Short Sales - Real Estate Sales

Post Short Sale Bank Tactics

John McConnin — Wed, 08 Feb 2012 19:49:30 +0000

We know banks change sometimes change their minds after closing. We hear from collection guys who request more money and pretend they can unwind the closing.

This statute might present a problem for them.

California Civil Code Section 2943 – California Attorney Resources – California Laws

(d) (1) A beneficiary statement or payoff demand statement may be relied upon by the entitled person or his or her authorized agent in accordance with its terms, including with respect to the payoff demand statement reliance for the purpose of establishing the amount necessary to pay the obligation in full. If the beneficiary notifies the entitled person or his or her authorized agent of any amendment to the statement, then the amended statement may be relied upon by the entitled person or his or her authorized agent as provided in this subdivision. (2) If notification of any amendment to the statement is not given in writing, then a written amendment to the statement shall be delivered to the entitled person or his or her authorized agent no later than the next business day after notification.

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Short Sales - Real Estate Sales - Attorney Negotiated Short Sales and Traditional Real Estate Transactions

New Short Sale Package for Some Lenders – Pay Attention

John McConnin — Wed, 08 Feb 2012 17:47:13 +0000

1.1 Uniform Borrower Assistance Form fannie mae short sale package

New Fannaie Mae / Freddie Mac Short Sale Package.

This form is replacing the RMA for some some lenders.
You may wish to review page 4 with an Attorney before you sign this short sale package.
If you have assets to protect you may wish to pay attention to page 4 question 4 and question 14.
We did.

710 – Uniform Borrower Assistance Form fnm short sale application

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Short Sales - Real Estate Sales - Attorney Negotiated Short Sales and Traditional Real Estate Transactions

Short Payoff then Loan Modification Question from a client

John McConnin — Tue, 07 Feb 2012 19:56:56 +0000

Successful short payoff client begins work on the second leg.

John,

First, I wanted to thank you for helping me with the home equity line of credit. The bank sent me the 1098 (or 99) and I would like to ask you what do you think my options would be for the first mortgage.

I was thinking of contacting the bank for a refinancing to see if they can fix my current variable interest only.

My property 9422 compass point drive south unit 2 is worth about 390 K and I owe 404K.

I want to keep the property and not short sale it or foreclose it. What do you recommend?

Answer-

2 parts.

1. As with all loan workouts… you have to be very persistent. You never know when you catch the right person or right program.

You do have an uphill battle because your lender has close to full value of the loan as security. So they are likely to foreclose as quickly as they can if you were to stop making payments. Again persistence.

2. I would monitor all the hype coming from banks and the adminstration. I would read all the rules. If you do qualify for an upto 120 percent loan to value refi. I would create a pristine package. I would contact all govt agencies and push for them to hit the time frames. I would also contact your congressman and senator and be as respectful as possible to the aide. You might become one of the rare examples of a successful underwater refi.

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Short Sales - Real Estate Sales - Attorney Negotiated Short Sales and Traditional Real Estate Transactions

Warning – Mortgage Debt Forgiveness Expires 2012

John McConnin — Mon, 06 Feb 2012 21:36:25 +0000

If you plan to Walkaway or take a Strategic Default, the foreclosure process may not end until 2013.
Some short sales take less than 3 months, some take less than 9 months, but some take longer. (It frequently depends on the lender’s investor and whether they have insurance from third parties like AIG or if they are arguing internally with the originator over who should bare the loss.

Since Realtor negotiated short sales only succeed 25% of the time, (regardless of their hype) there is a chance your short sale will not close in 2012.

If your home is $100,000 upside down you could face a 1099 for $100,000 dollars in income.
How will handle it. What will that do to your tax bill? What will that do to your tax bracket?

It is now vital you understand the difference between recourse loans vs non recourse loans.

As of February 2012… both the California and Federal Mortgage Debt Forgiveness Acts Expire.
A loan workout now could hit you with a large 1099 which could result in a large income tax bill.

The following is from the IRS Webiste.

Ten Facts for Mortgage Debt Forgiveness

en Facts for Mortgage Debt Forgiveness IRS Tax Tip 2011-44, March 3, 2011 If you are a homeowner whose mortgage debt is partly or entirely forgiven during tax years 2007 through 2012, you may be able to claim special tax relief and exclude the debt forgiven from your income. Here are 10 facts the IRS wants you to know about Mortgage Debt Forgiveness. 1. Normally, debt forgiveness results in taxable income. However, under the Mortgage Forgiveness Debt Relief Act of 2007, you may be able to exclude up to $2 million of debt forgiven on your principal residence. 2. The limit is $1 million for a married person filing a separate return. 3. You may exclude debt reduced through mortgage restructuring, as well as mortgage debt forgiven in a foreclosure. 4. To qualify, the debt must have been used to buy, build or substantially improve your principal residence and be secured by that residence. 5. Refinanced debt proceeds used for the purpose of substantially improving your principal residence also qualify for the exclusion. 6. Proceeds of refinanced debt used for other purposes – for example, to pay off credit card debt – do not qualify for the exclusion. 7. If you qualify, claim the special exclusion by filling out Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness, and attach it to your federal income tax return for the tax year in which the qualified debt was forgiven. 8. Debt forgiven on second homes, rental property, business property, credit cards or car loans do not qualify for the tax relief provision. In some cases, however, other tax relief provisions – such as insolvency – may be applicable. IRS Form 982 provides more details about these provisions. 9. If your debt is reduced or eliminated you normally will receive a year-end statement, Form 1099-C, Cancellation of Debt, from your lender. By law, this form must show the amount of debt forgiven and the fair market value of any property foreclosed. 10. Examine the Form 1099-C carefully. Notify the lender immediately if any of the information shown is incorrect. You should pay particular attention to the amount of debt forgiven in Box 2 as well as the value listed for your home in Box 7. For more information about the Mortgage Forgiveness Debt Relief Act of 2007, visit http://www.irs.gov. A good resource is IRS Publication 4681, Canceled Debts, Foreclosures, Repossessions and Abandonments. You can also use the Interactive Tax Assistant available on the IRS website to determine if the cancellation of debt is taxable. The ITA tool is a tax law resource that takes you through a series of questions and provides you with responses to tax law questions Taxpayers may obtain copies of IRS publications and forms either by downloading them from http://www.irs.gov or by calling 800-TAX-FORM (800-829-3676). Links: Form 982 Form 1099-C Publication 4681

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Short Sales - Real Estate Sales - Attorney Negotiated Short Sales and Traditional Real Estate Transactions

Disputed Debt Doctrine, short sale taxes

John McConnin — Wed, 01 Feb 2012 02:14:03 +0000

If the Mortgage Debt Forgivness Act expire soon, this may become upside down homeowners and their attorneys focus.

