It's tax season, which means it's time for our annual flood of questions about tax issues and bankruptcy. One we get quite often is regarding the "Cancellation of Debt 1099's" some people get after bankruptcy, and whether these are reportable income on your taxes. Not being an expert at tax law, my answer is always going to be consult with a tax attorney. However, I can tell you that the IRS exempts from income any discharge of debt arising from a case brought under Title 11 (see 26 U.S.C. § 108(1)(A)). In other words, if your debt was discharged in bankruptcy, then no, you do not report the income on your federal taxes. Side note: Title 11 and Chapter 11 are two different things. Title 11 refers to the portion of the U.S. Code dealing with all federal bankruptcy laws. Chapter 11, like Chapters 7 and 13, are types of bankruptcy referring to subsections of Title 11. So no, do you do not have to file a Chapter 11 case for 26 U.S.C. § 108(1)(A) to apply! The question is not so clear-cut when it comes to Wisconsin state income taxes. For all the cases I've filed and all the years I've been practicing, I've only had a problem with this issue once. But it is worth noting. 26 U.S.C. § 108 was amended by P.L. 110-142. In determining what is computed as income,t he Wisconsin Legislature passed Act 28 in 2009, which created created Wis. Stat. 71.01(6)(u) and (um). These two provisions exclude P.L. 110-142. Did you follow all that? Neither did I, really. As far as I can trace the legislative history, basically, Wisconsin statutes now exclude the federal exclusion of taxable income, the double-negative thereby creating taxable income out of debts discharged in bankruptcy. But again, it's a very convoluted series of statutes, which is why I refer you to speak to a tax professional.
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