Dear Jeff and Jon,
There is an important recent and temporary addition to 26 U.S.C. 108(a) and (b) (available at
http://frwebgate.access.gpo.gov/cgi-bin ... ubl142.110). The key new provisions appear below, underlined and in bold font.
Public Law 110-142
110th Congress
An Act
To amend the Internal Revenue Code of 1986 to exclude discharges of indebtedness on principal residences from gross income, and for other
purposes. NOTE: Dec. 20, 2007 - [H.R. 3648]
Be it enacted by the Senate and House of Representatives of the United States of America in Congress: Mortgage Forgiveness Debt Relief Act of 2007
SECTION 1. NOTE: 26 USC 1 note. SHORT TITLE.
This Act may be cited as the "Mortgage Forgiveness Debt Relief Act of 2007''.
SEC. 2. DISCHARGES OF INDEBTEDNESS ON PRINCIPAL RESIDENCE EXCLUDED FROM GROSS INCOME.
(a) In General.--Paragraph (1) of section 108(a) of the Internal Revenue Code of 1986 is amended by striking "or'' at the end of subparagraph (C), by striking the period at the end of
subparagraph (D) and inserting ", or'', and by inserting after subparagraph (D) the following new subparagraph:
"(E) the indebtedness discharged is qualified principal residence indebtedness which is discharged before January 1, 2010.''
. . .
(b) Special Rules Relating to Qualified Principal Residence Indebtedness.--Section 108 of such Code is amended by adding at the end the following new subsection:
. . .
"(2) Qualified principal residence indebtedness.--For purposes of this section, the term 'qualified principal residence indebtedness' means acquisition indebtedness (within the meaning of section 163(h)(3)(B), applied by substituting '$2,000,000 ($1,000,000' for '$1,000,000 ($500,000' in clause (ii) thereof) with respect to the principal residence of the taxpayer.
"(3) Exception for certain discharges not related to taxpayer's financial condition.--Subsection (a)(1)(E) shall not apply to the discharge of a loan if the discharge is on account of services performed for the lender or any other factor not directly related to a decline in the value of the residence or to the financial condition of the taxpayer.
Based on this provision, it could be (depending on the facts of a particular case) that the forgiveness of a post-short sale deficiency would not give rise to taxable income, provided, of course, that the forgiveness takes place before January 1, 2010.
Unfortunately, most people contemplating a short sale have refinanced, rendering this provision inapplicable to their case.
All the best,
Nick
Nicholas Gebelt, Ph.D., J.D.
Law Offices of Nicholas Gebelt
15150 Hornell Street
Whittier, CA 90604
Phone: 562.777.9159
FAX: 562.946.1365
Email:
ngebelt@goodbye2debt.com
Web:
www.goodbye2debt.com
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----- Original Message -----
To:
cdcbaa@yahoogroups.com
Sent: Friday, February 06, 2009 12:16 PM
Subject: [cdcbaa] Re:1099 from short sale
Internal Revenue Code Section 108
(a) Exclusion from gross income
(1) In general
Gross income does not include any amount which (but for this
subsection) would be includible in gross income by reason of the
discharge (in whole or in part) of indebtedness of the taxpayer if-
(A) the discharge occurs in a title 11 case,
(B) the discharge occurs when the taxpayer is insolvent,
(C) the indebtedness discharged is qualified farm indebtedness, or
(D) in the case of a taxpayer other than a C corporation, the
indebtedness discharged is qualified real property business
indebtedness.
(2) Coordination of exclusions
(A) Title 11 exclusion takes precedence
Subparagraphs (B), (C), and (D) of paragraph (1) shall not apply to
a discharge which occurs in a title 11 case.
(B) Insolvency exclusion takes precedence over qualified farm
exclusion and qualified real property business exclusion
Subparagraphs (C) and (D) of paragraph (1) shall not apply to a
discharge to the extent the taxpayer is insolvent.