916 F.2d 110

66 A.F.T.R.2d 90-5679, 59 USLW 2256, 90-2
USTC P 50,530

David & Louise ZARIN
v.
COMMISSIONER OF INTERNAL REVENUE.
Appeal of David ZARIN and Louise Zarin.

No. 90-1240.

United States Court of Appeals,
Third Circuit.

Argued Aug. 20, 1990.
Decided Oct. 10, 1990.

William M. Goldstein (argued), Theodore P. Seto, Drinker, Biddle & Reath, Philadelphia, Pa., for appellants.

Bruce Ellisen (argued), Gary R. Allen, U.S. Dept. of Justice, Tax Div., Washington, D.C., for appellee.

Before STAPLETON, COWEN and WEIS, Circuit Judges.

OPINION OF THE COURT

COWEN, Circuit Judge.

David Zarin (“Zarin”) appeals from a decision of the Tax Court holding that he recognized $2,935,000 of income from discharge of indebtedness resulting from his gambling activities, and that he should be taxed on the income.1 This Court has jurisdiction to review the Tax Court’s decision under section 7482 of the Internal Revenue Code (1954) (the “Code”). After considering the issues raised by this appeal, we will reverse.

Zarin was a professional engineer who participated in the development, construction, and management of various housing projects. A resident of Atlantic City, New Jersey, Zarin occasionally gambled, both in his hometown and in other places where gambling was legalized. To facilitate his gaming activities in Atlantic City, Zarin applied to Resorts International Hotel (“Resorts”) for a credit line in June, 1978. Following a credit check, Resorts granted Zarin $10,000 of credit. Pursuant to this credit arrangement with Resorts, Zarin could write a check, called a marker,2 and in return receive chips, which could then be used to gamble at the casino’s tables.

Before long, Zarin developed a reputation as an extravagant “high roller” who routinely bet the house maximum while playing craps, his game of choice. Considered a “valued gaming patron” by Resorts, Zarin had his credit limit increased at regular intervals without any further credit checks, and was provided a number of complimentary services and privileges. By November, 1979, Zarin’s permanent line of credit had been raised to $200,000. Between June, 1978, and December, 1979, Zarin lost $2,500,000 at the craps table, losses he paid in full.

Responding to allegations of credit abuses, the New Jersey Division of Gaming Enforcement filed with the New Jersey Casino Control Commission a complaint against Resorts. Among the 809 violations of casino regulations alleged in the complaint of October, 1979, were 100 pertaining to Zarin. Subsequently, a Casino Control Commissioner issued an Emergency Order, the effect of which was to make further extensions of credit to Zarin illegal.

Nevertheless, Resorts continued to extend Zarin’s credit limit through the use of two different practices: “considered cleared” credit and “this trip only” credit.3 Both methods effectively ignored the Emergency Order and were later found to be illegal.4

By January, 1980, Zarin was gambling compulsively and uncontrollably at Resorts, spending as many as sixteen hours a day at the craps table.5 During April, 1980, Resorts again increased Zarin’s credit line without further inquiries. That same month, Zarin delivered personal checks and counterchecks to Resorts which were returned as having been drawn against insufficient funds. Those dishonored checks totaled $3,435,000. In late April, Resorts cut off Zarin’s credit.

Although Zarin indicated that he would repay those obligations, Resorts filed a New Jersey state court action against Zarin in November, 1980, to collect the $3,435,000. Zarin denied liability on grounds that Resort’s claim was unenforceable under New Jersey regulations intended to protect compulsive gamblers. Ten months later, in September, 1981, Resorts and Zarin settled their dispute for a total of $500,000.

The Commissioner of Internal Revenue (“Commissioner”) subsequently determined deficiencies in Zarin’s federal income taxes for 1980 and 1981, arguing that Zarin recognized $3,435,000 of income in 1980 from larceny by trick and deception. After Zarin challenged that claim by filing a Tax Court petition, the Commissioner abandoned his 1980 claim, and argued instead that Zarin had recognized $2,935,000 of income in 1981 from the cancellation of indebtedness which resulted from the settlement with Resorts.

Agreeing with the Commissioner, the Tax Court decided, eleven judges to eight, that Zarin had indeed recognized $2,935,000 of income from the discharge of indebtedness, namely the difference between the original $3,435,000 “debt” and the $500,000 settlement. Zarin v. Commissioner, 92 T.C. 1084 (1989). Since he was in the seventy percent tax bracket, Zarin’s deficiency for 1981 was calculated to be $2,047,245. With interest to April 5, 1990, Zarin allegedly owes the Internal Revenue Service $5,209,033.96 in additional taxes. Zarin appeals the order of the Tax Court.

II.

The sole issue before this Court is whether the Tax Court correctly held that Zarin had income from discharge of indebtedness.6 Section 108 and section 61(a)(12) of the Code set forth “the general rule that gross income includes income from the discharge of indebtedness.” I.R.C. Sec. 108(e)(1). The Commissioner argues, and the Tax Court agreed, that pursuant to the Code, Zarin did indeed recognize income from discharge of gambling indebtedness.

Under the Commissioner’s logic, Resorts advanced Zarin $3,435,000 worth of chips, chips being the functional equivalent of cash. At that time, the chips were not treated as income, since Zarin recognized an obligation of repayment. In other words, Resorts made Zarin a tax-free loan. However, a taxpayer does recognize income if a loan owed to another party is cancelled, in whole or in part. I.R.C. Secs. 61(a)(12), 108(e). The settlement between Zarin and Resorts, claims the Commissioner, fits neatly into the cancellation of indebtedness provisions in the Code. Zarin owed $3,435,000, paid $500,000, with the difference constituting income. Although initially persuasive, the Commissioner’s position is nonetheless flawed for two reasons.

III.

Initially, we find that sections 108 and 61(a)(12) are inapplicable to the Zarin/Resorts transaction. Section 61 does not define indebtedness. On the other hand, section 108(d)(1), which repeats and further elaborates on the rule in section 61(a)(12), defines the term as any indebtedness “(A) for which the taxpayer is liable, or (B) subject to which the taxpayer holds property.” I.R.C. Sec. 108(d)(1). In order to bring the taxpayer within the sweep of the discharge of indebtedness rules, then, the IRS must show that one of the two prongs in the section 108(d)(1) test is satisfied. It has not been demonstrated that Zarin satisfies either.

Because the debt Zarin owed to Resorts was unenforceable as a matter of New Jersey state law,7 it is clearly not a debt “for which the taxpayer is liable.” I.R.C. Sec. 108(d)(1)(A). Liability implies a legally enforceable obligation to repay, and under New Jersey law, Zarin would have no such obligation.

