Reacquisition of Principal Residence Triggers Loss of Exclusion

The 8th Circuit Court of Appeals affirmed the opinion of IRS and Tax Court in this case.

On July 11, 2006 Marvin DeBough sold his principal residence on the installment method for $1.4 million.  He reported gain on the sale of 658k, of which 500k was excluded under IRC Section 121.  The remaining 158k of gain was reported on the installment method.  From 2006-2008 he collected 505k in principal payments and reported 56k of this as gain through the installment method.  The buyers failed to comply with the terms of the contract, so Mr. DeBough took the property back during July 2009.

The rules under Section 1038, which control the gain on a repossession/foreclosure, basically require reporting as income the difference between the amount of value (i.e., money) received and the amount already taxed.

The Section 121 exclusion permits a taxpayer to exclude up to $500,000 ($250,000 if single or MFS) of the gain as long as the taxpayer meets the “two out of the last five year” ownership and occupancy conditions.  If the taxpayer did not have enough gain to use the maximum exclusion AND resells the property within one year of the repossession/foreclosure date, the taxpayer can use the rest of the maximum exclusion to offset gain from the resale.  Mr. DeBough did not resell the property within one year of the repossession/foreclosure date.

The issue in the DeBough case is whether, 1) the exclusion amount of 500k claimed on the original sale still applies, or 2) Mr. DeBough has to report income equal to the entire amount received less the 158k already taxed.  IRS and Tax Court said the answer is #2 – Mr. DeBough has to report income equal to the excess of the principal payments received over the amount already taxed.

In his appeal Mr. DeBough stated Section 1038 didn’t apply since he did not resell the property within one year of the repossession/foreclosure date.  He further argued the Code was “silent on the question” of whether the exclusion originally taken was still applicable.  The Court of Appeals, 8th Circuit agreed with IRS and Tax Court – Mr. DeBough owed taxes on the 448k he received in excess of the 56k already taxed.

Marvin DeBough, CA 8 8/28/15, 106 AFTR 2d, 2015-5192


This text has been shared with you courtesy of David & Mary Mellem, EAs & Ashwaubenon Tax Professionals.

Identity Theft and Tax Refund Fraud

By William Delaney, EA
Westwood, Massachusetts

Is this a solution or does it add to the problem?

A proposal currently scheduled for hearing by the U.S. Senate Finance Committee
described as a “Bill to Prevent Identity Theft and Tax Refund Fraud” includes a major provision which would mandate the regulation of all presently unregulated paid tax return preparers by reestablishing the Registered Tax Return Preparer status.  Aside from that, the proposal has a number of provisions which are actually suggestive of its’ title.

Improper use of information by preparers of returns.  The penalty for “unauthorized disclosure or use of information by tax return preparers” is increased from $250 to $1,000 per incident.  The criminal penalty for knowing or reckless conduct would be increased to $100,000 “in the case of disclosures or uses in connection with taxpayer identity theft.”

Require the IRS to study the feasibility of blocking electronically-filed tax returns.  This would be a process whereby a taxpayer who has filed an “identity theft affidavit” and been properly identified, may elect to block a tax return or returns filed either by that taxpayer or by someone purporting to be that taxpayer.  Question:  How would the IRS be able to tell the difference?  This blocking would have to be in place prior to a filing.  Perhaps it has to do with the presence or absence of a taxpayer PIN (see following)?

Enhancements to the IRS PIN program.  Expands the program (6-digit identifier which authenticates a return filer as the legitimate taxpayer) to require the IRS “…to issue an IP PIN to any individual requesting protection from identity theft-related tax fraud…”  This proposal would be effective on a nation-wide basis by July 1, 2018.

Increase electronic filing of returns.  Individual tax return preparers would be required to file all individual returns electronically effective for returns with a due date (without extension) after December 31, 2016.  A waiver would be possible for return preparers whose business is operated in a geographic location which has “technological constraints such as lack of internet availability.”

Information returns regarding wages paid employees.  “The proposal accelerates the filing of Forms W-2 and W-3, and Forms 1099-MISC…”  The due date for providing copies to recipients would still be January 31, but the employer (whether paper filed or electronically filed) due date would be 15 days later (i.e. Feb. 15th).  At present, the electronically filed due date is March 31.  Effective for calendar years beginning after December 31, 2015.

Taxpayer notification of suspected identity theft.  If there may have been unauthorized use of a taxpayer’s identity or that of a dependent, the secretary shall (as soon as practicable) “notify the taxpayer of such determination…”  “In addition, the Secretary shall disclose to the taxpayer (or such person’s designee) whether an investigation has been initiated, is open or is closed…As under present law, the Secretary is not obliged to disclose return information the disclosure of which would seriously impair Federal tax administration.”

