This week, Joe Kristan (CPA & Shareholder, Roth & Company (Des Moines, Iowa); Editor, Tax Update Blog) discusses a recent Tax Court case that illustrates the need for a “'sauce for the gander' rule that allows taxpayers to receive penalty payments from the IRS on the same basis as the IRS can impose penalties on taxpayers taking lame positions."
I’ll take your house, but the money I give you is for sweeping it.
The keys will be extra. It’s common to see a Tax Court decision where you wonder why they bothered to go to the trouble of litigating. It’s unusual when the puzzling litigant is the IRS.
When the real estate bubble popped in 2008, mortgage lenders were swamped with borrowers who couldn’t keep up the payments. To deal with all of the repossessions, they came up with deals to encourage delinquent borrowers to leave quietly without wrecking the house.
A California couple took advantage of such a deal when they got underwater on a second home in North Carolina (my emphasis):
In May 2012 petitioners entered into a deed in lieu of foreclosure agreement with Green Tree that included a “cash for keys” (cash for keys) payment. Under the terms of this agreement petitioners signed the deed over to Green Tree and in exchange the mortgage company forgave the balance of petitioners’ note on the property. Petitioners also agreed to vacate the property by a certain time and meet other specified requirements, including leaving the property in “broom-swept condition”, and in exchange petitioners would receive cash for keys payment.
The cash for keys program was designed by mortgage lenders to allow them to gain possession of a property quickly and avoid a long foreclosure process. Lenders began issuing these payments in exchange for borrowers’ vacating a property quickly and leaving it in good condition. A foreclosure process to reclaim a property can be time consuming, causing a lender to spend time and money and risk further damage to the property.
The bank made a $20,500 cash payment when the home passed inspection after the couple vacated. It’s obvious that the amount paid was part of the foreclosure. That’s how the taxpayer’s preparer reported it, with the cash payment reducing the loss on the home sale.
Obvious to everyone but the IRS.
The lender made the mistake of reporting the payment on a 1099-MISC as “non-employee compensation.” That was all the IRS needed to say that the payment was for something other than the house. For exceptional broomsmanship, perhaps.
The Tax Court found the IRS arguments unimpressive:
Respondent argues that the $20,500 cash for keys payment is an incentive payment which petitioners received only by fulfilling the conditions of the cash for keys program. Respondent asserts that this incentive payment is not part of the amount realized in the exchange and should instead be considered ordinary income. It is clear from the record that Green Tree did not hire petitioner husband for services or have another reason to issue the cash for keys payment. Rather, the cash for keys payment was part of a single transaction, the property sale or exchange; Green Tree paid petitioners $20,500 to avoid the lengthy and expensive legal process of foreclosure as part of the deed in lieu of foreclosure process. The two agreements are inextricably linked, and there is no basis for treating them separately.
Cases like this show why we need a “sauce for the gander” rule that allows taxpayers to receive penalty payments from the IRS on the same basis as the IRS can impose penalties on taxpayers taking lame positions. The taxpayers had to go through the time and effort of filing a Tax Court petition and winning (pro se!) the case against three(!) lawyers from the U.S. Department of Justice, the world’s largest law firm, to avoid a tax that obviously should never have been assessed.
Bobo v. Commissioner, T.C. Summ. Op. 2016-74 (Nov. 8, 2016).
Here’s the rest of this week’s Tax Roundup:
Monday, November 7, 2016
Annette Nellen, Sharing economy tax checklist.
Hank Stern, If you like your doctor... (InsureBlog). A useful video montage of an often made, rapidly forgotten promise, and a reminder of how much we should believe politician stuff, and a useful link to what went wrong in with Kansas tax reforms.
Jack Townsend, Former Business Professor Pleads Guilty to Tax Related Crimes; In Addition, Will Pay $100 Million FBAR Penalty. “This is the first I can recall where there was a relinquishment of citizenship with a false Form 8854.”
Jason Dinesen, S-Corporations and Charitable Contributions: A Brief Overview. “Here’s the basic rule: if an S-corp makes a charitable contribution, the contribution is not deductible on the S-corp tax return, but is instead taken as a deduction by the corporation’s shareholder(s).”
