TaxProf Blog

Editor: Paul L. Caron, Dean
Pepperdine University School of Law

Wednesday, October 31, 2007

Camp on Proceduralist Reflections on Tax Consequences of Home Mortgage Foreclosures

Bryan Camp (Texas Tech) has posted Proceduralist Reflections on Tax Consequences of Home Mortgage Foreclosures, 117 Tax Notes 483 (10/29/07), on SSRN.  Here is the abstract:

In tax law and theory, procedure gets short shrift. Yet sometimes, procedure makes all the difference. That seems to me to be particularly true regarding the recent publicity over the tax consequences of foreclosures on taxpayers' principal residences. H.R. 3648, passed by the U.S. House of Representatives on October 4, 2007, and pending in Congress as of the date of this article, purports to address the alleged problem with the law. This article examines the pending legislation and, more importantly, examines the overlooked role of procedure in creating the problems faced by taxpayers who are told they have taxable income even when they have just taken a huge financial hit in losing their home.

My thesis is that Congress is amending the wrong statute. H.R. 3648 does little to help those taxpayers who find themselves in foreclosures because it completely ignores procedure. Congress should instead amend the statutes concerning third-party reporting procedure because current statutes force both the IRS and taxpayers into an inefficient process to find the right substantive answer. While I will also make a few observations about its substance, I will focus mostly on the procedural aspects of the bill -- or lack thereof. I propose an alternative statutory reform that can fix what is a very real problem for a great many taxpayers, taxpayers who theoretically owe nothing but as a practical matter get stuck with a hefty tax bill. Part I of this article reviews the substantive issue. Part II explains why the issue presented is really a procedural problem. Part III critiques H.R. 3648 and explains how true reform could be accomplished through a simpler amendment.

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Foreclosure victims should also be concerned about the danger of the bank suing them after foreclosure and trying to take the new house or attach a lien to it. If the house does not sell at sheriff sale for an amount to pay off the defaulted loan plus the extra foreclosure costs and late fees, the bank may be able to sue for a deficiency judgment and come after any other assets owned by the former homeowners. The bank will have to proceed with a new lawsuit after the foreclosure process is over, though, which will cost them additional time and resources.

Posted by: John | Dec 4, 2007 1:02:19 AM