Attorney-at-Law

UNSAFE, UNSOUND, BUT YOU OWE TAX

In Uncategorized on 09/19/2017 at 18:44

Thomas Joseph Ritter, 2017 T. C. Memo. 185, filed 9/19/17, was in the wrong class of victim when the Office of the Comptroller of the Currency whanged the collective pates of Jamie Dimon & Co. for “’deficiencies and unsafe or unsound practices in [Chase Bank’s] residential mortgage servicing and in the Bank’s initiation and handling of foreclosure proceedings’ that the OCC had identified.” 2017 T. C. Memo. 185, at p. 3.

As a result of said pate-whanging, TJ, whose home was foreclosed by the Chasers during the meltdown, was a recipient of coin of the realm from the QSF, or Qualified Settlement Fund, which the deficient, unsafe and unsound ponied up to atone for their sins aforesaid.

The QSF was preceded by the IFR, or Independent Foreclosure Review, which foreclosed on Chase’s delicitons. That document delineated which among those who lost their homes while enduring bankruptcy proceedings lost their equity, and who was just getting some dough anyway.

TJ never asked for the review mandated by the IFR, which might have put him in the lost equity camp and made at least part of the payout tax-free as damages. Even if he did, Judge Chiechi points out Chase won a lift-stay in Bankruptcy Court, which means Chase proved no equity in the premises.

In the immortal words of Robert Alan Zimmerman, “when you ain’t got nuthin’ you got nuthin’ to lose.”  So TJ only gets the taxable payout.

I’ve done those lift-stays. I can’t say they were the best part of my practice.

You can guess the rest. TJ gets a 1099-MISC saying he got $31K, and talk to your tax adviser. Whether TJ talked to a tax adviser, or what his/her qualifications were, or whether TJ heeded said adviser in good faith, all are entirely immaterial here, as in a burst of magnanimity, IRS concedes the chops.

The tax is another story.

Judge Chiechi: “Section 468B and the regulations thereunder provide special rules for the taxation of a designated settlement fund, like the QSF.  Pursuant to section 1.468B-4, Income Tax Regs., whether a distribution from a designated settlement fund, like the QSF, is includible in a payee’s gross income is generally determined by reference to the claim in respect of which the distribution is made and as if the distribution were made directly to the payee by the transferor to the designated settlement fund.

“The $31,250 payment that petitioner received from the QSF was a payment to remedy certain ‘deficiencies and unsafe or unsound practices in [Chase Bank’s] residential mortgage servicing and in the Bank’s initiation and handling of Section 468B and the regulations thereunder provide special rules for the taxation of a designated settlement fund, like the QSF.  Pursuant to section 1.468B-4, Income Tax Regs., whether a distribution from a designated settlement fund, like the QSF, is includible in a payee’s gross income is generally determined by reference to the claim in respect of which the distribution is made and as if the distribution were made directly to the payee by the transferor to the designated settlement fund.

“The $31,250 payment that petitioner received from the QSF was a payment to remedy certain ‘deficiencies and unsafe or unsound practices in [Chase Bank’s] residential mortgage servicing and in the Bank’s initiation and handling of foreclosure proceedings’ that the OCC had identified.  Pursuant to the IFR and the February 28, 2013 amendment, a borrower was not required to show financial harm or request a review through the IFR in order to receive a monetary payment.  The February 28, 2013 amendment expressly provided that the payments from the QSF did not ‘in any manner reflect specific financial injury or harm that may have been suffered by borrowers receiving payments’.  Moreover, the categories for the so-called standard payment amounts set forth in a document titled ‘Independent Foreclosure Review Payment Agreement Details’ did not include any amounts for lost equity.” 2017 T. C. Memo. 185, at pp. 8-9.

In any event, the payment wasn’t anything like excess proceeds from a foreclosure sale that go to the foreclosed mortgagor, and which might escape tax per Section 121.

TJ owes the tax.

For some background on one of the many “unsafe and unsound” foreclosure practices, see my blogpost “Robosigner?” 12/23/16.

As this is a non-political blog, I will not comment on Messrs. Dimon & Co., and his fellows. That is, not here.

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