In Uncategorized on 11/08/2016 at 19:22

This was (and still is) an often-heard phrase in the dirt lawyer community. It refers to the practice of a mortgagor, whose property is worth less than the balance due on the mortgage debt, mailing the keys to the mortgagee (or more likely, mortgagee’s servicing agent) and walking away.

An unpleasant alternative is the mortgagor’s scorched-earth interposition of numerous defenses to foreclosure proceedings, including without limitation standing to sue, fraud in the inducement, oral modifications, and an occasional visit to bankruptcy court.

But the more hip among the servicing agents, deciding that peace is worth the price, and getting back the property untrashed and with taxes paid beats facing off with debtor-friendly courts and pro bono bulldogs, have reversed the process.

If the mortgagor plays nice and hands over title and clean property (both physically and legally clean), the servicing agent might fork over some of the cash that would otherwise go to their hard-laboring and underpaid foreclosure attorneys. Trust me, it isn’t easy being one thereof.

What has this to do with tax? Well, we know that cancellation of debt is income, a residence is generally a capital asset, foreclosure or deed in lieu thereof is a sale or exchange, and to the extent basis is greater than debt forgiven, there is a capital loss and the usual short-vs-long debate follows.

But how about the forked-over cash?

Karl D. Bobo & Kimberly D. Bobo, 2016 T. C. Sum. Op. 74, filed 11/8/16, say that $20K jingle they got was sales proceeds and therefore included in their computation of their capital loss.

IRS claims what K&K got was ordinary income. And the servicing agent did give K&K a 1099-MISC non-employee compensation for the $20K, in addition to the 1099-A abandonment. But of course neither K nor K worked for the servicing agent, so the 1099-MISC is strictly for the jingle money.

K&K’s trusty CPA filed their return showing the whole thing as COD.

CSTJ Panuthos, recovered from his recent display of modesty and displaying his full title, holds for K&K.

IRS’ claim that the jingle was an incentive payment falls flat.

Too bad this is non-precedential.

But the principle isn’t. The deed in lieu and the jingle are all one transaction. No way would the servicing agent have given K&K Penny One unless K&K handed over clean title and possession.

“Looking at the substance of the transaction the two agreements are inseparable; [servicer] would not have issued the cash for keys payment but for petitioners’ agreeing to sign over the deed to the property. Thus the cash for keys payment should be treated as part of the deed in lieu of foreclosure transaction and included in the amount realized….

“As a result, we calculate the gross proceeds from the transaction by adding the cash for keys incentive payment to the amount of loan forgiveness. Petitioners’ basis in the property is their cost basis. See secs. 1001(a) and (b), 1012(a); sec. 1.1001-2(a)(1), Income Tax Regs.” 2016 T. C. Sum. Op. 74, at pp. 10-11. (Citation and footnotes omitted).

K&K were pro se. They get a Taishoff “Good job!”

Correction, 3/17/17: Thanks to Mr Peter Reilly, CPA (happy St Patrick’s Day, sir!) for pointing out a misstatement. K&K’s trusty CPA didn’t list the jingle as COD; I should have read my own comment above. The CPA reported the entire amount as sales proceeds, as the mortgaged property was deemed sold for the outstanding debt balance plus the jingle.

  1. […] Taishoff, who covers the Tax Court with great thoroughness, had something on this decision – Jingle Mail. I might call Lew out on a fine […]


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