DocketNumber: Docket No. 15840-15S.
Judges: PANUTHOS
Filed Date: 11/8/2016
Status: Non-Precedential
Modified Date: 4/17/2021
PANUTHOS,
In a notice of deficiency dated March 23, 2015, respondent determined a deficiency of $7,175 in petitioners' Federal income tax for 2012. The issue for decision is whether petitioners' receipt in 2012 of $20,500 designated by the payor as payment for a deed in lieu of foreclosure is ordinary income. Respondent also determined that petitioners are liable for an alternative minimum tax of $410. This is a computational adjustment dependent on the outcome of the disputed issue.
Some of the facts have been stipulated, and we incorporate the stipulation*76 of facts by this reference. Petitioners resided in California when the petition was timely filed.
Petitioners Karl D. Bobo (petitioner husband) and Kimberly D. Bobo were residing in California during the year in issue. In 2008 petitioners owned their primary residence in California (California house) but worked in management positions requiring frequent travel to North Carolina. For this reason petitioners purchased a second house in North Carolina (North Carolina house) in March 2008*77 in lieu of foreclosure" (deed in lieu of foreclosure) program. Since petitioners could no longer afford to make payments on the North Carolina mortgage loan, they applied for and were accepted into this program.
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 a 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.*78
Petitioners provided a copy of the letter from Green Tree's law firm Hutchens, Senter, Kellam, & Petit, P.A. dated May 4, 2012. The letter stated that "you have agreed to sign a deed in lieu of foreclosure on your property" in North Carolina. The letter instructed petitioners as follows: Please sign the enclosed Deed, Marital Status Affidavit(s), Affidavit Regarding Liens, and Estoppel Affidavit before a Notary Public and return these documents to our office no later than 5/25/2012 and vacate by 5/25/2012. A property inspection will be ordered by Green Tree on or after 5/25/2012. Based on your agreement with the lender $20,500.00 cash for keys incentive will be issued by Green Tree once Green Tree confirms property is vacant and in broom swept condition. Also please send evidence/information that assessments and homeowners association dues if any are paid in full to the transfer date unless other agreements regarding these items have been previously approved by the lender, and forward all keys to the subject property, if you have any in your possession, to our office when you return*79 the documents mentioned above.
Petitioners also provided copies of the marital status affidavit, warranty deed, affidavit regarding liens, and estoppel affidavit, all dated May 21, 2012, executed as part of the agreement described in the letter dated May 4, 2012. The warranty deed and the estoppel affidavit reflect that petitioners signed the deed to the North Carolina house and agreed to vacate it by May 25, 2012, in exchange for Green Tree's canceling the note on the North Carolina house.
Green Tree issued a Form 1099-MISC, Miscellaneous Income, for the cash for keys payment in petitioner husband's name and categorized the $20,500 in box 7 as "nonemployee compensation".*80
Petitioners timely filed a joint Form 1040, U.S. Individual Income Tax Return, for 2012 on July 11, 2013.*81
Respondent issued a notice of deficiency dated March 23, 2015, reclassifying the $20,500 payment from Green Tree as ordinary income. Petitioners timely filed their petition on June 18, 2015, contesting the notice of deficiency and asserting "the return is correct as originally filed".
In general, the Commissioner's determination set forth in a notice of deficiency is presumed correct, and the taxpayer bears the burden of proving that the determination is in error. Rule 142(a);
Section 61(a) defines gross income as "all income from whatever source derived" and includes compensation paid for services, whether furnished by the taxpayer as an employee or as a self-employed person or independent contractor. Gains derived from the sale or exchange of property are included in gross income unless excluded by law.*82
It is "well settled" that the transfer of property by deed in lieu of foreclosure constitutes a "sale or exchange" for Federal income tax purposes.
The Court looks to the substance of the transaction when determining how a deed in lieu of transaction or a similar exchange is taxed.
The Court held that the "the sale of the property, the transfer of $177,495 cash, and the assignment of the sale proceeds * * * has the same practical effect as several other transactions which have been held to be a 'sale or exchange.'"*84
On the basis of this record we are satisfied that the deed in lieu of foreclosure and the cash for keys incentive are the results of a single transaction. Similar to the partnership in
Respondent argues that the $20,500 cash for keys payment is an incentive payment which petitioners received only by fulfilling the conditions of the*86 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.
We have considered all of the parties' arguments, and, to the extent not addressed herein, we conclude that they are moot, irrelevant, or without merit.
To reflect the foregoing,
1. Unless otherwise indicated, subsequent section references are to the Internal Revenue Code in effect for the year in issue, and all Rule references are to the Tax Court Rules of Practice and Procedure.↩
2. Petitioners' tax return reported the purchase date of March 26, 2008. Petitioners executed the promissory note relating to the purchase of the house on January 23, 2008.↩
3. Respondent provided this explanation at trial, and petitioners did not dispute the nature of the cash for keys program.
4. Petitioner husband did not work for Green Tree. The parties agree that Green Tree issued the Form 1099-MISC for the cash for keys incentive payment.↩
5. Green Tree calculated the cancellation of debt income of $108,926 as follows:
Loan principal balance outstanding | $716,426 |
Fair market value of property | (607,500) |
Total income | 108,926 |
6. Petitioners attached to their Form 1040 a Form 4868, Application for Automatic Extension of Time to File U.S. Individual Income Tax Return.↩
7. Mr. Bergland calculated petitioners' gross proceeds by adding the cash for keys incentive payment to the fair market value of the North Carolina house and the cancellation of debt income.
Calculation of gross proceeds | Calculation of loss | ||
Cash for keys payment | $20,500 | Gross Proceeds | $736,926 |
Fair market value | 607,500 | Cost basis | (850,000) |
Cancellation of debt | 108,926 | Loss | 113,074 |
income | |||
Total proceeds | 736,926 |
8. The Court recognizes that
9. This achieves the same result as petitioners' calculation on their return.
Calculation of proceeds | Calculation of loss | ||
Cash for keys payment | $20,500 | Gross proceeds | $736,926 |
Balance of loan forgiven | 716,426 | Cost basis | (850,000) |
Total proceeds | 736,926 | Loss | 113,074 |