Jim Maule, An Entity That Doesn’t Exist Can’t Petition the Tax Court. “If the taxpayer does not exist for purposes of litigating in the Tax Court, does it exist for purposes of being the recipient of a notice of deficiency?”
Joseph Henchman, Trump and Clinton Campaigns Leave Lots to the Imagination on Taxes; Bipartisan Support for Fairer, Simpler Tax Code; Why Supporters of a Carbon Tax Oppose Its Passage on Washington Ballot (Tax Policy Blog).
Kay Bell, ‘Trusted’ taxpayers to get more ID theft protection. “The IRS and its Security Summit partners are confident that these ‘trusted customer’ features, taken together, will help federal and state tax collectors do an even better job of detecting fraudulent returns and protecting taxpayers.”
Kent Kramer, Vote with your ballot, not your portfolio (IowaBiz.com). “While the idea of predicting stock market performance based on a single signal is a popular diversion for the media and conversation, investors always gain the most benefit when they structure their portfolios for long-term success based on their personal financial goals, rather than who they plan to vote for in November.”
Leslie Book, TIGTA Reports on IRS Offer In Compromise Program (Procedurally Taxing). “On balance, TIGTA found that IRS has made significant improvements in the way it administers offers…”
Lew Taishoff, LEADING CAPTIVITY CAPTIVE. “Well, IRS has a checklist of phony insurance deals where there is no shifting of risk, no economic substance, no adherence to generally-accepted industry-wide practices, and a roundy-round with money to dodge taxes.”
Megan Lewczyk, Crunching Some Numbers on the Cubs (Going Concern). I think the key number is 11 post-season wins.
News you can use New York Supreme Court: Hustler Club’s Sale Of ‘Beaver Bucks’ Is Subject To Sales Tax. (Tony Nitti)
Peter Reilly, How Much Do Large Corporations Pay In Income Tax ? Probably Less Than You Think. A bold trip into the weeds of corporation tax provisions. Peter focuses on stock options in discussing Facebook. Remember, when a company deducts stock options, the same amount is compensation income to the option holder — with employment tax, and probably a higher rate than the corporation rate.
Philip Stallworth, Chenxi Lu, Gene Steuerle, Joseph Rosenberg, Both Clinton and Trump would reduce tax incentives for charitable giving (TaxVox)
Robert D. Flach brings the last Buzz of the election season, with home office deductions, 529 plans, and more on the menu.
Robert Wood, Leaving U.S. Over Election? Hiding Assets On Exit Is Criminal, Draws $100 Million Fine
Roberton Williams, Donald Trump’s tax plan would hit single parents hard
Roger McEowen, Selected Tax Issues For Rural Landowners Associated With Easement Payments
TaxGrrrl, IRS Warns On New Scam Targeting Tax Professionals. “In the scam, which is a variation on a prior scam, tax professionals receive an email asking them to update their accounts: the link in the email directs to a bogus website which purports to be an e-services registration page.”
TaxProf, The IRS Scandal, Day 1276, Day 1277, Day 1278.
Tuesday, November 8, 2016
Caleb Newquist ponders the reduction in IRS scam calls since the big call center raid last month in India, and the doughty scammers still at work.
Kay Bell, Election Day 2016 is here. Finally. Vote!
Len Burman, How Trump could take advantage of his business tax loophole (TaxVox). “Donald Trump’s proposal to slash tax rates on unincorporated businesses would create huge incentives for income tax avoidance and evasion, and his own behavior illustrates why.”
Leslie Book, District Court Blesses Sale of Marital House to Satisfy Other Spouse’s Tax Liability (Procedurally Taxing)
Lew Taishoff, CLEANING UP. “Big Jim wanted to deduct the legal fees in settling the case, but as the claim originated in a non-business environment, no deduction for settlement or costs of procuring same.”
Peter Reilly, Top 100 S&P Companies Averaged 25% In Income Taxes Actually Paid. Peter continues his brave slog through the weeds of accounting treatment of income taxes. “If like a lot of people you care about income and wealth inequality getting out of hand, understanding how income taxes actually work might be a useful thing.”
Robert D. Flach says you should VOTE!
Robert Wood, IRS Forms 1099 Are Critical, And Due Early In 2017.
