1099-R for defaulted DB loan

[emmetttrudy]

One-person DB Plan. In 2012 the participant defaulted on a loan, and a 1099-R was issued for the 2012 year. The total loan taken was for $50,000. At the end of 2012 the outstanding balance on the loan was $42,000 because the participant had made some repayments. The 2012 Form 1099-R was issued for the full amount of $50,000 showing the entire amount as taxable. In 2013 the participant took a cash distribution of the remaining balance in the Plan. The participant had paid back $8,000 of the loan (this was part principle and part interest) into the Plan. My thinking is the amount he repaid created basis in the Plan and he does NOT pay taxes on this again for 2013 when he took the cash withdrawal of the remaining assets. Is this correct? If so, does the principle payments only create basis, or both the principle and interest payments ($8,000 total) create basis?

[ETA Consulting LLC]

Only repayment of the loan amount outstanding at the time of default creates basis; as this would the amount for which he was already taxed.

Good Luck!

[emmetttrudy]

That's what I'm confused about, however, because the 1099-R showed the entire $50,000 as taxable, even though he had paid a portion of it back. At the time of default $42,000 was outstanding. He did not make any more repayments after this. So, are you saying he would have $0 basis in the example above?

[Belgarath]

In the situation you describe, there's no basis at all. What you have is an incorrectly issued 1099 at the time of default. This needs to be corrected - should have only been issued for $42,000.