob’s debt to Adam. Now we need to issue a 1099-C cancelation of debt income, and maybe take a bad debt deduction… but under these circumstances I don’t think we can actually take a bad debt deduction, because I don’t think this technically counts as a bad debt, which means that somehow both Bob and Adam’s beneficiaries are going to have to pay taxes on the money… it’s going to get double taxed.

And one of Adam’s beneficiaries is a church, who receives an equal share with everyone else according to the will.

If you’re getting lost, don’t worry, I am too. So, the problem is that I’m the ‘best’ in the office… the top of the trash heap, if it were.

I call around to a few other offices, and a few other people who are more skilled than me, and none of them want to touch it with a 10 foot pole.

but, from the terms in the trust documents, and the terms in the installment sale it’s looking like we’re going need to redo Adam and Bob’s 2021 and 2020 taxes.

Annnd I’m just screaming into the fucking void.

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#2

Little bit lost, but I think this is what’s happening?

  • Bob was paying Adam’s debt in exchange for certain benefits, but because it involved medical debt, taxes were involved, but they weren’t paying taxes on it

  • When Adam died, the person in charge of the will cancelled the medical debt

  • This has messed up their taxes for the past couple years because now you need to include their agreement because of medical debt, but now the medical debt was cancelled, but you still have to calculate taxes with it, so it both exists and does not exist at the same time

  • This has also messed up the amount given in the will because Adam’s estate now has less money than it should, so now the amount that everyone gets needs to be recalculated

  • And I take it they can’t uncancel the debt?

This sounds like an awful situation and I’m not even looking at solving a maze of paperwork.

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#3

Actually the hospital canceled the debt against the estate, and THEN the estate canceled that portion of the debt against Bob

Their taxes were messed up for the past couple of years because, even though they both needed to, neither included the installment agreement because… essentially… it was a private agreement between two individuals who both believed that what the IRS didn’t know couldn’t hurt them.

But now I know about it, and I need the installment agreement information from those prior two years to correctly calculate this year. If you skip a year on an installment agreement’s taxes, it literally becomes impossible to calculate.

They don’t want to uncancel the debt, because they would have to distribute MORE money if they did >.<

#4

Eesh. Good luck.

1000 headache-relieving tablets
1000 headache-relieving tablets700×700 84.8 KB

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#5

This right here tells me everything I need to know about how much of a nightmare this is. You’re going to need an extra large bottle of aspirin…

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#6

One person said they’d take it, then when I faxed them the documents, they called me and said that they couldn’t take it but they were confident in my abilities.

That’s when I knew I was fucked.

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#7

Oh jeez.

“I’ll take the case!” looks at files “Oh wait, I’d love to help, but I just remembered that I left my apartment on fire this morning. I’m sure this won’t be a problem for you, though!” flees to the hills

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#8

Was this Schrodinger’s tax return by chance? :nerd_face:

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#9

Yikes.

And it sounds like the folks in other offices took one look and suddenly had to move to an island without phone or internet ASAP.

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#10

So, I want everyone to know that I took an entire day working on it and refused all other clients, but I made it work. I had to re-do, essentially, three years worth of taxes for three entities… Adam’s taxes, Bob’s taxes and the trust’s taxes, but I got something put together that isn’t flagrantly illegal.

I also had to write out a 1099-C and file it with the government correctly, and this is my first time ever doing such a thing… but I made it work.

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#11

Ultimately, it was actually pretty simple: Figure the Installment Agreement, figure the gross profit ratio, figure the imputed interest, and figure out how much debt was released.

Technically I didn’t have to file the 1099-C because they’re related parties, but I’ll be fucked if I’m leaving paperwork undone because I technically don’t have to do it, when a paper trail makes everything more legal.

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