Fans of great opera will remember the confrontation between Tosca and Scarpia, when Tosca asks the price of the life of her lover, Cavaradossi. “How much?” asks Tosca. Scarpia echoes her question, “How much?” “The price,” she replies.
That’s the question for Bernard R. Shepherd and Desiree Shepherd, T. C. Memo. 2012-212, filed 7/24/12. And the answer is that Bernie and Desiree can’t prove the price, so they must include in their income the relief of indebtedness they received from Capital One. So the answer to Capital One’s oft-reiterated question “What’s in your wallet?” is answered by Judge Ruwe, “Less than they thought they had.”
In the year at issue, Cap One scrubbed some credit card debt Bernie and Desiree had racked up with what Cap One had placed in their wallets. Bernie and Desiree failed to include on their joint Form 1040 the amount shown on the Form 1099-C Cap One sent them.
Bernie and Desiree claim they were insolvent, and schedule assets and liabilities, with all but three of which IRS agrees. They disagree about the values of Bernie and Desiree’s beach house, their principal residence, and Bernie’s pension with the State of New Jersey.
Burden of proof is on Bernie and Desiree, specifically the excess of liabilities over assets immediately before the cancellation.
Bernie and Desiree introduce real estate tax bills, but those are found wanting, because New Jersey notoriously low-balls the real estate tax assessments on homes, and also because no method of valuation is stated on the bills. Neither is the litigation settlement Bernie wangled with the municipality for the beach house proof of value, because (a) again it states no method of valuation and (b) it’s for a period three years after the cancellation, not immediately before.
Sound familiar? See my blogpost “Method to His Madness?”, posted 6/18/12. Method of valuation is essential.
Bernie claims he prepared comparables, prices of houses similar to his in the same neighborhood sold at around the same time: “At trial Mr. Shepherd testified that in his opinion the value of the beach house immediately before the discharge was approximately $340,000. Mr. Shepherd’s valuation testimony was allegedly based on comparable sales that he assembled for the purpose of a property tax appeal.” T. C. Memo. 2012-212, at p. 7. But Bernie never put the comparables in evidence nor did he describe them; worse, he never stated when he derived them, whether “immediately before” or at some other time.
As for their principal residence, Bernie and Desiree do no better. They have an “exterior broker price opinion/appraisal” from the mortgagee, Chase Bank, but don’t tell Judge Ruwe that an “exterior broker price opinion/appraisal” is a drive-by shooting from the hip of a real estate broker, who never sees the inside of the house, and anyway, that’s from years after the cancellation, and after the judicially-noticed meltdown in the housing market. And the real estate tax bills they proffer for their home are as disregarded as the ones for their beach house.
Judge Ruwe: “The tax bill does not describe the property in detail nor the methodology used in determining the tax value. As we noted earlier, a value placed upon property for local taxation purposes is not determinative of fair market value of the property for Federal income tax purposes in the absence of evidence of the method used in arriving at that valuation.
“Furthermore, in New Jersey the assessed value of property is generally not equivalent to the fair market value of the property. See City of Passaic v. Passaic Cnty. Bd. Of Taxation, 113 A.2d 753, 756 (1955) (“There has been general agreement for over a century that individual property valuations and assessments have been and are marred by the grossest inequities.”). In fact, the statutory framework for property assessments in New Jersey specifically contemplates that the assessed value of a property for tax purposes will not be equivalent to the fair market value of the property.” T. C. Memo. 2012-212, at pp. 10-11 (Citations omitted.)
So without reliable values for their home and the beach house, Bernie and Desiree are out, but Judge Ruwe goes on to examine Bernie’s pension, as apparently both Bernie and IRS spent a lot of time on that issue. Even though exempt from execution by creditors under State law, pensions are still assets. Bernie took out a loan from the pension fund before the cancellation, that he was paying back currently, and listed the loan as a liability, but didn’t list his credit balance with the pension fund as an asset. That’s a no-no, and beside, Bernie could have withdrawn up to 50% of his credited portion of the pension plan via loans (he could have more than one at a time outstanding). So Bernie’s credit balance with the pension fund must be more than the loan he had outstanding immediately prior to cancellation.
Bernie and Desiree, you’re solvent, so pick up the cancellation.