One cannot help but wonder just what can or will be disclosed under such a provision which the taxpayer does not know under “present law,” which is often very little.  This is really a negative reaction to N. H. Senator Kelly Ayottee’s recent initiative whereby the IRS Commissioner agreed to look into providing a copy to the taxpayer of a fraudulently filed return using that taxpayer’s and/or dependent’s identity information.  It appears to your Editor that the government is having second thoughts about letting us know what they know…privacy and all, don’t you know!

Sales of Real Estate Equal Ordinary Income or Capital Gain

SI Boo LLC was formed as a multi member LLC, treated as a partnership for tax purposes. SI Boo purchased real estate tax liens (certificates) at public auctions held by county tax collectors. These certificates could be assigned to other parties.  These certificates could also be "redeemed” by the real estate owners for various amounts based on the price sold at the auction. If the real estate owner didn’t redeem the certificate within a specific time frame, the holder of the certificate became the owner of the real estate.

After acquiring certificates, SI Boo attempted to sell them to third parties.  SI Boo’s method of making money was to borrow money to purchase these certificates and resell them at a profit.  If certificates were not transferred to other parties, SI Boo would try to negotiate a redemption by the property owner, tenants, or neighbors.  If this was unsuccessful, a “For Sale” sign would be put in the property’s yard or a real estate broker was hired to sell the property.  Some of the unredeemed properties sold were held for more than one year.  SI Boo’s 2007 partnership return showed $0 gross receipts, about $700,000 of deductions (mostly management fees paid to related companies), $1 million of short term capital gain, and $500,000 of long-term capital gains.  (SI Boo did not have any employees and relied entirely on the staff of the related companies, thus the management fees.)

Tax Court agreed with IRS determining SI Boo LLC’s purpose was to acquire certificates primarily for sale to customers in the ordinary course of a trade or business.  The subsequent sale of property not redeemed was considered to be a part of this same activity.  This “acquire and resell” activity was deemed to be a business activity and not an investment activity, therefore the income from the sales should be reported as ordinary income and not as capital gain.  Side note – Since this is ordinary income from a trade or business activity, it is also self-employment income.

SI Boo LLC, TC Memo 2015-19


This text has been shared with you courtesy of David & Mary Mellem, EAs & Ashwaubenon Tax Professionals.

Listed Property Limits for 2015

IRC §280F (listed property) provides ceilings on the amount of depreciation and §179 that can be
claimed on passenger automobiles, light duty trucks and vans.  This email gives you these limits for vehicles placed in service beginning in 2015.

These limits are multiplied by the taxpayer’s business use percentage of the vehicle.

Limits for passenger automobiles

The §280F limits for passenger automobiles first placed in service during the calendar year 2015 that are neither trucks nor vans:

• Year 1 - 3,160
• Year 2 - 5,100
• Year 3 - 3,050
• Year 4 & after - 1,875

Limits for trucks and vans

The §280F limits for trucks and vans first placed in service during the calendar year 2015 are:

• Year 1 - 3,460
• Year 2 – 5,600
• Year 3 – 3,350
• Year 4 & after - 1,975

 Currently bonus depreciation does not exist for 2015.  If Congress renews the bonus depreciation, it may also renew a higher amount for Year 1 above (such as the extra $8,000 we had for 2014 purchases).

 The leasehold inclusion for 2015 applies to a passenger automobile when the FMV of the vehicle exceeds $17,500 and apply to a light duty truck and van when the FMV of the vehicle exceeds $18,500.

This information including the lease tables for 2015 can be found in Revenue Procedure 2015-19 which can be found at www.irs.gov/pub/ by clicking on irs-drop and then on rp-15-19.



This text has been shared with you courtesy of:  David & Mary Mellem, EAs & Ashwaubenon Tax Professionals, 920-496-1065.

Per Diem Amounts Effective October 1, 2015

The M&IE rates have increased effective October 1, 2015.  Prior to this date the M&IE rates are $46, $51, $56, $61, $66, and $71 depending on the locality the taxpayer sleeps that night.  Effective October 1, 2015, the M&IE rates increase to $51, $54, $59, $64, $69, and $74.  The full per diem tables by state and key city can be found at www.gsa.gov.

The High/Low cost amounts are now $275 and $185 with the M&IE portion deemed to be $68 and $57, respectively.  As normal some of the localities included in the High cost areas have changed.  These can be found in the Notice.

The special M&IE per diem rate for taxpayers in the transportation industry is $63 for travel in the continental United States on or after October 1, 2015 ($59 for travel before October 1, 2015).

As in the past, taxpayer can choose to use the new rates beginning October 1, 2015, OR continue to use the old rates for the entire year.

Notice 2015-63


This text has been shared with you courtesy of:  David & Mary Mellem, EAs & Ashwaubenon Tax Professionals, 920-496-1065 (920-496-9111).