Sam Brunson, Donald Trump —> Mandatory Tax Return Disclosure (Surly Subgroup). “So it looks like Trump wasn’t lying when he said he wouldn’t release his tax returns—it’s Election Day, and we still haven’t seen them.” He also grades candidate tax return disclosures.
Scott Drenkard, State Tax Successes in 2016 Thanks to You, Our Readers and Supporters! (Tax Policy Blog)
Stuart Gibson, Who Decides? (Tax Analysts Blog). The post ponders the proliferation of referenda on tax policy.
Tax Foundation, Top State Tax Ballot Initiatives to Watch in 2016
Tax Justice Blog has A Revenues and Referenda Recap: Tax Questions Facing Voters in Many States on Tuesday.
TaxGrrrl, with a stronger stomach than I, offers Live Blog: Election Day 2016. Both the Tax Foundation and the Tax Policy Center have calculators to estimate the effect the candidates’ tax proposals will have on your return. TPC has a full page of election issues. Tax Foundation offers a page comparing the 2016 Presidential Tax Reform Proposals
Wednesday, November 9, 2016
Jack Townsend has updated his report Former Business Professor Pleads Guilty to Tax Related Crimes; In Addition, Will Pay $100 Million FBAR Penalty with links to the criminal information, plea agreement and statement of facts.
Jared Walczak stayed up late tracking tax related ballot questions.
Jason Dinesen, How are “B-Corporations” Taxed? “A ‘B-corp’ refers to a ‘benefit corporation.'”
Jim Maule, Is A Tax More Effective Than Licensing? On whether a tax on pet food can take the place of pet licensing.
Kay Bell, President Trump and your taxes. “Although it probably will be relatively easy to push the changes through the GOP Congress, 2017 still is likely to be a transition year. I’d count on the tax code staying as is for the first year of Trump’s administration.”
Keith Fogg, Pursuing Non-Filers (Procedurally Taxing). “The unflattering report exposes some of the dysfunction of the IRS and how that dysfunction, in this case, benefits high income non-filers.”
Lew Taishoff, THE SHILL. “A busy day for CSTJ Panuthos, as he deals with shilling for dollars and hustlers at the Hustler.”
Joe Kristan, What we can learn from a fallen Tax Court judge. My newest post at IowaBiz.com, the Des Moines Business Record Business Professionals’ Blog.
Robert D. Flach, THE WORST THAT COULD HAPPEN! Robert wakes up unhappy this morning.
Robert Wood, If IRS Labels You Willful Expect Penalties, Maybe Prosecution. “The tax law draws a line between non-willful and willful, and penalties or even prosecution can hang in the balance.”
Roger McEowen, Are You A Farmer? It Depends! “The definition of a farmer is different for different provisions in the Code.”
TaxProf, The IRS Scandal, Day 1280
Tony Nitti, President Trump: What Does It Mean For Your Tax Bill? “Lower and Fewer Tax Rates; Goodbye Obamacare”
Thursday, November 10, 2016
Andrew Mitchel, 2016 Third Quarter Published Expatriates – Second Highest Ever
Arnold Kling, What Will be the Significance of Mr. Trump? “On health care policy, pundits are talking as if a Senate filibuster is inevitable if the Republicans try to repeal Obamacare. I would bet against this. For one thing, I don’t think Democratic pollsters are going to be advising their clients to fall on their swords to keep Obamacare”
Career Corner. Tax Reform (TaxCPA1990, Going Concern). “Should tax CPAs be worried about major tax overhaul (switch to a flat / fair tax) or are our jobs likely secure?” Don’t worry, friend. Our jobs are too secure.
Danshera Cords, Unfinished Business in Senate: Time to Approve Nominated Tax Court Judges (Procedurally Taxing)
Darrin Mish, RESPECT Act to protect against IRS asset seizures awaiting final Congressional action. “In a rare show of bipartisanship, the Clyde-Hirsch-Sowers RESPECT Act was passed unanimously this fall by the House of Representatives.” A rare guest post at Kay Bell’s blog.
Des Moines Register, Tax cuts, legal fireworks likely from GOP-led Iowa Legislature; I hope the Tax Foundation’s excellent Iowa Tax Reform Options issued this year serves as a blueprint, along with the Tax Update’s Quick and Dirty Iowa Tax Reform Plan.
