In Uncategorized on 01/11/2016 at 18:08

Whether it’s taking a loss on your 1040, or getting your litigation costs, timing is everything.

Judge Morrison elucidates the first mistiming in Jeffrey J. Evans, 2016 T. C. Memo. 7, filed 1/11/16. Jeff claims the loss is ordinary, as the real estate he lost to a foreclosure sale was stuff he was meaning to fix up and sell. He fails to prove that he was in the business of buying, fixing up and selling, so he gets a capital loss.

But the point of Jeff’s sad story (his daughter was shot and killed by a police officer, an event that devastated him, as happens all too often) is that the foreclosure sale took place in one year, but Jeff didn’t get the surplus money from the foreclosure until the next year.

Surplus money is what’s left over after the lienholders get paid and all costs and fees of sale are recovered.

Jeff says he’s a cash-basis taxpayer, and so the loss follows the cash.

A foreclosure sale isn’t final if the foreclosed-upon owner has a right of redemption (Jeff didn’t under local law), or there’s an ongoing dispute about the foreclosure. For the latter, see my blopost “It Ain’t Over Till It’s Over,” 5/20/14.

Jeff argues that the trustee (the local equivalent of what we here in the Empire State call the referee) didn’t tell him about the surplus (although he admits he could have asked), and demanded a heavy-duty release and indemnification before he handed Jeff the loot.

But there was no fight with the lienholder about what was due, and Jeff testified nobody else made any claims. And local law required the trustee to unload the cash. “The mere fact that the trustee continued to hold those funds…and paid them after receiving a release from Evans does not show that there was any dispute about whether the proceeds were distributable to Evans or the amount of proceeds so distributable.” 2016 T. C. Memo. 7, at p. 20.

But what about the cash-basis taxpayer argument? Well, that may hold for cash items, but losses like depreciation and foreclosure have the Section 165(a) rules. And Jeff has no counter to that. He does have a loss, but not for the year at issue.

As for the trustee, he was right not to hand over money without a release and indemnity. I wouldn’t.

Now for the litigation costs. This is the story of Silvia L. Repetto, Docket No. 15570-14S, filed 1/11/16, a designated hitter from The Great Dissenter, a/k/a The Judge Who Writes Like a Human Being, s/a/k/a The Implacable, Imperturbable, Ineluctable, Irrefragable, Illustrious and Indefatigable Foe of the Partitive Genitive, and Old China Hand, Judge Mark V. Holmes.

Silvia went down to Birmingham. But unlike The Wabash Cannonball it wasn’t “just the other day.” Judge Holmes gifted the parties with an off-the-bencher, they agreed on the numbers, and Silvia asks for litigation costs.

Well, actually she asked for “litigation or administrative costs,” but as she only asked for post-petition costs, that’s litigation costs per Reg. 301.7430-4(c)(3)(ii).

Silvia did have a loss on the $50K she put into an oil well. But she also has another problem.

“The problem for her is that the Court actually ruled against her on this issue for the year before the Court. As we explained in the opinion, we do think this is a timing issue, but 2010 wasn’t the right time. As the Commissioner points out, this means that he won on about 80% of the dollars at stake in the case. And we agree with him and Ms. Repetto that the $50,000 was the most significant issue in the case.” Order, at pp. 1-2. (Emphasis by the Court).

$50K is pretty significant to me too, Judge.




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