CCA 201112008
Being as attached to double entry as any other accountant, I understand the theory behind making cancellation of indebtedness taxable income. Somebody writes off a loan receivable. If the debtor does not pick up income that big balance sheet in the sky will be out of balance creating severe perturbances in the space time continuum. Still I put it in the same category as the auditors putting a going concern qualification on financial statements. It's kicking somebody when they are down.
There is relief from cancellation of indebtedness income. It does not apply if you are in bankruptcy of if you are insolvent to the extent of your insolvency. It always seemed to me that there should be a presumption of insolvency when there is debt discharge, but nobody ever asks me.
This ruling is a bit of good news for some people who might otherwise be facing debt discharge income. It concerns victims of predatory lending practices :
Payments made by co. to settle allegations of unfair lending practices weren't gross income to borrowers under IRC Sec(s). 61(a)(12) where settlement had effect of equitably reforming loans by adjusting principal amount to amounts that borrowers would have obtained in absence of unfair lending practices, and where trustee's payments to loan holders and/or servicers didn't result in accession of wealth to borrowers.
Company provided funding to Bank to finance Loans to Borrowers. Borrowers used the proceeds of Loans to finance Assets, and the Assets secured Borrowers' obligations under the Loans. State investigated the activities of Company in financing the Loans and alleged that Company had engaged in unfair lending practices under State law. To avoid further investigation and possible legal action by State, Company entered into Settlement with State.
The Settlement states that Company enabled Bank to make unfair Loans with principal amounts in excess of the principal amount that Borrowers would have obtained in the absence of the unfair lending practices. The Company agreed to pay $x to an independent trustee of a settlement fund. The trustee will make payments to a Loan holder and/or servicer of a Borrower's Loan to reduce the amount a Borrower will repay on a Loan.
The Settlement has the effect of equitably reforming the Loans by adjusting the principal amounts to the amounts that the Borrowers would have obtained in the absence of the unfair lending practices. The trustee's payments to the Loan holders and/or servicers do not result in an accession to wealth to Borrowers. Consequently, the payments are not gross income to Borrowers under § 61 of the Internal Revenue Code (including § 61(a)(12)) and are not subject to information reporting requirements under § 6041 or § 6050P.
So if the state regulators finally caught up with the tin men who got your aunt to sign a $50,000 note to put $10,000 worth of siding on her house, she doesn't have to worry about picking up income.
Showing posts with label cancelation of indebtedness. Show all posts
Showing posts with label cancelation of indebtedness. Show all posts
Friday, June 24, 2011
Wednesday, June 1, 2011
Seven Year Itch ?
John Adair, et ux. v. Commissioner, TC Memo 2011-75
This was an appeal from a collection due process hearing. Taxpayers had multiple liens on their house for different tax obligations. If all the liens were released they would have been able to borrow enough to pay off one of their obligations. Collections decided not to go for half a loaf. Tax Court indicated that IRS had not abused its discretion:
In his discretion, the Appeals officer decided that the benefits of the Adairs' proposal, i.e. the $58,108 in cash the government would have received, was outweighed by the impairment of the government's ability to collect the much greater total of the amounts as to which the notices of the two tax liens gave the government priority over other claims on their assets. We do not find that the Appeals officer abused his discretion.
Mona L. Herrington v. Commissioner, TC Memo 2011-73
This case was mainly interesting because of the story.
Petitioner's relationship with the boyfriend was marked by intimidation and physical abuse. When she failed to do his bidding or attempted to leave him, he reacted violently. He once threw her from a moving car. Another time when she threatened to leave him, he placed a gun against her forehead and cocked the hammer. On another occasion, in midwinter, he hit her in the head with a beer bottle and threw her from a boat into a lake. On another occasion, she testified credibly, he “gave me a picture of my daughter with her face shot out, and told me that's what would happen to her if I tried to leave.”
At some point after becoming involved with petitioner, the boyfriend obtained a video poker license and opened an establishment in Monroe, Louisiana. After only a few months, he lost his license for misdeeds that included selling liquor to a minor. The boyfriend convinced petitioner to open her own video poker business.