(3) Insolvency exclusion limited to amount of insolvency
In the case of a discharge to which paragraph (1)(B) applies, the
amount excluded under paragraph (1)(B) shall not exceed the amount
by which the taxpayer is insolvent.
(b) Reduction of tax attributes
(1) In general
The amount excluded from gross income under subparagraph (A), (B),
or (C) of subsection (a)(1) shall be applied to reduce the tax
attributes of the taxpayer as provided in paragraph (2).
(2) Tax attributes affected; order of reduction
Except as provided in paragraph (5), the reduction referred to in
paragraph (1) shall be made in the following tax attributes in the
following order:
(A) NOL
Any net operating loss for the taxable year of the discharge, and
any net operating loss carryover to such taxable year.
(B) General business credit
Any carryover to or from the taxable year of a discharge of an
amount for purposes for determining the amount allowable as a credit
under section 38 (relating to general business credit).
(C) Minimum tax credit
The amount of the minimum tax credit available under section 53(b)
as of the beginning of the taxable year immediately following the
taxable year of the discharge.
(D) Capital loss carryovers
Any net capital loss for the taxable year of the discharge, and any
capital loss carryover to such taxable year under section 1212.
(E) Basis reduction
(i) In general The basis of the property of the taxpayer.
(ii) Cross reference
For provisions for making the reduction described in clause (i), see
section 1017.
(F) Passive activity loss and credit carryovers
Any passive activity loss or credit carryover of the taxpayer under
section 469 (b) from the taxable year of the discharge.
(G) Foreign tax credit carryovers
Any carryover to or from the taxable year of the discharge for
purposes of determining the amount of the credit allowable under
section 27.
(3) Amount of reduction
(A) In general
Except as provided in subparagraph (B), the reductions described in
paragraph (2) shall be one dollar for each dollar excluded by
subsection (a).
(B) Credit carryover reduction
The reductions described in subparagraphs (B), (C), and (G) shall be
331/3 cents for each dollar excluded by subsection (a). The
reduction described in subparagraph (F) in any passive activity
credit carryover shall be 331/3 cents for each dollar excluded by
subsection (a).
(4) Ordering rules
(A) Reductions made after determination of tax for year
The reductions described in paragraph (2) shall be made after the
determination of the tax imposed by this chapter for the taxable
year of the discharge.
(B) Reductions under subparagraph (A) or (D) of paragraph (2)
The reductions described in subparagraph (A) or (D) of paragraph (2)
(as the case may be) shall be made first in the loss for the taxable
year of the discharge and then in the carryovers to such taxable
year in the order of the taxable years from which each such
carryover arose.
(C) Reductions under subparagraphs (B) and (G) of paragraph (2)
The reductions described in subparagraphs (B) and (G) of paragraph
(2) shall be made in the order in which carryovers are taken into
account under this chapter for the taxable year of the discharge.
(5) Election to apply reduction first against depreciable property
(A) In general
The taxpayer may elect to apply any portion of the reduction
referred to in paragraph (1) to the reduction under section 1017 of
the basis of the depreciable property of the taxpayer.
(B) Limitation
The amount to which an election under subparagraph (A) applies shall
not exceed the aggregate adjusted bases of the depreciable property
held by the taxpayer as of the beginning of the taxable year
following the taxable year in which the discharge occurs.
(C) Other tax attributes not reduced
Paragraph (2) shall not apply to any amount to which an election
under this paragraph applies.
(c) Treatment of discharge of qualified real property business
indebtedness
(1) Basis reduction
(A) In general
The amount excluded from gross income under subparagraph (D) of
subsection (a)(1) shall be applied to reduce the basis of the
depreciable real property of the taxpayer.
(B) Cross reference
For provisions making the reduction described in subparagraph (A),
see section 1017.
(2) Limitations
(A) Indebtedness in excess of value
The amount excluded under subparagraph (D) of subsection (a)(1) with
respect to any qualified real property business indebtedness shall
not exceed the excess (if any) of-
(i) the outstanding principal amount of such indebtedness
(immediately before the discharge), over
(ii) the fair market value of the real property described in
paragraph (3)(A) (as of such time), reduced by the outstanding
principal amount of any other qualified real property business
indebtedness secured by such property (as of such time).
