Short Answer

In North Carolina, the personal representative must gather prior tax records, determine where any cancellation of debt income belongs (estate vs. company), and file the decedent’s final individual returns and the estate’s fiduciary returns on time. If the estate owns a business, ensure the business files its own federal and North Carolina returns so K-1s or dividends flow correctly to the estate. Pay claims in the statutory order, seek the Clerk’s approval before paying commissions and attorney fees, and coordinate filings to support the final account and closing.

Understanding the Problem

You are the personal representative in North Carolina asking: how do I prepare and file the estate’s and the company’s tax returns after a debt discharge? You need a step-by-step plan to place any cancellation-of-debt income correctly, file the required tax returns, and keep the estate on track to close with the Clerk of Superior Court. One key fact here is that the estate holds a stake in a closely held company.

Apply the Law

Under North Carolina law, a personal representative must settle the estate efficiently, account for receipts and disbursements, pay lawful claims in the statutory order, and file required inventories and accounts with the Clerk of Superior Court. For taxes, that typically means: (1) the decedent’s final federal and state individual returns; (2) the estate’s federal fiduciary income tax return (Form 1041) and North Carolina fiduciary return (Form D-407) if filing thresholds or distributions apply; and (3) separate business filings for any closely held corporation, S-corporation, or partnership so the company’s income, loss, or debt discharge items pass correctly to the estate. The main forums are the IRS and the North Carolina Department of Revenue for returns, and the Clerk of Superior Court for approving commissions/fees and closing. The typical trigger for the estate’s fiduciary return is income or distributions during the estate’s fiscal year; the federal Form 1041 is due on the 15th day of the fourth month after the estate’s fiscal year ends, with comparable timing for the NC D-407. Procedures and deadlines can change, so verify current forms and dates.

Key Requirements

• Identify the taxpayer and the debtor: Determine whether the cancellation-of-debt income belongs to the business entity or the estate, based on who owed the debt and the entity’s tax status.
• Collect prior returns and records: Locate the decedent’s last three years of individual returns and the company’s returns to align filings and capture carryovers, basis, and ownership data.
• File the right returns, on time: File the decedent’s final Form 1040 and NC D-400; the estate’s Form 1041 and NC D-407 if required; and the company’s IRS/NC returns (for example, 1120/1120-S/1065 and NC CD-405/CD-401S/D-403).
• Use extensions if needed: If you need time, request extensions (e.g., IRS Form 7004; NC D-410P for fiduciary) and pay estimated tax to reduce penalties and interest.
• Pay claims in statutory order: Treat commissions, approved attorney/accounting fees, taxes, and government claims before general unsecured debts; seek Clerk approval before paying commissions/fees.
• Support the Clerk’s accountings: Maintain records that tie tax filings, receipts, and disbursements to the annual/final account to close the estate.

What the Statutes Say

• North Carolina Gen. Stat. § 28A-13-2 (Duty to settle estate) – PR must administer and settle the estate expeditiously and prudently.
• North Carolina Gen. Stat. § 28A-21-2 (Final account) – Sets timing for filing final account and allows extensions.
• North Carolina Gen. Stat. § 28A-23-3 (Commissions) – Commissions are capped and require Clerk approval; treated as costs of administration.
• North Carolina Gen. Stat. § 28A-19-6 (Order of claims) – Establishes priority for paying estate debts and governmental claims.

Analysis

Apply the Rule to the Facts: Because the estate owns a stake in a closely held company, first confirm whether the company (not the estate) was the debtor on the discharged loan. If the company is a pass-through (S-corporation/partnership), cancellation-of-debt items generally pass through on K‑1s to the estate’s Form 1041; if it’s a C‑corporation, the income is reported at the corporate level. Next, gather prior individual and business returns to prepare the decedent’s final Form 1040/NC D‑400 and the estate’s Form 1041/NC D‑407 on the correct fiscal calendar. With limited liquidity, petition the Clerk for approval before paying commissions and attorney fees and follow the statutory order so taxes and approved costs come ahead of general creditors, while coordinating the SBA settlement and any Form 1099‑C.

Process & Timing

1. Who files: Personal representative. Where: IRS; North Carolina Department of Revenue; and the Clerk of Superior Court (for accountings/approvals). What: Decedent’s final returns (IRS Form 1040; NC D-400); estate fiduciary returns (IRS Form 1041; NC D-407); business returns (e.g., IRS Forms 1120/1120‑S/1065 and NC CD‑405/CD‑401S/D‑403); extensions (IRS Form 7004; NC D‑410P). When: Final 1040/D‑400 by April 15 of the year after death; Form 1041/D‑407 by the 15th day of the fourth month after the estate’s fiscal year end; corporate returns on their statutory due dates; file annual/final accounts per the Clerk’s schedule.
2. Confirm the debtor and entity type; collect the Form 1099‑C (if issued), prior returns, K‑1s, balance sheets, and loan files; obtain an EIN for the estate and choose a fiscal year aligned with information flow from the company. Expect several weeks to assemble records; timeframes vary by county and by how quickly the business provides statements.
3. Prepare and file returns; request extensions if needed with estimated payments. Submit a petition to the Clerk for approval of commissions and professional fees before payment. After returns post and claims are paid in the statutory order, file the final account with supporting receipts and close the estate.

Exceptions & Pitfalls

• COD placement errors: If the company (not the estate) was the debtor, do not report the income on the estate’s 1041; use the correct corporate/partnership/S‑corp filings so K‑1s flow properly.
• Missed extensions: If records are delayed, file IRS Form 7004 and NC D‑410P and submit estimated payments to reduce penalties and interest.
• Paying out of order: Do not pay general creditors (including settlements) ahead of approved costs of administration and taxes; follow the statutory order to avoid liability.
• Unapproved fees/commissions: Get Clerk approval before paying commissions or significant attorney/accounting fees from estate funds.
• Missing K‑1s or basis data: Without the business return, the estate’s 1041 may be wrong; coordinate filing calendars to capture pass‑through items.
• Insolvency variables: Federal exclusions for cancellation‑of‑debt income may apply; confirm with a tax professional, as treatment depends on the debtor’s status and the facts.

Talk to a Probate Attorney

If you’re dealing with debt discharge, pass‑through business income, and tight filing deadlines, our firm has experienced attorneys who can help you understand your options and timelines. Call us today at [919-341-7055].

Disclaimer: This article provides general information about North Carolina law based on the single question stated above. It is not legal advice for your specific situation and does not create an attorney-client relationship. Laws, procedures, and local practice can change and may vary by county. If you have a deadline, act promptly and speak with a licensed North Carolina attorney.