In 1996 petitioner acquired two video poker licenses in her own name. Because, according to petitioner's testimony, the licenses were required “to be run separately”, she opened two sandwich shops next door to each other in Farmerville, Louisiana, each with a video poker machine. Petitioner worked in the shops making sandwiches and dealing with the public. The boyfriend took charge of the finances and the books and had check-signing authority on the business bank accounts. Virtually all the shops' income resulted from video poker revenue.
Taxpayer claimed a compensation deduction for the money that Prince Charming took out of the business. The Tax Court determined that there was no intent to compensate, but despite how tough they can be on innocent spouses, the Tax Court can sometimes recognize a damsel in distress. They allowed the amounts he had taken as theft losses.
On a preponderance of the evidence we find (and respondent does not contend otherwise) that petitioner had no prospect of being reimbursed for any amounts the boyfriend took and that she sustained the losses in the years for which she has claimed the deductions. There is no dispute as to the amounts. On the basis of all the evidence, we hold and conclude that petitioner is entitled to deduct as theft losses incurred in a trade or business the $114,000 that the boyfriend took in 1997 and the $96,000 that he took in 1998.
Jeffrey L. Marchisio v. Commissioner, TC Summary Opinion 2011-39
Sometimes I long to find out the story behind the story knowing that it will forever be a mystery. Mr. Marchisio was married for 15 years (1990-2005). In 1997, his wife forged his signature to a loan document in order to buy a car. Mr. Marchisio found out about the transaction in 2007 when he received a 1099-C from Wells Fargo reflecting the cancelation of a loan in the amount of $5,358.
Petitioner disputes that he borrowed money from Wells Fargo or that he was a signatory to a financing agreement. Petitioner provided a copy of the financing contract to respondent, and the parties provided a copy of the financing contract to the Court. The financing contract includes two signatures, that of petitioner's former spouse and a purported signature of Jeffrey Marchisio. Petitioner asserts that the purported signature is not his. The Court notes that the purported signature on the financing contract does not appear to match petitioner's signature on the petition or on the stipulation of facts.
So the Tax Court went with the taxpayer on this one. In the very unlikely event that Mr. Marchisio was pulling a fast one, I have to give him credit for having the presence of mind to get someone else to sign his name to the stipulation that went to the Tax Court. From reading a lot of decisions I have concluded that there are some really dumb people out there or some otherwise smart people who think Tax Court judges are really dumb. Regardless, I believe that Mr. Marchisio did not know about the loan. What is really intriguing is that he never saw the car. So we are left to wonder who the heck was driving that car. Noting that the former Mrs. Marchisio forged her husbands name to a loan document to purchase the car after she had been married to him for seven years, my imagination becomes inflamed. Why would a married woman buy a car for someone. A little seven year itch maybe.
This was an appeal from a collection due process hearing. Taxpayers had multiple liens on their house for different tax obligations. If all the liens were released they would have been able to borrow enough to pay off one of their obligations. Collections decided not to go for half a loaf. Tax Court indicated that IRS had not abused its discretion:
In his discretion, the Appeals officer decided that the benefits of the Adairs' proposal, i.e. the $58,108 in cash the government would have received, was outweighed by the impairment of the government's ability to collect the much greater total of the amounts as to which the notices of the two tax liens gave the government priority over other claims on their assets. We do not find that the Appeals officer abused his discretion.
Mona L. Herrington v. Commissioner, TC Memo 2011-73
This case was mainly interesting because of the story.
Petitioner's relationship with the boyfriend was marked by intimidation and physical abuse. When she failed to do his bidding or attempted to leave him, he reacted violently. He once threw her from a moving car. Another time when she threatened to leave him, he placed a gun against her forehead and cocked the hammer. On another occasion, in midwinter, he hit her in the head with a beer bottle and threw her from a boat into a lake. On another occasion, she testified credibly, he “gave me a picture of my daughter with her face shot out, and told me that's what would happen to her if I tried to leave.”
At some point after becoming involved with petitioner, the boyfriend obtained a video poker license and opened an establishment in Monroe, Louisiana. After only a few months, he lost his license for misdeeds that included selling liquor to a minor. The boyfriend convinced petitioner to open her own video poker business.
