That’s what CSTJ Peter Panuthos has for us today in a Summary Op (“don’t quote me”), Nayemul B. Chowdhury and Laila Banu, 2016 T. C. Sum. Op. 31, filed 6/30/16.
It’s a fight about a big $7800 deficiency, but add a zero to show the magnitude of the case for these taxpayers; they really got hit hard.
Nay and Laila bought a Häagen-Dazs franchise, which they coupled with a “Submarina” franchise (sounds like Subway on a bad day), and didn’t make a dime from either.
Their SBA loan was foreclosed, their landlord booted them for unpaid rent, their part-ownership of a gas station likewise tanked, and they saved their home in FL only by filing bankruptcy.
Their records were a mess and their tax return for the year at issue was late, and Nay and Laila put in no evidence why, so get hit with the late filing penalty.
CSTJ Panuthos gives us the basics.
“Petitioners seek to deduct losses from the sale of assets repossessed by their creditor. A sale in which the collateral is repossessed from the debtor constitutes a taxable sale or exchange by the debtor of the encumbered property. See Helvering v. Hammel, 311 U.S. 504, 506-511 (1941); Estate of Delman v. Commissioner, 73 T.C. 15, 28 (1979). The debtor’s gain or loss in the disposition is measured by the difference between the amount realized in the disposition of the property and the debtor’s adjusted basis in the property. Sec. 1001(a). In the case of recourse debt, the amount realized is the fair market value of the property repossessed. Frazier v. Commissioner, 111 T.C. 243, 245 (1998). In general, the debtor’s basis is cost. Sec. 1012. The debtor’s basis must be reduced by the amount of depreciation that was allowed or allowable during 2010 and 2011. Sec. 1016(a)(2).” 2016 T. C. Sum. Op. 31, at p. 7. (Footnote omitted, but I’m leaving in the citations for your next brief.)
CSTJ Panuthos goes through the property sold at the foreclosure of the SBA loan, works out cost, depreciation, and FMV at sale, and sends the parties off to a Rule 155 beancount based upon same.
What wasn’t foreclosed was abandoned when the landlord tossed Nay and Laila, and though IRS wants capital loss treatment, CSTJ Panuthos gives Nay and Laila Section 1231 business property largesse, although it wasn’t much of a business, and goes through the computations to arrive at the loss, giving it the Cohan shuffle. And it also goes to the Rule 155 mix-and-match.
IRS wants to slice off some of the aforesaid largesse based upon the bankruptcy discharge Nay and Laila got, but that was the year after the year at issue. That’s not on the table. I note it might be closed year, unless IRS plays the mitigation gambit.
As for the 20% negligence chop, “(P)etitioners provided no evidence of expenses underlying either their Schedule E deductions or their itemized deductions. Petitioners conceded that they claimed losses on their Schedule C to which they are not entitled. Petitioners’ records did not support the loss reported on Form 4797. Petitioners have not demonstrated that they acted with reasonable cause and in good faith with respect to the recordkeeping requirements; therefore, the Court sustains respondent’s determinations on this issue.” 2016 T. C. Sum. Op. 31, at p. 18.
I offer this for the B-Schoolers as a case study. Much to learn here.