[CLBS] Question for Chapter 7 Trustees, and Chapter 11 attorneys re preference recoveries (taxable event?)

[Holly Roark]

When you recover a preference, is this a taxable event to the Debtors? I
have a creditor who issued a 1099 to my Chapter 11 client under the theory
that the funds returned were funds for "settlement of a lawsuit" (the
preference adversary proceeding we filed), and thus taxable. I have not seen
this before and my thought is that the funds returned to the Debtor
(actually to the estate) should be construed as a discharged debt. Had the
preference payments never been made, then it would have been an outstanding
balance that was discharged in the BK. How is this different? Just because
we "settled" on an amount? 

 

Best regards,

HOLLY ROARK

Attorney at Law 

Certified Bankruptcy Specialist -

By the State Bar of California Board of Legal Specialization

 

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