In 1996 petitioner acquired two video poker licenses in her own name. Because, according to petitioner's testimony, the licenses were required “to be run separately”, she opened two sandwich shops next door to each other in Farmerville, Louisiana, each with a video poker machine. Petitioner worked in the shops making sandwiches and dealing with the public. The boyfriend took charge of the finances and the books and had check-signing authority on the business bank accounts. Virtually all the shops' income resulted from video poker revenue.
Taxpayer claimed a compensation deduction for the money that Prince Charming took out of the business. The Tax Court determined that there was no intent to compensate, but despite how tough they can be on innocent spouses, the Tax Court can sometimes recognize a damsel in distress. They allowed the amounts he had taken as theft losses.
On a preponderance of the evidence we find (and respondent does not contend otherwise) that petitioner had no prospect of being reimbursed for any amounts the boyfriend took and that she sustained the losses in the years for which she has claimed the deductions. There is no dispute as to the amounts. On the basis of all the evidence, we hold and conclude that petitioner is entitled to deduct as theft losses incurred in a trade or business the $114,000 that the boyfriend took in 1997 and the $96,000 that he took in 1998.
Jeffrey L. Marchisio v. Commissioner, TC Summary Opinion 2011-39
Sometimes I long to find out the story behind the story knowing that it will forever be a mystery. Mr. Marchisio was married for 15 years (1990-2005). In 1997, his wife forged his signature to a loan document in order to buy a car. Mr. Marchisio found out about the transaction in 2007 when he received a 1099-C from Wells Fargo reflecting the cancelation of a loan in the amount of $5,358.
Petitioner disputes that he borrowed money from Wells Fargo or that he was a signatory to a financing agreement. Petitioner provided a copy of the financing contract to respondent, and the parties provided a copy of the financing contract to the Court. The financing contract includes two signatures, that of petitioner's former spouse and a purported signature of Jeffrey Marchisio. Petitioner asserts that the purported signature is not his. The Court notes that the purported signature on the financing contract does not appear to match petitioner's signature on the petition or on the stipulation of facts.
So the Tax Court went with the taxpayer on this one. In the very unlikely event that Mr. Marchisio was pulling a fast one, I have to give him credit for having the presence of mind to get someone else to sign his name to the stipulation that went to the Tax Court. From reading a lot of decisions I have concluded that there are some really dumb people out there or some otherwise smart people who think Tax Court judges are really dumb. Regardless, I believe that Mr. Marchisio did not know about the loan. What is really intriguing is that he never saw the car. So we are left to wonder who the heck was driving that car. Noting that the former Mrs. Marchisio forged her husbands name to a loan document to purchase the car after she had been married to him for seven years, my imagination becomes inflamed. Why would a married woman buy a car for someone. A little seven year itch maybe.
Monday, April 11, 2011
RTFI - Read The Instructions
Brian J. Talaske v. Commissioner, TC Summary Opinion 2011-33
I really don't like the outcome of this case. The basic story is one that I have seen before. A creditor writes off somebody's debt. Time passes. Someone who works for the creditor senses anomalies in the space time continuum. What is the problem ? The creditor has taken a deduction without someone picking up income. That big balance sheet in the sky is out of balance. Crap. We forgot to send out the 1099-C. Let's send it out now. They don't know where the dead beat is or in one case even have his correct name, but they've got a social security number and they have the address of the IRS so out it goes.
That's pretty much the story with Mr. Talaske, except unlike Dennis Gaffney a/k/a Thomas Gaffney, they seem to have gotten his name correct:
In March 2002, petitioner obtained a First USA VISA (First USA) credit card. Petitioner transferred to this new account balances from credit cards issued by other financial institutions.
In September 2002, petitioner defaulted on his First USA account.
As of March 31, 2003, petitioner's outstanding balance on his First USA account was $23,119.99, consisting of principal of $20,291.22 and finance charges of $2,828.77. On that date, First USA “charged off” principal of $20,291.22 and finance charges of $2,828.77, thereby resulting in a “new balance” of zero.
