In Uncategorized on 07/13/2020 at 16:47

This is the kind of conundrum within a puzzle that Judge James S. (“Big Jim”) Halpern loves. Edward J. Duffy and Shannon L. Duffy, 2020 T. C. Memo. 108, filed 7/13/20 are underwater on two OR properties. They short-sold the investment property, which they had converted from their getaway to rental for friends and family, and got Wells Fargo to forgive the home equity line of credit on their principal residence.

The question is COI: Cancellation of Indebtedness.

” When a creditor forgives debt in connection with the sale or exchange of property that secures the debt, the discharge of debt can either result in cancellation of indebtedness income or instead be included in the taxpayer’s amount realized from the sale, thereby increasing the taxpayer’s gain or reducing the taxpayer’s loss on the sale. The varying treatment of the debt discharge turns on whether the indebtedness was recourse or nonrecourse–that is, whether the creditor’s remedies were limited to the transferred property. Section 1.1001- 2(a)(1), Income Tax Regs., provides as a general rule that ‘the amount realized from a sale or other disposition of property includes the amount of liabilities from which the transferor is discharged as a result of the sale or disposition.’ Section 1.1001-2(a)(2), Income Tax Regs., however, provides: ‘The amount realized on a sale or other disposition of property that secures a recourse liability does not include amounts that are (or would be if realized and recognized) income from the discharge of indebtedness under section 61(a)(12).'” 2020 T. C. Memo. 108, at pp. 21-22.

IRS’ claim that the forgiven debt was recourse gets torpedoed by OR’s anti-deficiency statute (that’s not tax, that’s going after the mortgagor when the property isn’t worth the balance of the mortgage). OR law says that an administrative foreclosure (that is, nonjudicial), whether residential property or nonresidential,  bars the mortgagee from pursuing the mortgagor for the shortfall.

As for your jurisdiction’s anfractuosities, YMMV.

The principal residence COI goes off on Section 108(a)(1)(B) and (3), insolvency. The only COI income from Wells’ generosity is the difference between how much Wells forgave, and how much Ed’s and Shannon’s liabilities exceeded assets. Judge Halpern has a soft spot for a lady in distress, and Shannon tells a sorrowful tale, despite private schools for her children and Ed’s country club dues. Her lost wedding ring features prominently. Who says Tax Court Judges have no heart?

Finally, IRS ignores a Taishoff maxim: stipulate, don’t capitulate.

“The civil penalty approval form included in the record establishes that Ms. C approved the penalties for some of the years in issue, but respondent has not established that Ms. C is ‘the immediate supervisor of the individual’ who made the determination to assess penalties. See sec. 6751(b)(1). To establish that Ms. C’s approval complied with section 6751(b)(1), respondent relies on the parties’ stipulation that she ‘was the manager or supervisor of one or more of the auditing revenue agents’. The stipulation thus does not establish that Ms. C was the immediate supervisor of the person who made the initial determination to assess the penalties in issue (whether that person was Ms. K or someone else). According to the stipulation, Ms. C supervised some of the agents involved in the audit but not necessarily all of them. Thus, the record does not demonstrate that Ms. C was the immediate supervisor of the individual who made the initial determination to assess the penalties respondent seeks to impose with section 6751(b)(1), petitioners are not subject to an accuracy-related penalty under section 6662 for any of the years in issue.” 2020 T. C. Memo. 108, at pp. 58-59. (Names and footnote omitted).

The omitted footnote says IRS was trying to include a couple other years (hi, Judge Holmes) in Ms. C’s single-year sign-off. Judge Halpern isn’t going there, but you should.

I give a Taishoff “good job” on the Boss Hoss to the Duffys’ counsel.

Note- There’s a bunch of partnership stuff here, with guaranteed payments and SE tax on same, because Ed teamed up with a doctor to sell medical equipment, but this blogpost is long enough.







Leave a Reply

Please log in using one of these methods to post your comment: Logo

You are commenting using your account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

This site uses Akismet to reduce spam. Learn how your comment data is processed.

%d bloggers like this: