In Uncategorized on 07/15/2020 at 19:53

When the Black ’08 spread its shadow across the land, Congress sought to bail out the underwater home-mortgagors who jingle-mailed or otherwise had their indebtedness forgiven or extinguished, via now-extinct Section 108(a)(1)(E), which untaxed COI on Section 163 qualified principal residence debt.

Unhappily, either the debt was unsecured, or was not used for acquisition, construction, or improvement, in the case of Mark Weiderman and Jennifer Weiderman, 2020 T. C. Memo, 109, filed 7/15/20.

The debt starts with a signing bonus to Jennifer, who gets a no-interest loan to buy a new house in CA when she relocates from MA to become a heavy-hitter at a shoe company. The loan was due in 10 years, or if Jennifer left voluntarily or otherwise. The shoe company gave Jennifer the boot in less than a year. Jennifer couldn’t pay, so there were various modifications of the payout terms. The original note was unsecured, but a subsequent novation note was. Eventually Jennifer got out of some of the shoe company debt by selling the CA house, but the shoe company forgave the rest.

Judge Ashford: “Section 108(a)(1)(E) provides that gross income does not include amounts which would be includible as COD income if ‘the indebtedness discharged is qualified principal residence indebtedness’. The term ‘qualified principal residence indebtedness’ is defined as acquisition indebtedness (within the meaning of section 163(h)(3)(B)) with respect to the taxpayer’s principal residence. Sec. 108(h)(2), (5). Section 163(h)(3)(B)(i) provides that acquisition indebtedness is any indebtedness which is (1) incurred in acquiring, constructing, or substantially improving any qualified residence of the taxpayer and (2) secured by that residence. For these purposes, secured debt is any debt that is on the security of any instrument (such as a mortgage, deed of trust, or land contract) that makes the debtor’s interest in the qualified residence specific security for the payment of the debt (1) under which, in the event of default, the residence could be subjected to the same priority as a mortgage or deed of trust in the jurisdiction in which the property is situated and (2) is recorded or otherwise perfected in accordance with the applicable State law. Sec. 1.163-10T(o)(1), Temporary Income Tax Regs., 52 Fed. Reg. 48417 (Dec. 22, 1987).” 2020 T. C. Memo. 109, at pp. 24-25.

The problem for Jennifer is that the secured debt on the principal residence wasn’t qualified.

“Although [shoe company] recorded the deed of trust with the Los Angeles County, California, Registrar-Recorder, the $280,000 debt was not “incurred in acquiring, constructing, or substantially improving” the [residence] property. Indeed, the … promissory note conditioned repayment of the $280,000 upon the sale of the [residence] property. Like the indebtedness of $500,000, the indebtedness of $280,000 was therefore not acquisition indebtedness, and thus [shoe company]’s cancellation of $35,000 of that indebtedness… shortly before the sale of the [residence] property was not cancellation of qualified principal residence indebtedness.” 2020 T. C. Memo. 109, at p. 27.

There’s the usual unsubstantiated business deductions, but there’s nothing to spend time on.

There’s also a reopener joust for Boss Hossery, as this case was tried pre-Graev, but Jennifer and Mark lose that one. And they didn’t tell their preparers the whole story.








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