In or about 2004, First USA was acquired by JPMorgan Chase (Chase). For tax year 2005, Chase issued to petitioner a Form 1099-C, Cancellation of Debt, showing cancellation of indebtedness on December 31, 2005, of $20,291.22. The account number listed on the form matches the number of petitioner's credit card account with First USA.
Petitioner does not recall receiving any Form 1099-C from Chase in 2006, and his Form 1040, U.S. Individual Income Tax Return, for tax year 2005, which was prepared and timely filed in 2006, did not report any income from cancellation of indebtedness.
My first managing partner, who was running a firm founded by his father, who also ran a finance company, had many wise sayings that had been handed down by his father. One of them was :
You'll never get out of debt by borrowing.
I have to congratulate Mr. Talaske on finding a loophole to that principle. If you borrow from somebody who writes it off, you will get out of debt. I doubt that JP Morgan Chase bought First USA because First USA had such a brilliant business model. Give somebody money to pay off his credit card bills. Wait one year. Write off. Regardless, apparently JP Morgan Chase was a little more compulsive about compliance or something.
When this happened to Mr. Gaffney, he took the matter to tax court and the court determined that whenever it was that the discharge occurred, it wasn't the year of the 1099-C. Mr. Gaffney apparently was a little more on the ball though. Here is what happened with Mr. Talaski:
The March 24, 2008 notice of deficiency was mailed to petitioner at his last known address and was received by him no later than March 30, 2008. Notwithstanding the language in the notice of deficiency about filing a petition with the Tax Court "[i]f you want to contest this determination in court before making any payment,” petitioner did not do so. Rather, by letter dated March 30, 2008, petitioner wrote to respondent's Holtsville, New York service center, the office that had issued the deficiency notice, stating (inter alia) that “I continue to object” and “I will petition the tax court as required if the IRS fails to recognize the errors of the IRS claims”.
He didn't read the instructions, so he didn't get a chance to contest the deficiency in tax court. So what is he doing in tax court now ?
Petitioner having failed to file a petition for redetermination, respondent assessed the determined deficiency, together with statutory interest, on August 11, 2008, see secs. 6213(c), 6601(a), and made notice and demand for payment pursuant to section 6303(a). Petitioner did not satisfy the outstanding liability.
On December 1, 2008, respondent sent petitioner a Final Notice of Intent To Levy And Notice Of Your Right To A Hearing in respect of the outstanding liability. Petitioner responded by filing a Form 12153, Request for a Collection Due Process or Equivalent Hearing.
What many people do not realize is that there are two distinct sets of processes involved in the tax system. One has to do with the determination of what the correct tax is. The other is about how, when and how much of, if any, that correct amount will be paid. It sometimes seems that there are two types of people and two types of practitioners. One group thinks that when the first process is complete, the taxpayer just writes a check. The other group doesn't really pay much attention to the first process, since the "correct tax" is merely of academic interest.
Mr. Talaske, being pro se, understandably given his overall circumstances and the relatively small stakes, apparently didn't understand the system. He blew his chance to argue about what the correct tax was. Although you "doubt as to liability" is one of the boxes that you can check on Form 12153, those guys really don't want to hear about it.
The Tax Court noted that Mr. Talaske might have a decent argument:
Finally, petitioner argues that regardless of when his credit card debt with First USA may have been canceled, he was insolvent at the time, which, in petitioner's view, justifies his failure to report the $20,291.22 amount on any return. In this regard, the record does strongly hint of petitioner's financial frailty;
Unfortunately they don't think they can help him:
however, petitioner's insolvency at any particular point in time was never proven. otherwise have an opportunity to dispute such tax liability. Sec. 6330(c)(2)(B). Stated otherwise, a taxpayer may not challenge the underlying liability in an administrative hearing, and therefore this Court may not review that liability in a subsequent collection review proceeding such as the instant one, if the taxpayer received a notice of deficiency or otherwise had a prior opportunity to dispute the underlying liability
It seems to me that there should almost be a presumption of insolvency, when people have cancellation of indebtedness income. Why else is the debt being discharged ? I'm not sure how sorry I feel for Mr. Talaske, but the decision is overall very unsatisfying.