Moreover, Zarin did not have a debt subject to which he held property as required by section 108(d)(1)(B). Zarin’s indebtedness arose out of his acquisition of gambling chips. The Tax Court held that gambling chips were not property, but rather, “a medium of exchange within the Resorts casino” and a “substitute for cash.” Alternatively, the Tax Court viewed the chips as nothing more than “the opportunity to gamble and incidental services …” Zarin, 92 T.C. at 1099. We agree with the gist of these characterizations, and hold that gambling chips are merely an accounting mechanism to evidence debt.

Gaming chips in New Jersey during 1980 were regarded “solely as evidence of a debt owed to their custodian by the casino licensee and shall be considered at no time the property of anyone other than the casino licensee issuing them.” N.J.Admin.Code tit. 19k, Sec. 19:46-1.5(d) (1990). Thus, under New Jersey state law, gambling chips were Resorts’ property until transferred to Zarin in exchange for the markers, at which point the chips became “evidence” of indebtedness (and not the property of Zarin).

Even were there no relevant legislative pronouncement on which to rely, simple common sense would lead to the conclusion that chips were not property in Zarin’s hands. Zarin could not do with the chips as he pleased, nor did the chips have any independent economic value beyond the casino. The chips themselves were of little use to Zarin, other than as a means of facilitating gambling. They could not have been used outside the casino. They could have been used to purchase services and privileges within the casino, including food, drink, entertainment, and lodging, but Zarin would not have utilized them as such, since he received those services from Resorts on a complimentary basis. In short, the chips had no economic substance.

Although the Tax Court found that theoretically, Zarin could have redeemed the chips he received on credit for cash and walked out of the casino, Zarin, 92 T.C. at 1092, the reality of the situation was quite different. Realistically, before cashing in his chips, Zarin would have been required to pay his outstanding IOUs. New Jersey state law requires casinos to “request patrons to apply any chips or plaques in their possession in reduction of personal checks or Counter Checks exchanged for purposes of gaming prior to exchanging such chips or plaques for cash or prior to departing from the casino area.” N.J.Admin.Code tit. 19k, Sec. 19:45-1.24(s) (1979) (currently N.J.Admin.Code tit. 19k, Sec. 19:45-1.25(o) (1990) (as amended)). Since his debt at all times equalled or exceeded the number of chips he possessed, redemption would have left Zarin with no chips, no cash, and certainly nothing which could have been characterized as property.

Not only were the chips non-property in Zarin’s hands, but upon transfer to Zarin, the chips also ceased to be the property of Resorts. Since the chips were in the possession of another party, Resorts could no longer do with the chips as it pleased, and could no longer control the chips’ use. Generally, at the time of a transfer, the party in possession of the chips can gamble with them, use them for services, cash them in, or walk out of the casino with them as an Atlantic City souvenir. The chips therefore become nothing more than an accounting mechanism, or evidence of a debt, designed to facilitate gambling in casinos where the use of actual money was forbidden.8 Thus, the chips which Zarin held were not property within the meaning of I.R.C. Sec. 108(d)(1)(B).9

In short, because Zarin was not liable on the debt he allegedly owed Resorts, and because Zarin did not hold “property” subject to that debt, the cancellation of indebtedness provisions of the Code do not apply to the settlement between Resorts and Zarin. As such, Zarin cannot have income from the discharge of his debt.IV.

Instead of analyzing the transaction at issue as cancelled debt, we believe the proper approach is to view it as disputed debt or contested liability. Under the contested liability doctrine, if a taxpayer, in good faith, disputed the amount of a debt, a subsequent settlement of the dispute would be treated as the amount of debt cognizable for tax purposes. The excess of the original debt over the amount determined to have been due is disregarded for both loss and debt accounting purposes. Thus, if a taxpayer took out a loan for $10,000, refused in good faith to pay the full $10,000 back, and then reached an agreement with the lendor that he would pay back only $7000 in full satisfaction of the debt, the transaction would be treated as if the initial loan was $7000. When the taxpayer tenders the $7000 payment, he will have been deemed to have paid the full amount of the initially disputed debt. Accordingly, there is no tax consequence to the taxpayer upon payment.

The seminal “contested liability” case is N. Sobel, Inc. v. Commissioner, 40 B.T.A. 1263 (1939). In Sobel, the taxpayer exchanged a $21,700 note for 100 shares of stock from a bank. In the following year, the taxpayer sued the bank for recision, arguing that the bank loan was violative of state law, and moreover, that the bank had failed to perform certain promises. The parties eventually settled the case in 1935, with the taxpayer agreeing to pay half of the face amount of the note. In the year of the settlement, the taxpayer claimed the amount paid as a loss. The Commissioner denied the loss because it had been sustained five years earlier, and further asserted that the taxpayer recognized income from the discharge of half of his indebtedness.

The Board of Tax Appeals held that since the loss was not fixed until the dispute was settled, the loss was recognized in 1935, the year of the settlement, and the deduction was appropriately taken in that year. Additionally, the Board held that the portion of the note forgiven by the bank “was not the occasion for a freeing of assets and that there was no gain …” Id. at 1265. Therefore, the taxpayer did not have any income from cancellation of indebtedness.

There is little difference between the present case and Sobel. Zarin incurred a $3,435,000 debt while gambling at Resorts, but in court, disputed liability on the basis of unenforceability. A settlement of $500,000 was eventually agreed upon. It follows from Sobel that the settlement served only to fix the amount of debt. No income was realized or recognized. When Zarin paid the $500,000, any tax consequence dissolved.10

Only one other court has addressed a case factually similar to the one before us. In United States v. Hall, 307 F.2d 238 (10th Cir.1962), the taxpayer owed an unenforceable gambling debt alleged to be $225,000. Subsequently, the taxpayer and the creditor settled for $150,000. The taxpayer then transferred cattle valued at $148,110 to his creditor in satisfaction of the settlement agreement. A jury held that the parties fixed the debt at $150,000, and that the taxpayer recognized income from cancellation of indebtedness equal to the difference between the $150,000 and the $148,110 value affixed to the cattle. Arguing that the taxpayer recognized income equal to the difference between $225,000 and $148,000, the Commissioner appealed.

The Tenth Circuit rejected the idea that the taxpayer had any income from cancellation of indebtedness. Noting that the gambling debt was unenforceable, the Tenth Circuit said, “The cold fact is that taxpayer suffered a substantial loss from gambling, the amount of which was determined by the transfer.” Id. at 241. In effect, the Court held that because the debt was unenforceable, the amount of the loss and resulting debt cognizable for tax purposes were fixed by the settlement at $148,110. Thus, the Tenth Circuit lent its endorsement to the contested liability doctrine in a factual situation strikingly similar to the one at issue.11

The Commissioner argues that Sobel and the contested liability doctrine only apply when there is an unliquidated debt; that is, a debt for which the amount cannot be determined. See Colonial Sav. Ass’n v. Commissioner, 85 T.C. 855, 862-863 (1985) (Sobel stands for the proposition that “there must be a liquidated debt”), aff’d, 854 F.2d 1001 (7th Cir.1988). See also N. Sobel, Inc. v. Commissioner, 40 B.T.A. at 1265 (there was a dispute as to “liability and the amount” of the debt). Since Zarin contested his liability based on the unenforceability of the entire debt, and did not dispute the amount of the debt, the Commissioner would have us adopt the reasoning of the Tax Court, which found that Zarin’s debt was liquidated, therefore barring the application of Sobel and the contested liability doctrine. Zarin, 92 T.C. at 1095 (Zarin’s debt “was a liquidated amount” and “[t]here is no dispute about the amount [received].”).

We reject the Tax Court’s rationale. When a debt is unenforceable, it follows that the amount of the debt, and not just the liability thereon, is in dispute. Although a debt may be unenforceable, there still could be some value attached to its worth. This is especially so with regards to gambling debts. In most states, gambling debts are unenforceable, and have “but slight potential …” United States v. Hall, 307 F.2d 238, 241 (10th Cir.1962). Nevertheless, they are often collected, at least in part. For example, Resorts is not a charity; it would not have extended illegal credit to Zarin and others if it did not have some hope of collecting debts incurred pursuant to the grant of credit.

Moreover, the debt is frequently incurred to acquire gambling chips, and not money. Although casinos attach a dollar value to each chip, that value, unlike money’s, is not beyond dispute, particularly given the illegality of gambling debts in the first place. This proposition is supported by the facts of the present case. Resorts gave Zarin $3.4 million dollars of chips in exchange for markers evidencing Zarin’s debt. If indeed the only issue was the enforceabilty of the entire debt, there would have been no settlement. Zarin would have owed all or nothing. Instead, the parties attached a value to the debt considerably lower than its face value. In other words, the parties agreed that given the circumstances surrounding Zarin’s gambling spree, the chips he acquired might not have been worth $3.4 million dollars, but were worth something. Such a debt cannot be called liquidated, since its exact amount was not fixed until settlement.

To summarize, the transaction between Zarin and Resorts can best be characterized as a disputed debt, or contested liability. Zarin owed an unenforceable debt of $3,435,000 to Resorts. After Zarin in good faith disputed his obligation to repay the debt, the parties settled for $500,000, which Zarin paid. That $500,000 settlement fixed the amount of loss and the amount of debt cognizable for tax purposes. Since Zarin was deemed to have owed $500,000, and since he paid Resorts $500,000, no adverse tax consequences attached to Zarin as a result.12V.

In conclusion, we hold that Zarin did not have any income from cancellation of indebtedness for two reasons. First, the Code provisions covering discharge of debt are inapplicable since the definitional requirement in I.R.C. section 108(d)(1) was not met. Second, the settlement of Zarin’s gambling debts was a contested liability. We reverse the decision of the Tax Court and remand with instructions to enter judgment that Zarin realized no income by reason of his settlement with Resorts.

STAPLETON, Circuit Judge, dissenting.

I respectfully dissent because I agree with the Commissioner’s appraisal of the economic realities of this matter.

Resorts sells for cash the exhilaration and the potential for profit inherent in games of chance. It does so by selling for cash chips that entitle the holder to gamble at its casino. Zarin, like thousands of others, wished to purchase what Resorts was offering in the marketplace. He chose to make this purchase on credit and executed notes evidencing his obligation to repay the funds that were advanced to him by Resorts. As in most purchase money transactions, Resorts skipped the step of giving Zarin cash that he would only return to it in order to pay for the opportunity to gamble. Resorts provided him instead with chips that entitled him to participate in Resorts’ games of chance on the same basis as others who had paid cash for that privilege.1 Whether viewed as a one or two-step transaction, however, Zarin received either $3.4 million in cash or an entitlement for which others would have had to pay $3.4 million.

Despite the fact that Zarin received in 1980 cash or an entitlement worth $3.4 million, he correctly reported in that year no income from his dealings with Resorts. He did so solely because he recognized, as evidenced by his notes, an offsetting obligation to repay Resorts $3.4 million in cash. See, e.g., Vukasovich, Inc. v. Commissioner, 790 F.2d 1409 (9th Cir.1986); United States v. Rochelle, 384 F.2d 748 (5th Cir.1967), cert. denied, 390 U.S. 946, 88 S.Ct. 1032, 19 L.Ed.2d 1135 (1968); Bittker and Thompson, Income From the Discharged Indebtedness: The Progeny of United States v. Kirby Lumber Co., 66 Calif.L.Rev. 159 (1978). In 1981, with the delivery of Zarin’s promise to pay Resorts $500,000 and the execution of a release by Resorts, Resorts surrendered its claim to repayment of the remaining $2.9 million of the money Zarin had borrowed. As of that time, Zarin’s assets were freed of his potential liability for that amount and he recognized gross income in that amount. Commissioner v. Tufts, 461 U.S. 300, 103 S.Ct. 1826, 75 L.Ed.2d 863 (1983); United States v. Kirby Lumber Company, 284 U.S. 1, 52 S.Ct. 4, 76 L.Ed. 131 (1931); Vukasovich, Inc. v. Commissioner, 790 F.2d 1409 (9th Cir.1986). But see United States v. Hall, 307 F.2d 238 (10th Cir.1962).2

The only alternatives I see to this conclusion are to hold either (1) that Zarin realized $3.4 million in income in 1980 at a time when both parties to the transaction thought there was an offsetting obligation to repay or (2) that the $3.4 million benefit sought and received by Zarin is not taxable at all. I find the latter alternative unacceptable as inconsistent with the fundamental principle of the Code that anything of commercial value received by a taxpayer is taxable unless expressly excluded from gross income.3 Commissioner v. Glenshaw Glass Co., 348 U.S. 426, 75 S.Ct. 473, 99 L.Ed. 483 (1955); United States v. Kirby Lumber Co., supra. I find the former alternative unacceptable as impracticable. In 1980, neither party was maintaining that the debt was unenforceable and, because of the settlement, its unenforceability was not even established in the litigation over the debt in 1981. It was not until 1989 in this litigation over the tax consequences of the transaction that the unenforceability was first judicially declared. Rather than require such tax litigation to resolve the correct treatment of a debt transaction, I regard it as far preferable to have the tax consequences turn on the manner in which the debt is treated by the parties. For present purposes, it will suffice to say that where something that would otherwise be includable in gross income is received on credit in a purchase money transaction, there should be no recognition of income so long as the debtor continues to recognize an obligation to repay the debt. On the other hand, income, if not earlier recognized, should be recognized when the debtor no longer recognizes an obligation to repay and the creditor has released the debt or acknowledged its unenforceability.4

In this view, it makes no difference whether the extinguishment of the creditor’s claim comes as a part of a compromise. Resorts settled for 14 cents on the dollar presumably because it viewed such a settlement as reflective of the odds that the debt would be held to be enforceable. While Zarin should be given credit for the fact that he had to pay 14 cents for a release, I see no reason why he should not realize gain in the same manner as he would have if Resorts had concluded on its own that the debt was legally unenforceable and had written it off as uncollectible.5

I would affirm the judgment of the Tax Court.

David Zarin’s wife, Louise, is also a party to this appeal, since she filed a joint return with her husband. When the term “Zarin” is used in this opinion, however, it will refer only to David Zarin

A “marker” is a negotiable draft payable to Resorts and drawn on the maker’s bank

Under the “considered cleared” method, Resorts would treat a personal check as a cash transaction, and would therefore not apply the amount of the check in calculating the amount of credit extended Zarin. “This trip only” credit allowed Resorts to grant temporary increases of credit for a given visit, so long as the credit limit was lowered by the next visit

On July 8, 1983, the New Jersey Casino Control Commission found that Resorts violated the Emergency Order at least thirteen different times, nine involving Zarin, and fined Resorts $130,000

Zarin claims that at the time he was suffering from a recognized emotional disorder that caused him to gamble compulsively

Subsequent to the Tax Court’s decision, Zarin filed a motion to reconsider, arguing that he was insolvent at the time Resorts forgave his debt, and thus, under I.R.C. section 108(a)(1)(B), could not have income from discharge of indebtedness. He did, not, however, raise that issue before the Tax Court until after it rendered its decision. The Tax Court denied the motion for reconsideration. By reason of our resolution of this case, we do not need to decide whether the Tax Court abused its discretion in denying Zarin’s motion

The Tax Court held that the Commissioner had not met its burden of proving that the debt owed Resorts was enforceable as a matter of state law. Zarin, 92 T.C. at 1090. There was ample evidence to support that finding. In New Jersey, the extension of credit by casinos “to enable [any] person to take part in gaming activity as a player” is limited. N.J.Stat.Ann. Sec. 5:12-101(b) (1988). Under N.J.Stat.Ann. Sec. 5:12-101(f), any credit violation is “invalid and unenforceable for the purposes of collection …” In Resorts Int’l Hotel, Inc. v. Salomone, 178 N.J.Super. 598, 429 A.2d 1078 (App.Div.1981), the court held that “casinos must comply with the Legislature’s strict control of credit for gambling purposes. Unless they do, the debts reflected by players’ checks will not be enforced….” Id. at 607, 429 A.2d at 1082

With regards to the extension of credit to Zarin after the Emergency Order of October, 1979, was issued, Resorts did not comply with New Jersey regulations. The Casino Control Commission specifically stated in 1983 “that Resorts was guilty of infractions, violations, improprieties, with the net effect that [Zarin] was encouraged to continue gambling long after, one, his credit line was reached, and exceeded; two, long after it became apparent that the gambler was an addicted gambler; three, long after the gambler had difficulty in paying his debts; and four, Resorts knew the individual was gambling when he should not have been gambling.” Appendix at 325-326. It follows, therefore, that under New Jersey law, the $3,435,000 debt Zarin owed Resorts was totally unenforceable.

Although, as noted above, Zarin would not have been able to leave the casino with cash or chips, and probably would not have used the chips for services, these facts do not change the character of the chips. Despite the aforementioned limitations upon Zarin’s use of the chips, they remain an accounting mechanism or evidence of a debt. Resorts’ increased interest in Zarin’s chips does not rise to the level of a property interest, since Zarin still has dominion over the chips within the casino

The parties stipulated before the Tax Court that New Jersey casino “chips are property which are not negotiable and may not be used to gamble or for any other purpose outside the casino where they were issued.” It could be argued that we are bound by this stipulation to accept the proposition that chips are property. We do not dispute the notion that chips are property, but as discussed above, they are only property in the hands of the casino. The stipulation is consistent with this idea. In fact, both parties agreed in their briefs that chips are property of the casino. Moreover, during oral arguments, both parties agreed that chips were not property when held by the gambler

Had Zarin not paid the $500,000 dollar settlement, it would be likely that he would have had income from cancellation of indebtedness. The debt at that point would have been fixed, and Zarin would have been legally obligated to pay it

The Commissioner argues that the decision in Hall was based on United States Supreme Court precedent since overruled, and therefore Hall should be disregarded. Indeed, the Hall court devoted a considerable amount of time to Bowers v. Kerbaugh-Empire Co., 271 U.S. 170, 46 S.Ct. 449, 70 L.Ed. 886 (1926), a case whose validity is in question. We do not pass on the question of whether or not Bowers is good law. We do note that Hall relied on Bowers only for the proposition that ” ‘a court need not in every case be oblivious to the net effect of the entire transaction.’ ” United States v. Hall, 307 F.2d at 242, quoting Bradford v. Commissioner, 233 F.2d 935, 939 (6th Cir.1956). Hall’s reliance on Bowers did not extend to the issue of contested liability, and even if it did, the idea that “Courts need not apply mechanical standards which smother the reality of a particular transaction,” Id. at 241, is hardly an exceptional concept in the tax realm. See Commissioner v. Tufts, 461 U.S. 300, 103 S.Ct. 1826, 75 L.Ed.2d 863 (1983); Hillsboro Nat’l Bank v. Commissioner, 460 U.S. 370, 103 S.Ct. 1134, 75 L.Ed.2d 130 (1983)

The Commissioner argues in the alternative that Zarin recognized $3,435,000 of income in 1980. This claim has no merit. Recognition of income would depend upon a finding that Zarin did not have cancellation of indebtedness income solely because his debt was unenforceable. We do not so hold. Although unenforceability is a factor in our analysis, our decision ultimately hinges upon the determination that the “disputed debt” rule applied, or alternatively, that chips are not property within the meaning of I.R.C. section 108

I view as irrelevant the facts that Resorts advanced credit to Zarin solely to enable him to patronize its casino and that the chips could not be used elsewhere or for other purposes. When one buys a sofa from the furniture store on credit, the fact that the proprietor would not have advanced the credit for a different purpose does not entitle one to a tax-free gain in the event the debt to the store is extinguished for some reason

This is not a case in which parties agree subsequent to a purchase money transaction that the property purchased has a value less than thought at the time of the transaction. In such cases, the purchase price adjustment rule is applied and the agreed-upon value is accepted as the value of the benefit received by the purchaser; see e.g., Commissioner v. Sherman, 135 F.2d 68 (6th Cir.1943); N. Sobel, Inc. v. Commissioner, 40 B.T.A. 1263 (1939). Nor is this a case in which the taxpayer is entitled to rescind an entire purchase money transaction, thereby to restore itself to the position it occupied before receiving anything of commercial value. In this case, the illegality was in the extension of credit by Resorts and whether one views the benefit received by Zarin as cash or the opportunity to gamble, he is no longer in a position to return that benefit

As the court’s opinion correctly points out, this record will not support an exclusion under Sec. 108(a) which relates to discharge of debt in an insolvency or bankruptcy context. Section 108(e)(5) of the Code, which excludes discharged indebtedness arising from a “purchase price adjustment” is not applicable here. Among other things, Sec. 108(e)(5) necessarily applies only to a situation in which the debtor still holds the property acquired in the purchase money transaction. Equally irrelevant is Sec. 108(d)’s definition of “indebtedness” relied upon heavily by the court. Section 108(d) expressly defines that term solely for the purposes of Sec. 108 and not for the purposes of Sec. 61(a)(12)

Cf. Bear Manufacturing Co. v. United States, 430 F.2d 152 (7th Cir.1970) (termination of a liability for tax purposes turns not on running of applicable statute of limitations, but on conduct of the parties), cert. denied, 400 U.S. 1021, 91 S.Ct. 583, 27 L.Ed.2d 632 (1971)

A different situation exists where there is a bona fide dispute over the amount of a debt and the dispute is compromised. Rather than require tax litigation to determine the amount of income received, the Commission treats the compromise figure as representing the amount of the obligation. I find this sensible and consistent with the pragmatic approach I would take

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Short Sales, Disputed Debt doctrine, COD and 1099s.

John McConnin — Wed, 01 Feb 2012 02:06:48 +0000

This short sale question came to us via email.

A very quick question re short sales – desparate for answer

I have a home in Escondido and have a short sale negotiator. I am trying to convince him to ask the lender to put a realistic FMV in the 1099C box 7 in return from some contribution from me. As you know short sale prices are really 10-15% below what a willing seller would take, so what I am asking seems very reasonable. He is adamant that this cannot be done. Can it be done? I am in really severe financial trouble, so I would REALLY appreciate an answer to this. I don’t live in the home and will need to pay 25% on every dollar in box 2.

Response – There are so many facts we would need to know before we answer this question.

1 Recourse or non recourse loans

2. Original Loan Amounts

3. Insolvency

4. Disputed Debt

5. Have you set the lender up with letters from a lawyer challenging them on the origination of the loans.

However, in our experience when it comes to short sales, money and lenders… everything is negotiable.

Note….

Disputed Debt Doctrine

The Disputed Debt Doctrine (also known as the Contested Liability Doctrine), is yet another exception to including COD income in gross income. This doctrine can be found in a Third Circuit Court of Appeals case, Zarin v. Commissioner.^[7] In order for this exception to apply, the amount of debt must actually be disputed. This can happen if the two parties actually have a good faith dispute over the amount owed. A written instrument containing the amount of debt will probably not satisfy this requirement. However, as the court decided in Zarin, the Disputed Debt Doctrine can also apply if the debt is not legally enforceable.^[8]

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What is a Mortgage under California Law

John McConnin — Tue, 31 Jan 2012 23:25:44 +0000

I reviewed another short sale approval letter for a client today.

The relevent section is quoted below.

Bank of America recently wrote this in their short sale approval letter. I would prefer BofA to refer to its security interest as a Deed of Trust… but I realize they might justify their language by the code section 2924.

“The owner of your mortgage note, the mortgage insurer, if your loan is covered by mortgage insurance, and Bank of America, N.A.

waive their right to pursue collection of any deficiency following the completion of your short sale and your debt is considered

settled. The deficiency is the difference between: (1) the remaining amount due under the mortgage note and mortgage or deed of

trust; and, (2) the current market value of the property plus any cash contribution you make or amount you agree to repay in the

future. The amount of the deficiency will be reported to the Internal Revenue Service (IRS) on the appropriate 1099 Form or Forms.

We suggest that you contact the IRS or your tax preparer to determine if you have any tax liability.”

California Civil Code Section 2924 – California Attorney Resources – California Laws

(a) Every transfer of an interest in property, other than in trust, made only as a security for the performance of another act, is to be deemed a mortgage, except when in the case of personal property it is accompanied by actual change of possession, in which case it is to be deemed a pledge. Where, by a mortgage created after July 27, 1917, of any estate in real property, other than an estate at will or for years, less than two, or in any transfer in trust made after July 27, 1917, of a like estate to secure the performance of an obligation, a power of sale is conferred upon the mortgagee, trustee, or any other person, to be exercised after a breach of the obligation for which that mortgage or transfer is a security, the power shall not be exercised except where the mortgage or transfer is made pursuant to an order, judgment, or decree of a court of record, or to secure the payment of bonds or other evidences of indebtedness authorized or permitted to be issued by the Commissioner of Corporations, or is made by a public utility subject to the provisions of the Public Utilities Act, until all of the following apply: (1) The trustee, mortgagee, or beneficiary, or any of their authorized agents shall first file for record, in the office of the recorder of each county wherein the mortgaged or trust property or some part or parcel thereof is situated, a notice of default. That notice of default shall include all of the following: (A) A statement identifying the mortgage or deed of trust by stating the name or names of the trustor or trustors and giving the book and page, or instrument number, if applicable, where the mortgage or deed of trust is recorded or a description of the mortgaged or trust property. (B) A statement that a breach of the obligation for which the mortgage or transfer in trust is security has occurred. (C) A statement setting forth the nature of each breach actually known to the beneficiary and of his or her election to sell or cause to be sold the property to satisfy that obligation and any other obligation secured by the deed of trust or mortgage that is in default. (D) If the default is curable pursuant to Section 2924c, the statement specified in paragraph (1) of subdivision (b) of Section 2924c. (2) Not less than three months shall elapse from the filing of the notice of default. (3) Except as provided in paragraph (4), after the lapse of the three months described in paragraph (2), the mortgagee, trustee, or other person authorized to take the sale shall give notice of sale, stating the time and place thereof, in the manner and for a time not less than that set forth in Section 2924f. (4) Notwithstanding paragraph (3), the mortgagee, trustee, or other person authorized to take sale may file a notice of sale pursuant to Section 2924f up to five days before the lapse of the three-month period described in paragraph (2), provided that the date of sale is no earlier than three months and 20 days after the filing of the notice of default. (b) In performing acts required by this article, the trustee shall incur no liability for any good faith error resulting from reliance on information provided in good faith by the beneficiary regarding the nature and the amount of the default under the secured obligation, deed of trust, or mortgage. In performing the acts required by this article, a trustee shall not be subject to Title 1.6c (commencing with Section 1788) of Part 4. (c) A recital in the deed executed pursuant to the power of sale of compliance with all requirements of law regarding the mailing of copies of notices or the publication of a copy of the notice of default or the personal delivery of the copy of the notice of default or the posting of copies of the notice of sale or the publication of a copy thereof shall constitute prima facie evidence of compliance with these requirements and conclusive evidence thereof in favor of bona fide purchasers and encumbrancers for value and without notice. (d) All of the following shall constitute privileged communications pursuant to Section 47: (1) The mailing, publication, and delivery of notices as required by this section. (2) Performance of the procedures set forth in this article. (3) Performance of the functions and procedures set forth in this article if those functions and procedures are necessary to carry out the duties described in Sections 729.040, 729.050, and 729.080 of the Code of Civil Procedure. (e) There is a rebuttable presumption that the beneficiary actually knew of all unpaid loan payments on the obligation owed to the beneficiary and secured by the deed of trust or mortgage subject to the notice of default. However, the failure to include an actually known default shall not invalidate the notice of sale and the beneficiary shall not be precluded from asserting a claim to this omitted default or defaults in a separate notice of default. (f) This section shall become operative on January 1, 2011.

