In Uncategorized on 11/16/2016 at 00:18

Judge Holmes Does the Split

 No, this is not C. S. Lewis’ voyage to the Celestial Realm, nor has The Great Dissenter taken up acrobatic dancing.

Here is the story of Benjamin Cornell Bridges, Docket No. 228-15, filed 11/15/16, a designated hitter off-the-bench from The Great Dissenter, a/k/a The Judge Who Writes Like a Human Being, s/a/k/a The Implacable, Irrefragable, Indefatigable, Illustrious, Incomparable, Ineffable, Ineluctable, Incontrovertible and Irrefutable Foe of the Partitive Genitive, and Old China Hand, Judge Mark V. Holmes.

Ben Cornell is an honorable man. “He was very patient here. He was here all day and in the courthouse from beginning to end of the very long day, and he can tell his wife that, for sure.

“He volunteered to serve in the Army; he was discharged honorably. He served as a contract employee in our current wars, as a civilian where he was exposed to peril even in that capacity.” Transcript, at pp. 3-4.

But Ben Cornell was undone by ex-Mrs Ben Cornell, who, prior to being separated from Ben Cornell, had him sign with her the loan documents for her Ford Expedition. When they divorced, the decree gave her the vehicle and all benefits and obligations appurtenant thereto (as my expensive colleagues would say), including but not in any manner limited to, paying off said loan.

Ex-Mrs Ben Cornell didn’t, promptly defaulted, and after the said motor vehicle was repo’d, Ben Cornell got the 1099-C.

Ben Cornell never included the COD generated when the sale of the vehicle yielded less than the balance of the loan.

“So?” say you. “Joint and several on the paper means joint and several on the debt. And Tax Court isn’t bound by a State Court divorce decree. Both were relieved of indebtedness, therefore both are on the hook for the income thereby generated. All the divorce decree does is give Ben Cornell the right to sue ex-Mrs Ben Cornell for the tax, interest and additions to tax that Ben Cornell has to pay Uncle Sam.”

But in the words of the father of the Original Great Dissenter “ah, but stay,
I’ll tell you what happened without delay.”

Things get complicated. “Section 6050P of the Internal Revenue Code requires certain entities to report discharges of indebtedness. Under the regs for that section, 26 CFR Section 1.6050P-1(e)(1)(I), ‘In the case indebtedness incurred prior to January 1, 1995, and indebtedness of less than $10,000 incurred on or after January 1, 1995, involving multiple debtors, reporting under this section is required only with respect to the primary or first-named debtor.

“’Additionally, only one return of information is required under this section if the reporting entity knows or has reason to know to know that co-obligors were husband and wife living at the same address when an indebtedness was incurred and does not know or have reason to know that such circumstances have changed at the date of the discharge of the indebtedness.’” Transcript, at pp. 7-8.

But the lender knew they weren’t living at the same address, because the lender sent the shortfall calculation, which generated the COD, to ex-Mrs Ben Cornell at a different address than the 1099-C they sent to Ben Cornell.

Hang on, there’s more. Judge Holmes is just winding up.

Ordinarily, the right to sue for contribution when one co-obligor pays the entire indebtedness depends upon which of them got the debt proceeds, who had the benefit of any property purchased therewith, who had the basis in the property, and who got the interest deductions to the extent debt service was paid.

“In other words, property rights matter. Who owned the car after the divorce?” Transcript, at p. 11. And to determine this, Judge Holmes says we must look to State law. And Judge Holmes tried this case in Texas, wherein Ben Cornell resides.

Now the relieved indebtedness income must be apportioned among the co-obligors, and IRS agrees it can’t collect tax on the entire amount relieved from both co-obligors.

Judge Holmes looks to a non-binding, but useful, IRS Chief Counsel Advice, Memo 200023001.

And here we have the Texas twist, because Texas is a community property state. So one-half the car belonged to ex-Mrs Ben Cornell, and one-half to Ben Cornell. And the canceled debt was likewise split fifty-fifty.

So does Ben Cornell owe tax on half of the COD?

Negatory, good buddy. Judge Holmes performs a judicial double back flip jackknife, and Ben Cornell walks away scot free.

“What happened to that debt after the divorce? Well, for that again I looked at state law, which in this case is the state court divorce decree, and it says quite clearly, as Mr. Bridges emphatically put it, that the debt was hers, the car was hers — I’m sorry — the vehicle was hers. If she had had the right to take interest deductions, they would have belonged to her. If somehow she had souped the Ford Expedition up and it had become more valuable rather than less valuable and she had sold it, she would have been entitled to the profits; she would have had to pay the capital gains tax on it. And so here the income that’s attributable to the Ford Expedition, as a matter of state law, I find is entirely the former Mrs. Bridges’, and Mr. Bridges owes no deficiency. Oddly enough, representing himself, he has won.” Transcript, at p. 14.

Who says tax law is dull? Not when The Great Dissenter is on the case.


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