I really don't like the outcome of this case. The basic story is one that I have seen before. A creditor writes off somebody's debt. Time passes. Someone who works for the creditor senses anomalies in the space time continuum. What is the problem ? The creditor has taken a deduction without someone picking up income. That big balance sheet in the sky is out of balance. Crap. We forgot to send out the 1099-C. Let's send it out now. They don't know where the dead beat is or in one case even have his correct name, but they've got a social security number and they have the address of the IRS so out it goes.
That's pretty much the story with Mr. Talaske, except unlike Dennis Gaffney a/k/a Thomas Gaffney, they seem to have gotten his name correct:
In March 2002, petitioner obtained a First USA VISA (First USA) credit card. Petitioner transferred to this new account balances from credit cards issued by other financial institutions.
In September 2002, petitioner defaulted on his First USA account.
As of March 31, 2003, petitioner's outstanding balance on his First USA account was $23,119.99, consisting of principal of $20,291.22 and finance charges of $2,828.77. On that date, First USA “charged off” principal of $20,291.22 and finance charges of $2,828.77, thereby resulting in a “new balance” of zero.
In or about 2004, First USA was acquired by JPMorgan Chase (Chase). For tax year 2005, Chase issued to petitioner a Form 1099-C, Cancellation of Debt, showing cancellation of indebtedness on December 31, 2005, of $20,291.22. The account number listed on the form matches the number of petitioner's credit card account with First USA.
Petitioner does not recall receiving any Form 1099-C from Chase in 2006, and his Form 1040, U.S. Individual Income Tax Return, for tax year 2005, which was prepared and timely filed in 2006, did not report any income from cancellation of indebtedness.
My first managing partner, who was running a firm founded by his father, who also ran a finance company, had many wise sayings that had been handed down by his father. One of them was :
You'll never get out of debt by borrowing.
I have to congratulate Mr. Talaske on finding a loophole to that principle. If you borrow from somebody who writes it off, you will get out of debt. I doubt that JP Morgan Chase bought First USA because First USA had such a brilliant business model. Give somebody money to pay off his credit card bills. Wait one year. Write off. Regardless, apparently JP Morgan Chase was a little more compulsive about compliance or something.
When this happened to Mr. Gaffney, he took the matter to tax court and the court determined that whenever it was that the discharge occurred, it wasn't the year of the 1099-C. Mr. Gaffney apparently was a little more on the ball though. Here is what happened with Mr. Talaski:
The March 24, 2008 notice of deficiency was mailed to petitioner at his last known address and was received by him no later than March 30, 2008. Notwithstanding the language in the notice of deficiency about filing a petition with the Tax Court "[i]f you want to contest this determination in court before making any payment,” petitioner did not do so. Rather, by letter dated March 30, 2008, petitioner wrote to respondent's Holtsville, New York service center, the office that had issued the deficiency notice, stating (inter alia) that “I continue to object” and “I will petition the tax court as required if the IRS fails to recognize the errors of the IRS claims”.
He didn't read the instructions, so he didn't get a chance to contest the deficiency in tax court. So what is he doing in tax court now ?
Petitioner having failed to file a petition for redetermination, respondent assessed the determined deficiency, together with statutory interest, on August 11, 2008, see secs. 6213(c), 6601(a), and made notice and demand for payment pursuant to section 6303(a). Petitioner did not satisfy the outstanding liability.
On December 1, 2008, respondent sent petitioner a Final Notice of Intent To Levy And Notice Of Your Right To A Hearing in respect of the outstanding liability. Petitioner responded by filing a Form 12153, Request for a Collection Due Process or Equivalent Hearing.
What many people do not realize is that there are two distinct sets of processes involved in the tax system. One has to do with the determination of what the correct tax is. The other is about how, when and how much of, if any, that correct amount will be paid. It sometimes seems that there are two types of people and two types of practitioners. One group thinks that when the first process is complete, the taxpayer just writes a check. The other group doesn't really pay much attention to the first process, since the "correct tax" is merely of academic interest.