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Statute of Limitations in California for Mortgages and Notes

John McConnin — Tue, 24 Jan 2012 00:52:48 +0000

Many people have questions about the Stautes of Limitations on loans and mortgages. Short sale clients of Realtors who did not get written releases from the deficiency and people who walked away from recourse second loans have a keen interesting in knowing when their lender can no longer sue them. Lawyers are trained to decline to answer statute of limtations questions. Why? Because insurance carriers insurers tell us not to. Why? I think its because potential clients focus on a date, while at the same time a lawyer is thinking that it goes without saying that Plaintiff’s lawyers and collections firms try to get around statues of limitations all the time.

So… in the interest of being useful, we will post some of the relevent Code sections below. (note these laws may change over time.)

Below are some of the sections of the Calfornia Code which deal with some of statues of limitations. if you do conclude the SOL for a real estate loan in CA is 4 years, realize you still have more facts to nail down. Two item which almost everyone should consider are;

1. When did the time start to run? and

2. Are there any facts which might cause the time period to toll?

CA Codes (ccp:335-349.4)

336. Within five years: (a) An action for mesne profits of real property. (b) An action for violation of a restriction, as defined in Section 784 of the Civil Code. The period prescribed in this subdivision runs from the time the person seeking to enforce the restriction discovered or, through the exercise of reasonable diligence, should have discovered the violation. A failure to commence an action for violation of a restriction within the period prescribed in this subdivision does not waive the right to commence an action for any other violation of the restriction and does not, in itself, create an implication that the restriction is abandoned, obsolete, or otherwise unenforceable. This subdivision shall not bar commencement of an action for violation of a restriction before January 1, 2001, and until January 1, 2001, any other applicable statutory or common law limitation shall continue to apply to that action.

336a. Within six years. 1. An action upon any bonds, notes or debentures issued by any corporation or pursuant to permit of the Commissioner of Corporations, or upon any coupons issued with such bonds, notes or debentures, if such bonds, notes or debentures shall have been issued to or held by the public. 2. An action upon any mortgage, trust deed or other agreement pursuant to which such bonds, notes or debentures were issued. Nothing in this section shall apply to bonds or other evidences of indebtedness of a public district or corporation.

337. Within four years: 1. An action upon any contract, obligation or liability founded upon an instrument in writing, except as provided in Section 336a of this code; provided, that the time within which any action for a money judgment for the balance due upon an obligation for the payment of which a deed of trust or mortgage with power of sale upon real property or any interest therein was given as security, following the exercise of the power of sale in such deed of trust or mortgage, may be brought shall not extend beyond three months after the time of sale under such deed of trust or mortgage.

2. An action to recover

(1) upon a book account whether consisting of one or more entries;

(2) upon an account stated based upon an account in writing, but the acknowledgment of the account stated need not be in writing;

(3) a balance due upon a mutual, open and current account, the items of which are in writing; provided, however, that where an account stated is based upon an account of one item, the time shall begin to run from the date of said item, and where an account stated is based upon an account of more than one item, the time shall begin to run from the date of the last item. 3. An action based upon the rescission of a contract in writing. The time begins to run from the date upon which the facts that entitle the aggrieved party to rescind occurred. Where the ground for rescission is fraud or mistake, the time does not begin to run until the discovery by the aggrieved party of the facts constituting the fraud or mistake. Where the ground for rescission is misrepresentation under Section 359 of the Insurance Code, the time does not begin to run until the representation becomes false. 337a. The term “book account” means a detailed statement which constitutes the principal record of one or more transactions between a debtor and a creditor arising out of a contract or some fiduciary relation, and shows the debits and credits in connection therewith, and against whom and in favor of whom entries are made, is entered in the regular course of business as conducted by such creditor or fiduciary, and is kept in a reasonably permanent form and manner and is (1) in a bound book, or (2) on a sheet or sheets fastened in a book or to backing but detachable therefrom, or (3) on a card or cards of a permanent character, or is kept in any other reasonably permanent form and manner.

MERS as a “sham” rebuffed by the Ninth Circuit

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FIRFTA – Foreign Investment in Real Property Tax and CA witholding Law

John McConnin — Wed, 18 Jan 2012 22:25:51 +0000

Attached find a copy of the California Association of Realtors FIRFTA form.

FIRFTA

From the IRS Website in 2012 – http://www.irs.gov/businesses/small/international/article/0,,id=105000,00.html

Withholding of Tax on Dispositions of United States Real Property Interests

The disposition of a U.S. real property interest by a foreign person (the transferor) is subject to the Foreign Investment in Real Property Tax Act of 1980 (FIRPTA) income tax withholding. FIRPTA authorized the United States to tax foreign persons on dispositions of U.S. real property interests. A disposition means “disposition” for any purpose of the Internal Revenue Code. This includes but is not limited to a sale or exchange, liquidation, redemption, gift, transfers, etc. Persons purchasing U.S. real property interests (transferees) from foreign persons, certain purchasers’ agents, and settlement officers are required to withhold 10 percent of the amount realized on the disposition (special rules for foreign corporations). In most cases, the transferee/buyer is the withholding agent. If you are the transferee/buyer you must find out if the transferor is a foreign person. If the transferor is a foreign person and you fail to withhold, you may be held liable for the tax. For cases in which a U.S. business entity such as a corporation or partnership disposes of a U.S. real property interest, the business entity itself is the withholding agent.