(B) Overall limitation
The amount excluded under subparagraph (D) of subsection (a)(1)
shall not exceed the aggregate adjusted bases of depreciable real
property (determined after any reductions under subsections (b) and
(g)) held by the taxpayer immediately before the discharge (other
than depreciable real property acquired in contemplation of such
discharge).
(3) Qualified real property business indebtedness
The term "qualified real property business indebtedness" means
indebtedness which-
(A) was incurred or assumed by the taxpayer in connection with real
property used in a trade or business and is secured by such real
property,
(B) was incurred or assumed before January 1, 1993, or if incurred
or assumed on or after such date, is qualified acquisition
indebtedness, and
(C) with respect to which such taxpayer makes an election to have
this paragraph apply.
Such term shall not include qualified farm indebtedness.
Indebtedness under subparagraph (B) shall include indebtedness
resulting from the refinancing of indebtedness under subparagraph
(B) (or this sentence), but only to the extent it does not exceed
the amount of the indebtedness being refinanced.
(4) Qualified acquisition indebtedness
For purposes of paragraph (3)(B), the term "qualified acquisition
indebtedness" means, with respect to any real property described in
paragraph (3)(A), indebtedness incurred or assumed to acquire,
construct, reconstruct, or substantially improve such property.
(5) Regulations
The Secretary shall issue such regulations as are necessary to carry
out this subsection, including regulations preventing the abuse of
this subsection through cross-collateralization or other means.
(d) Meaning of terms; special rules relating to certain provisions
(1) Indebtedness of taxpayer
For purposes of this section, the term "indebtedness of the
taxpayer" means any indebtedness-
(A) for which the taxpayer is liable, or
(B) subject to which the taxpayer holds property.
(2) Title 11 case
For purposes of this section, the term "title 11 case" means a case
under title 11 of the United States Code (relating to bankruptcy),
but only if the taxpayer is under the jurisdiction of the court in
such case and the discharge of indebtedness is granted by the court
or is pursuant to a plan approved by the court.
(3) Insolvent
For purposes of this section, the term "insolvent" means the excess
of liabilities over the fair market value of assets. With respect to
any discharge, whether or not the taxpayer is insolvent, and the
amount by which the taxpayer is insolvent, shall be determined on
the basis of the taxpayer's assets and liabilities immediately
before the discharge.
[(4) Repealed. Pub. L. 99-514, title VIII, 822(b)(3)(A), Oct. 22,
1986, 100 Stat. 2373]
(5) Depreciable property
The term "depreciable property" has the same meaning as when used in
section 1017.
(6) Certain provisions to be applied at partner level
In the case of a partnership, subsections (a), (b), (c), and (g)
shall be applied at the partner level.
(7) Special rules for S corporation
(A) Certain provisions to be applied at corporate level
In the case of an S corporation, subsections (a), (b), (c), and (g)
shall be applied at the corporate level, including by not taking
into account under section 1366 (a) any amount excluded under
subsection (a) of this section.
(B) Reduction in carryover of disallowed losses and deductions
In the case of an S corporation, for purposes of subparagraph (A) of
subsection (b)(2), any loss or deduction which is disallowed for the
taxable year of the discharge under section 1366 (d)(1) shall be
treated as a net operating loss for such taxable year. The preceding
sentence shall not apply to any discharge to the extent that
subsection (a)(1)(D) applies to such discharge.
(C) Coordination with basis adjustments under section 1367 (b)(2)
For purposes of subsection (e)(6), a shareholder's adjusted basis in
indebtedness of an S corporation shall be determined without regard
to any adjustments made under section 1367 (b)(2).
(8) Reductions of tax attributes in title 11 cases of individuals to
be made by estate
In any case under chapter 7 or 11 of title 11 of the United States
Code to which section 1398 applies, for purposes of paragraphs (1)
and (5) of subsection (b) the estate (and not the individual) shall
be treated as the taxpayer. The preceding sentence shall not apply
for purposes of applying section 1017 to property transferred by the
estate to the individual.