Mr. Talaske, being pro se, understandably given his overall circumstances and the relatively small stakes, apparently didn't understand the system. He blew his chance to argue about what the correct tax was. Although you "doubt as to liability" is one of the boxes that you can check on Form 12153, those guys really don't want to hear about it.
The Tax Court noted that Mr. Talaske might have a decent argument:
Finally, petitioner argues that regardless of when his credit card debt with First USA may have been canceled, he was insolvent at the time, which, in petitioner's view, justifies his failure to report the $20,291.22 amount on any return. In this regard, the record does strongly hint of petitioner's financial frailty;
Unfortunately they don't think they can help him:
however, petitioner's insolvency at any particular point in time was never proven. otherwise have an opportunity to dispute such tax liability. Sec. 6330(c)(2)(B). Stated otherwise, a taxpayer may not challenge the underlying liability in an administrative hearing, and therefore this Court may not review that liability in a subsequent collection review proceeding such as the instant one, if the taxpayer received a notice of deficiency or otherwise had a prior opportunity to dispute the underlying liability
It seems to me that there should almost be a presumption of insolvency, when people have cancellation of indebtedness income. Why else is the debt being discharged ? I'm not sure how sorry I feel for Mr. Talaske, but the decision is overall very unsatisfying.
Sunday, September 19, 2010
Blast From The Past
Tax court summary opinions frequently feature taxpayers bringing fairly lame arguments forward. Like the couple who managed to log 90,000 miles, because whenever they were out and about they were in business. We should expect higher standards from the IRS. So it is a little disturbing to witness the IRS being lame. On the other hand, taxpayer victories in the tax court help us continue to have faith in the system.
Dennis W. Gaffney v. Com (TC Summary Opinion 2010-128) concerns cancellation of indebtedness income. Accountants understand cancellation of indebtedness income, because they think in double entry. Some of them think there is a big balance sheet in the sky. If somebody writes something off without somebody picking up income the fabric of space time will become disturbed. They can be extremely disturbed by asymmetrical results. Personally I put taxing debt discharge income in the same category as the GAAP going concern qualification. It's kicking somebody when they are down.
The exact year that you recognize income is always an important issue, since your tax is an annual computation. It is particularly significant with COI income though, since COI income is excludable to the extent that you are insolvent. One has to wonder why anybody would be cancelling your indebtedness for you when you are not insolvent. The Gaffney case is all about timing.
The Gaffneys had lived in Hawaii, but because of some business disputes they found that they had to abandon their residence and in 1993 they moved to Carefree, Arizona. Apparently there is something magical in that towns name. In 1994 the Bank of America foreclosed their Hawaii home and in 1995 obtained a deficiency judgement in the amount of $90,845. News of these events did not make it to the Gaffneys who were at least free of those cares in Carefree. In August of 1995 they moved to Cave Creek, Arizona where they continued to have mailed forwarded from their former Hawaii residence. No news of the foreclosure or deficiency judgement reached them there either. In 1998 they moved to Oregon.
In 1996 Mr. Gaffney had settled a dispute with the insurer of his business and paid off his various creditors. He was not aware of the judgment by Bank of America and they were not involved in the settlement. The problem may have been related to the fact that BOA attributed the loan deficiency to Thomas Gaffney, who according to BOA had the same address and social security number as Dennis Gaffney, who is apparently unacquainted with his fiscal doppelganger. BOA finally gave up collection action in 2001. Their last activity was the creation of an asset profile on Thomas Gaffney in April of 2003.
There must have been a BOA accounting minion troubled by perturbances in the big balance sheet in the sky. In 2006 they issued a 1099-C to the mysterious Thomas using Dennis's social security number and 1998 address. What the IRS brought to the tax court was the 1099-C and a letter from Bank of America saying that they had reviewed the file and that the amount of discharge was correct and had occurred in 2006.
The court was not impressed. There was a discussion of when the discharge may have occurred. The argument for 1994 was fairly strong, but it wasn't really necessary to make an exact determination. The important point was that whenever the discharge occurred it was well before 2006.
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