In Uncategorized on 05/29/2019 at 16:00

If tracing basis through a daisy-chain of 1031 like-kind exchanges involving multiple properties is your kind of amusement, check out Charles K. Breland, 2019 T. C. Memo. 59, filed 5/29/19. Judge Pugh shows you what happens if you don’t.

Unfortunately, with burden of proof not shifted from Chas to IRS, Chas’ claimed basis of bortscht (please pardon this arcane technical term) gives way to what was actually paid (even though Chas apparently jumped all the hurdles that Section 1031 imposes).

Judge Pugh: “Respondent does not dispute that petitioners paid $322,720 in cash and borrowed $6,720,000 for their acquisition of Dauphin Island 1 or that their cost basis in Dauphin Island 2 was $5,613,287.  Respondent contends that petitioners have not substantiated their $751,953 basis in Dauphin Island 1, carried over from [relinquished property they swapped for the Dauphins] through two successive like-kind exchanges.  The only evidence of petitioners’ basis in [relinquished property] is an excerpt of a depreciation schedule from petitioners’ 2003 Form 1040; they did not offer a settlement statement or deed. But taxpayers cannot rely on tax returns to substantiate a tax item.  The parties’ stipulation also expressly noted that the 2003 return was not audited; thus, this is not a situation where respondent has already reviewed the underlying transaction.  We conclude that petitioners have not adequately substantiated their basis in [relinquished property] or, in turn, the basis that they carried over to Dauphin Island 1.” 2019 T. C. Memo. 59, at p. 12. (Citation omitted).

Well, Chas got foreclosed and went bankrupt, but as this was in 2008, he wasn’t alone.  IRS wants to claim COD for the deficiency between what Chas’ lender got on the “public outcry” at the Courthouse door in Mobile County, AL, and the balance due on Chas’ defaulted mortgage note.

If nonrecourse, that would be a snap. But this loan was recourse, the lender put in a claim on Chas’ post-foreclosure bankruptcy, and Chas claims the lender’s claim got paid in the Ch 11 bankruptcy. Judge Pugh takes as much judicial notice as she can, but the whole bankruptcy file isn’t in evidence, so at best all she can find is that the lender made a claim.

But IRS founders on the “clear and convincing evidence” test to prove the amount publicly outcried wasn’t FMV, and therefore the amount paid was the amount realized by Chas was the outcried.

Chas’ capital loss is a lot less than he claimed.

Takeaway- Doing basis calculations on a multi-property 1031 daisy-chain is a real pain. But not doing them, and not preserving them, is worse.

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