(9) Time for making election, etc.
(A) Time
An election under paragraph (5) of subsection (b) or under paragraph
(3)(C) of subsection (c) shall be made on the taxpayer's return for
the taxable year in which the discharge occurs or at such other time
as may be permitted in regulations prescribed by the Secretary.
(B) Revocation only with consent
An election referred to in subparagraph (A), once made, may be
revoked only with the consent of the Secretary.
(C) Manner
An election referred to in subparagraph (A) shall be made in such
manner as the Secretary may by regulations prescribe.
(10) Cross reference
For provision that no reduction is to be made in the basis of exempt
property of an individual debtor, see section 1017 (c)(1).
(e) General rules for discharge of indebtedness (including
discharges not in title 11 cases or insolvency)
For purposes of this title-
(1) No other insolvency exception
Except as otherwise provided in this section, there shall be no
insolvency exception from the general rule that gross income
includes income from the discharge of indebtedness.
(2) Income not realized to extent of lost deductions
No income shall be realized from the discharge of indebtedness to
the extent that payment of the liability would have given rise to a
deduction.
(3) Adjustments for unamortized premium and discount
The amount taken into account with respect to any discharge shall be
properly adjusted for unamortized premium and unamortized discount
with respect to the indebtedness discharged.
(4) Acquisition of indebtedness by person related to debtor
(A) Treated as acquisition by debtor
For purposes of determining income of the debtor from discharge of
indebtedness, to the extent provided in regulations prescribed by
the Secretary, the acquisition of outstanding indebtedness by a
person bearing a relationship to the debtor specified in section 267
(b) or 707 (b)(1) from a person who does not bear such a
relationship to the debtor shall be treated as the acquisition of
such indebtedness by the debtor. Such regulations shall provide for
such adjustments in the treatment of any subsequent transactions
involving the indebtedness as may be appropriate by reason of the
application of the preceding sentence.
(B) Members of family
For purposes of this paragraph, sections 267 (b) and 707 (b)(1)
shall be applied as if section 267 (c)(4) provided that the family
of an individual consists of the individual's spouse, the
individual's children, grandchildren, and parents, and any spouse of
the individual's children or grandchildren.
(C) Entities under common control treated as related
For purposes of this paragraph, two entities which are treated as a
single employer under subsection (b) or (c) of section 414 shall be
treated as bearing a relationship to each other which is described
in section 267 (b).
(5) Purchase-money debt reduction for solvent debtor treated as
price reduction
If-
(A) the debt of a purchaser of property to the seller of such
property which arose out of the purchase of such property is
reduced,
(B) such reduction does not occur-
(i) in a title 11 case, or
(ii) when the purchaser is insolvent, and
(C) but for this paragraph, such reduction would be treated as
income to the purchaser from the discharge of indebtedness,
then such reduction shall be treated as a purchase price adjustment.
(6) Indebtedness contributed to capital
Except as provided in regulations, for purposes of determining
income of the debtor from discharge of indebtedness, if a debtor
corporation acquires its indebtedness from a shareholder as a
contribution to capital-
(A) section 118 shall not apply, but
(B) such corporation shall be treated as having satisfied the
indebtedness with an amount of money equal to the shareholder's
adjusted basis in the indebtedness.
(7) Recapture of gain on subsequent sale of stock
(A) In general
If a creditor acquires stock of a debtor corporation in satisfaction
of such corporation's indebtedness, for purposes of section 1245-
(i) such stock (and any other property the basis of which is
determined in whole or in part by reference to the adjusted basis of
such stock) shall be treated as section 1245 property,
(ii) the aggregate amount allowed to the creditor-
(I) as deductions under subsection (a) or (b) of section 166 (by
reason of the worthlessness or partial worthlessness of the
indebtedness), or
(II) as an ordinary loss on the exchange,
shall be treated as an amount allowed as a deduction for
depreciation, and
(iii) an exchange of such stock qualifying under section 354 (a),
355 (a), or 356 (a) shall be treated as an exchange to which section
1245 (b)(3) applies.