Howard Gleckman, Five Tax Policy Issues To Watch In The Trump Administration. “In contrast to other campaign promises, such his vow to build a wall at the US-Mexico border, Trump was highly malleable when it came to the specifics of his tax agenda. Indeed, Trump proposed three very different plans over the course of his campaign.”
Jack Townsend, Sixth Circuit Rejects Double Jeopardy Claim in Tax Prosecution Following State Civil Litigation Between Private Parties
Leandra Lederman, Letter Urging the Senate to Vote on U.S. Tax Court Nominations (Surly Subgroup). “Over 50 tax law professors have signed a letter (available here) urging the U.S. Senate to vote on U.S. Tax Court nominees.”
Lew Taishoff, “IT’S MY PARTY” “David B. Greenberg, Esq., claims that he’s the real party in interest in the Section 7430 claim he’s making after his client prevailed.”
Megan McArdle, Repeal Would Be Even Worse Than Obamacare. “While Trump will not be pushing particularly hard for repeal, he will probably not be pushing to save Obamacare either.”
Russ Fox, What Will President Trump Do To Our Taxes? “1. John Koskinen will soon be the ex-IRS Commissioner.”
TaxProf, The IRS Scandal, Day 1281.
Tyler Cowen quotes his Bloomberg column: “I think his natural instinct will be to look for some quick symbolic victories to satisfy supporters, and then pursue mass popularity with a lot of government benefits, debt and free-lunch thinking.”
Friday, November 11, 2016
David Vendler, Update on Issues Relating to Financial Institutions Underreporting Mortgage Interest to Millions of Consumers (Procedurally Taxing). “The issue literally involves billions and billions of dollars in mortgage interest deductions that millions of American homeowners are losing because of the failure of their mortgage servicers to properly report.”
Howard Gleckman, Trump’s Campaign Rhetoric May Have Been Populist But His Tax Plan Isn’t (TaxVox). “Many hedge fund operators, bankers, corporate executives, and the other fat cats Trump so disparaged on the stump would pay lower individual income tax rates than they do today.”
It’s Veterans Day. The IRS reminds us of the tax benefits for service personnel. Remember the veterans still with us, and those who never made it home.
Janet Novack, Will President Trump Cut Medicare And Social Security As Well As Taxes?
Jason Dinesen, Can You Get a Refund if You Pay Nothing In? “Maybe.”
Joseph Henchman, House Ways and Means Deep in Planning for Tax Reform; Chicago Next Up to Vote on Soda Tax; Seattle and L.A. Vote in Taxes for Transportation Improvements; San Diego Rejects Tax for NFL Stadium (Tax Policy Blog). This “lunch links” roundup says House reformers are working on a 100-day plan.
Kay Bell, Marijuana wins, taxes split on Nov. 8 ballots. “Only Arizona voters on Tuesday rejected personal marijuana legalization. The lone consolation for many disappointed Grand Canyon State supporters is that travel is easy to the neighboring, and pot-approving, states of Nevada, California and Colorado.”
Lew Taishoff, OH, CH J IRON FIST, YOU CRAFTY DEVIL! “Blogging Tax Court is so much fun.”
Megan Lewczyk, Tesco Bank Deals with Digital Heist (Going Concern). “Reports initially said around 30% of the company’s 136,000 current accounts got hit. However, new numbers released by the company said only 7% were actually missing money.”
Paul Neiffer, What are the Chances for Major Tax Reform in 2017? “With President-elect Trump, the chances of major tax reform in 2017 is extremely high.” Paul looks at what he sees coming, including “The new Section 385 rules on debt/equity are likely eliminated or changed dramatically.”
Roger McEowen, Watercourses and Boundary Lines. “Agricultural landowners owning land adjacent to a watercourse may be faced with a changing property line due to shifts in the size and location of the watercourse.”
Russ Fox, No Gambling Log, No Problem, Right? “The ‘bad for your psyche’ defense isn’t a good one at Tax Court.”
TaxGrrrl, O Canada: What You Need To Know About U.S. Taxes & Moving Across The Border. “Fleeing the country isn’t the silver bullet that you might expect to avoid reporting and paying taxes. So long as you’re a U.S. citizen or tax resident, you’re still required to file your federal income tax return with the Internal Revenue Service (IRS) every year and report your worldwide income.”
TaxProf, The IRS Scandal, Day 1282