Wednesday, October 19, 2011


The IRS has set its priorities for the coming year.  It is no secret, they are going after those who evade their responsibility to pay their taxes.  Foreign banks in bank secrecy jurisdictions have turned over literally thousands of names to the IRS to settle civil lawsuits brought by the United States Department of Justice in an effort to catch those that use foreign institutions to evade U.S. Tax obligations.
The IRS has given these types of taxpayers two opportunities to come forward voluntarily with voluntary disclosure initiatives which were done to give taxpayers fair notice that the IRS would no longer tolerate these types of foreign arrangements,
Approximately 19,000 taxpayers came forward and disclosed their foreign relationships through these two programs.
Now, the IRS plans a renewed effort to uncover hidden assets with new laws, new international information exchange agreements, and further use of the courts.  The IRS has found that there is approximately 96 percent compliance with the tax laws where there is accurate information reporting, and only 50 percent compliance where there is not.  It is a high priority of the United States to close this gap.
So beware and if you are one of the remaining taxpayers that has a foreign account that is not disclosed, see a tax attorney immediately to discuss your options.  Remember that the IRS intends to criminally prosecute these offenders in the future that did not come forward when they had the opportunity.

Tuesday, October 18, 2011

Potential of "Clawback" of Gifts made in 2011 and 2012

The President signed into law on December 17, 2010 the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010.  The Act reunified the Gift and Estate Tax when the maximum tax rate for both Gifts and Estates was set at 35 percent, and provided for a $5 Million applicable exclusion amount for both gift and estate tax purposes.  This new Act has the same problem as the old Act.  It has an automatic sunset provision and the law will then revert back to pre-Economic Growth and Tax Relief Reconciliation Act of 2001. 
If this happens the Gift and Estate tax rate will revert back to 55 percent with and applicable exclusion amount of $1,000,000 for gift and estate taxes.  The problem with this is that a clawback provision could be imposed for taxpayers that took advantage of the $5,000,000 gift tax exclusion in 2011 or 2012. 
If a clawback provision is applied in later years because the applicable exclusion amount goes down, the taxpayer will have to pay tax at the then current estate rate on gifts made in 2011 and 2012 on the difference between the $5 Million exclusion used in those years and the then current exclusion amount.
This is an uncertain area of the law and practitioners and their clients must be made aware of the potential for this to occur in the future.  It is likely that Congress did not intend for a clawback to occur, but this does not change the fact that those that might be affected should address the issue in their estate plans. 
We still do not have guidance from Congress in this area of the law, and until we do there will be uncertainty in the markets.  Hopefully, Congress will see the light and clarify this issue.

Sunday, June 5, 2011

Transferee Liability - Paying Someone Elses Taxes!

It is bad enough these days paying our own taxes, but being responsible for someone elses taxes - how could that be.  Yet, it is true that you can be held responsible to pay someone elses taxes and sometimes without even knowing that this could happen to you.
Section 6901 of the Internal Revenue Code provides a method for the IRS to collect on an unpaid tax liability "at law or in equity" of a transferee of property.  This allows the IRS to proceed to collect the tax that the transferror owed from the transferee in the same manner as that of a delinquent taxpayer pursuant to the provisions of IRC Section 6901.  How the IRS actually uses this provision will depend on your state law regarding transferee liability.
As mentioned, the liability can be established "at law or in equity."  In reality, the most common approach for the IRS is in equity.  The transferee liability in equity is based on the law of fraudulent conveyances.  To find transferee liability in equity, the IRS must prove the following elements:  1) the taxpayer - transferror transferred property to the transferee for less than full and adequate consideration; 2) at the time of the transfer and at the time transferee liability is asserted, the taxpayer-transferror was liable for the tax; 3) the transfer was made after liability for the tax accrued, whether or not the tax was actually assessed at the time of the transfer; 4) the taxpayer - transferor was insolvent at the time of the transfer or the transfer left the taxpayer-transferor insolvent; and 5) the IRS has exhausted all reasonable remedies against the taxpayer - transferor.
If these elements are met the IRS can assert transferee liability and proceed to collect the tax due from the transferee.

Tuesday, May 10, 2011

Tax Implications of Short Sales and Foreclosures

Mr. Lively will be presenting "Tax Implications of Short Sales and Foreclosures" on Wednesday, May 18, 2011 before a group of realtors.  The focus of the presentation will be:
  • How to deal with cancellation of debt issues
  • Understanding the difference between recourse and non-recourse debt
  • Computation of the potential capital gain on a short sale
  • Various other tax aspects of short sales
This seminar is sponsored by Bank of America and the Kevin Budde Team.