The amount determined under clause (ii) shall be reduced by the
amount (if any) included in the creditor's gross income on the
exchange.
(B) Special rule for cash basis taxpayers
In the case of any creditor who computes his taxable income under
the cash receipts and disbursements method, proper adjustment shall
be made in the amount taken into account under clause (ii) of
subparagraph (A) for any amount which was not included in the
creditor's gross income but which would have been included in such
gross income if such indebtedness had been satisfied in full.
(C) Stock of parent corporation
For purposes of this paragraph, stock of a corporation in control
(within the meaning of section 368(c)) of the debtor corporation
shall be treated as stock of the debtor corporation.
(D) Treatment of successor corporation
For purposes of this paragraph, the term "debtor corporation"
includes a successor corporation.
(E) Partnership rule
Under regulations prescribed by the Secretary, rules similar to the
rules of the foregoing subparagraphs of this paragraph shall apply
with respect to the indebtedness of a partnership.
(8) Indebtedness satisfied by corporate stock or partnership
interest
For purposes of determining income of a debtor from discharge of
indebtedness, if-
(A) a debtor corporation transfers stock, or
(B) a debtor partnership transfers a capital or profits interest in
such partnership,
to a creditor in satisfaction of its recourse or nonrecourse
indebtedness, such corporation or partnership shall be treated as
having satisfied the indebtedness with an amount of money equal to
the fair market value of the stock or interest. In the case of any
partnership, any discharge of indebtedness income recognized under
this paragraph shall be included in the distributive shares of
taxpayers which were the partners in the partnership immediately
before such discharge.
(9) Discharge of indebtedness income not taken into account in
determining whether entity meets REIT qualifications
Any amount included in gross income by reason of the discharge of
indebtedness shall not be taken into account for purposes of
paragraphs (2) and (3) of section 856 (c).
(10) Indebtedness satisfied by issuance of debt instrument
(A) In general
For purposes of determining income of a debtor from discharge of
indebtedness, if a debtor issues a debt instrument in satisfaction
of indebtedness, such debtor shall be treated as having satisfied
the indebtedness with an amount of money equal to the issue price of
such debt instrument.
(B) Issue price
For purposes of subparagraph (A), the issue price of any debt
instrument shall be determined under sections 1273 and 1274. For
purposes of the preceding sentence, section 1273 (b)(4) shall be
applied by reducing the stated redemption price of any instrument by
the portion of such stated redemption price which is treated as
interest for purposes of this chapter.
(f) Student loans
(1) In general
In the case of an individual, gross income does not include any
amount which (but for this subsection) would be includible in gross
income by reason of the discharge (in whole or in part) of any
student loan if such discharge was pursuant to a provision of such
loan under which all or part of the indebtedness of the individual
would be discharged if the individual worked for a certain period of
time in certain professions for any of a broad class of employers.
(2) Student loan
For purposes of this subsection, the term "student loan" means any
loan to an individual to assist the individual in attending an
educational organization described in section 170 (b)(1)(A)(ii) made
by-
(A) the United States, or an instrumentality or agency thereof,
(B) a State, territory, or possession of the United States, or the
District of Columbia, or any political subdivision thereof,
(C) a public benefit corporation-
(i) which is exempt from taxation under section 501 (c)(3),
(ii) which has assumed control over a State, county, or municipal
hospital, and
(iii) whose employees have been deemed to be public employees under
State law, or
(D) any educational organization described in section 170 (b)(1)(A)
(ii) if such loan is made-
(i) pursuant to an agreement with any entity described in
subparagraph (A), (B), or (C) under which the funds from which the
loan was made were provided to such educational organization, or
(ii) pursuant to a program of such educational organization which is
designed to encourage its students to serve in occupations with
unmet needs or in areas with unmet needs and under which the
services provided by the students (or former students) are for or
under the direction of a governmental unit or an organization
described in section 501 (c)(3) and exempt from tax under section
501 (a).
The term "student loan" includes any loan made by an educational
organization described in section 170 (b)(1)(A)(ii) or by an
organization exempt from tax under section 501 (a) to refinance a
loan to an individual to assist the individual in attending any such
educational organization but only if the refinancing loan is
pursuant to a program of the refinancing organization which is
designed as described in subparagraph (D)(ii).
(3) Exception for discharges on account of services performed for
certain lenders
Paragraph (1) shall not apply to the discharge of a loan made by an
organization described in paragraph (2)(D) if the discharge is on
account of services performed for either such organization.
(4) Payments under National Health Service Corps Loan Repayment
Program and certain State loan repayment programs
In the case of an individual, gross income shall not include any
amount received under section 338B(g) of the Public Health Service
Act or under a State program described in section 338I of such Act.
(g) Special rules for discharge of qualified farm indebtedness
(1) Discharge must be by qualified person
(A) In general
Subparagraph (C) of subsection (a)(1) shall apply only if the
discharge is by a qualified person.
(B) Qualified person
For purposes of subparagraph (A), the term "qualified person" has
the meaning given to such term by section 49 (a)(1)(D)(iv); except
that such term shall include any Federal, State, or local government
or agency or instrumentality thereof.
(2) Qualified farm indebtedness
For purposes of this section, indebtedness of a taxpayer shall be
treated as qualified farm indebtedness if-
(A) such indebtedness was incurred directly in connection with the
operation by the taxpayer of the trade or business of farming, and
(B) 50 percent or more of the aggregate gross receipts of the
taxpayer for the 3 taxable years preceding the taxable year in which
the discharge of such indebtedness occurs is attributable to the
trade or business of farming.
(3) Amount excluded cannot exceed sum of tax attributes and business
and investment assets
(A) In general
The amount excluded under subparagraph (C) of subsection (a)(1)
shall not exceed the sum of-
(i) the adjusted tax attributes of the taxpayer, and
(ii) the aggregate adjusted bases of qualified property held by the
taxpayer as of the beginning of the taxable year following the
taxable year in which the discharge occurs.
(B) Adjusted tax attributes
For purposes of subparagraph (A), the term "adjusted tax attributes"
means the sum of the tax attributes described in subparagraphs (A),
(B), (C), (D), (F), and (G) of subsection (b)(2) determined by
taking into account $3 for each $1 of the attributes described in
subparagraphs (B), (C), and (G) of subsection (b)(2) and the
attribute described in subparagraph (F) of subsection (b)(2) to the
extent attributable to any passive activity credit carryover.
(C) Qualified property
For purposes of this paragraph, the term "qualified property" means
any property which is used or is held for use in a trade or business
or for the production of income.
(D) Coordination with insolvency exclusion
For purposes of this paragraph, the adjusted basis of any qualified
property and the amount of the adjusted tax attributes shall be
determined after any reduction under subsection (b) by reason of
amounts excluded from gross income under subsection (a)(1)(B).
--- In
cdcbaa@yahoogroups.com, "Jeffery B Smith" wrote:
>
> I had an accountant tell me that the IRS will not consider the
sold out
> junior lien as taxable income (regardless of the bk) even if it
was a cash
> out loan to the borrower, IF the property was the borrowers
residence. That
> was news to me. I have not verified the accuracy of that
information. I
> don't know, if it's true, how you deal with the 1099 as far as the
IRS/tax
> return preparation goes. Does anyone have any opinion on the
accuracy of
> the advice I got from that accountant on this issue?
>
>
>
> -Jeffrey B. Smith
>
> CURD, GALINDO & SMITH, L.L.P.
>
> 301 East Ocean Blvd. #1700
>
> Long Beach, CA 90802
>
> (562) 624-1177
>
> (562) 624-1178 fax
>
> (310) 993-6560 cellular
>
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