Sunday, May 8, 2011

New Gift Tax Rules May Not Last Long

On December 17, 2010 President Obama signed into law a new Tax Act, The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (The 2010 Tax Relief Act).  This Act was a surprise to many, and the changes made to the gift tax area were the most astounding.  The annual exclusion for gifts was left alone at $13,000 per person that a donor wants to give to a donee.  However, the lifetime exclusion was unified with the estate tax exclusion and changed from $1 Million to $5 Million per individual.  That means that a family of wealth can effectively give up to $5 million, $10 million for a married couple, without any gift tax consequences.  It is unclear if their will be any recapture of this amount or clawback should the exclusion be lowered in the future.  Some members of the government already indicated that it was a mistake to not address this issue in The 2010 Tax Relief Act.  The President wanted to get this bill through before the end of the year, and the word on the Hill was to not even change a comma in the Act.
That is the good news.  This creates a tremendous planning opportunity for families that have a donative intent toward other family members.  However, this opportunity will only last for two years as the Act currently is written.  Further, President Obama has already indicated that he would like to modify this portion of the Act before it is set to expire.  He wants to see the exclusion back at $1 Million and the tax rate at 45 percent for gifts (it is currently 35 percent).  The message from this is that you should not sit and wait on this one.  If you want to take advantage of this opportunity you will need to act fast and do your planning, because this one is sure to not last long.

Monday, April 25, 2011

Recourse v. Non-Recourse Debt in California

A big question that arises in California these days is whether the debt on your real estate is recourse or non-recourse.  The difference can be quite significant if you are going through a foreclosure, deed in lieu of foreclosure, or a short sale.  If the debt is non-recourse and you go through a foreclosure, deed in lieu of foreclosure, or a short sale, there is no potential for a deficiency on the loan and there is no income from any cancellation of debt.  However, if the debt is recourse there is a potential for a deficiency and income from cancellation of debt.  Recourse debt creates personal liability for the debtor for the portion of the debt that is not repaid to the lender.  That is why this determination of recourse v. non-recourse is so important as an initial hurdle.

A note can be non-recourse if the contract that creates the debt indicates that it is a non-recourse note.  Purchase money notes in California are also non-recourse by definition.  A purchase money note is a note whereby the borrower borrowed money to purchase a principal residence and the funds went directly into escrow and then to the seller of the property for the purchase of a one to four unit property.  Thus, seconds, HELOCS and Refinanced Loans on property would typically not be a purchase money note and would create personal liability in the event of a default on the note.

California has come to the rescue with SB 931 with regard to short sales.  If a lender agrees to a short sale in writing in California the First Trust Deed on a one to four unit property is non-recourse and the lender can only look to the property for repayment.  Notice that this Bill does not exclude rental properties.  Therefore, if a borrower has a potential issue with a deficiency on a first trust deed, whether it is a rental or a principal residence, the borrower should attempt to short sale the property to avoid a deficiency judgment of the property.  SB 931 does not work for foreclosures or deeds in lieu of foreclosure.  It is only for short sales.

When you are disposing of distressed real estate there are numerous tax and legal issues that you must address and be aware of prior to closing the transaction.  Make sure that you consult with a tax attorney to make sure you do not have any hidden costs that you will be later surprised by when it is too late.

Sunday, April 24, 2011

Tax Implications of Short Selling Real Property

Short Sales of Real Estate

When you sell real property in a Short Sale Transaction there are numerous tax implications that you will want to consider.  First, just what is a Short Sale.  A short sale is when you sell a property and the sales proceeds are not sufficient to pay off the loan that you have on the property and you ask the lender to accept less than the full amount they are due to pay off the loan.

When you short sale a property the tax considerations revolve around two basic issues.  First, the income from the cancellation of the debt, and next any gain that may have to be recognized on the sale.  Cancellation of debt income occurs when you pay less than the full amount back to the lender.  When you borrowed the money from the lender you did not have to pay tax on the borrowed money because you were obligated to pay back the debt.  However, when the debt was canceled and you did not have to pay it back that is income.  The lender will send you a 1099C informing you and the IRS of the canceled debt.  You will also have to determine if there is a gain on the property you disposed of in the transaction.  The IRS considers this disposition a sale and you must report the sale less the tax basis in the property.  This could result in a gain if you have a low basis in the property and refinanced it pulling out cash.

The next thing that you need to consider is whether the income from the Cancellation of the Debt is actually taxable.  There are four exclusions that must be considered.  First, if the debt is non-recourse (as determined by state law) there can be no income from the cancellation of the debt; Second, if the home was your principal residence the debt is excluded up to $2,000,000 by the Mortgage Forgiveness Debt Relief Act of 2007; Third, if you are insolvent the cancellation of debt is forgiven to the extent that you are insolvent at the time the debt is forgiven; Fourth and finally, if you are bankrupt the cancellation of debt is forgiven if it was included in your petition.

The cancellation of debt and how you handled it for tax purposes is reported on Form 982 that is included with the filing of your form 1040.  This is where you also adjust the basis for assets where debt was canceled.