U.S. Real Property Interest

A U.S. real property interest is any interest, other than solely as a creditor, in real property (including an interest in a mine, well, or other natural deposit) located in the United States or the U.S. Virgin Islands, as well as certain personal property that is associated with the use of real property (such as farming machinery or hotel furniture). It also means any interest, other than solely as a creditor, in any domestic corporation unless it is established that the corporation was at no time a U.S. real property holding corporation during the shorter of the period during which the interest was held, or the 5-year period ending on the date of disposition. If on the date of disposition, the corporation did not hold any U.S. real property interests, and all the interests held at any time during the shorter of the applicable periods were disposed of in transactions in which the full amount of any gain was recognized, then FIRPTA withholding would not apply.

Rates of Withholding

The transferee must deduct and withhold a tax equal to 10% (or other amount) of the total amount realized by the foreign person on the disposition. The amount realized is the sum of (1) The cash paid, or to be paid (principal only), (2) the fair market value of other property transferred, or to be transferred, and (3) the amount of any liability assumed by the transferee or to which the property is subject immediately before and after the transfer. The amount realized is generally the amount paid for the property. If the property transferred was owned jointly by U.S. and foreign persons, the amount realized is allocated between the transferors based on the capital contribution of each transferor.

A foreign corporation that distributes a U.S. real property interest must withhold a tax equal to 35% of the gain it recognizes on the distribution to its shareholders.

A domestic corporation must withhold a tax equal to 10% of the fair market value of the property distributed to a foreign shareholder if (1) the shareholder’s interest in the corporation is a U.S. real property interest, and (2) the property distributed is either in redemption of stock or in liquidation of the corporation.

Exceptions from FIRPTA withholding
Reporting and Paying Tax on U.S. Real Property Interests
Withholding Certificates
Format for Applications
Road Map to Regulations
Definitions of terms and procedures unique to FIRPTA
For additional information on the withholding rules that apply to corporations, trusts, estates, and REITs, refer to section 1445 of the Internal Revenue Code and the related regulations. For additional information on the withholding rules that apply to partnerships, refer to discussion under partnership withholding. Also consult IRS Publication 515, Withholding of Tax on Nonresident Aliens and Foreign Entities, section U.S. Real Property Interest.

FIRPTA documents are processed at:

Internal Revenue Service Center
P.O. Box 409101
Ogden, UT 84409.

Note: This page contains one or more references to the Internal Revenue Code (IRC), Treasury Regulations, court cases, or other official tax guidance. References to these legal authorities are included for the convenience of those who would like to read the technical reference material. To access the applicable IRC sections, Treasury Regulations, or other official tax guidance, visit the Tax Code, Regulations, and Official Guidance page. To access any Tax Court case opinions issued after September 24, 1995, visit the Opinions Search page of the United States Tax Court.

–

Exceptions.

Exceptions from FIRPTA Withholding

Generally you do not have to withhold in the following situations; however, notification requirements must be met:
You (the transferee) acquire the property for use as a home and the amount realized (generally sales price) is not more than $300,000. You or a member of your family must have definite plans to reside at the property for at least 50% of the number of days the property is used by any person during each of the first two 12-month periods following the date of transfer. When counting the number of days the property is used, do not count the days the property will be vacant.
The property disposed of (other than certain dispositions of nonpublicly traded interests) is an interest in a domestic corporation if any class of stock of the corporation is regularly traded on an established securities market. However, if the class of stock had been held by a foreign person who beneficially owned more than 5% of the fair market value of that class at any time during the previous 5-year period, then that interest is a U.S. real property interest if the corporation qualifies as a United States Real Property Holding Corporation (USRPHC), and you must withhold on any disposition.
The disposition is of an interest in a domestic corporation and that corporation furnishes you a certification stating, under penalties of perjury, that the interest is not a U.S. real property interest. Generally, the corporation can make this certification only if the corporation was not a USRPHC during the previous 5 years (or, if shorter, the period the interest was held by its present owner), or as of the date of disposition, the interest in the corporation is not a U.S. real property interest by reason of section 897(c)(1)(B) of the Internal Revenue Code. The certification must be dated not more than 30 days before the date of transfer.
The transferor gives you a certification stating, under penalties of perjury, that the transferor is not a foreign person and containing the transferor’s name, U.S. taxpayer identification number, and home address (or office address, in the case of an entity).
You receive a withholding certificate from the Internal Revenue Service that excuses withholding. Refer to Withholding Certificates.
The transferor gives you written notice that no recognition of any gain or loss on the transfer is required because of a nonrecognition provision in the Internal Revenue Code or a provision in a U.S. tax treaty. You must file a copy of the notice by the 20th day after the date of transfer with the:
Internal Revenue Service Center
P.O. Box 409101
Ogden, UT 84409.
The amount the transferor realizes on the transfer of a U.S. real property interest is zero.
The property is acquired by the United States, a U.S. state or possession, a political subdivision thereof, or the District of Columbia.
The grantor realizes an amount on the grant or lapse of an option to acquire a U.S. real property interest. However, you must withhold on the sale, exchange, or exercise of that option.
The disposition (other than certain dispositions of nonpublicly traded interests) is of publicly traded partnerships or trusts. However, if an interest in a publicly traded partnership or trust was owned by a foreign person with a greater than 5% interest at any time during the previous 5-year period, then that interest is a U.S. real property interest if the partnership or trust would otherwise qualify as a USRPHC if it were a corporation, and you must withhold on it.
Certifications

The certifications in items (3) and (4) are not effective if you have actual knowledge, or receive a notice from an agent, that they are false. If you are required by regulations to furnish a copy of the certification to the IRS and you fail to do so in the time and manner prescribed, the certifications are not effective.

Liability of Agents

If you receive either of the certifications discussed in item (3) or (4) and the transferor’s agent or your agent (the transferee’s agent) has actual knowledge that the certification is false, or in the case of (3), that the corporation is a foreign corporation, the agent must notify you, or the agent will be held liable for the tax. The agent’s liability is limited to the amount of pay the agent gets from the transaction.

An agent is any person who represents the transferor or transferee in any negotiation with another person (or another person’s agent) relating to the transaction, or in settling the transaction. A person is not treated as an agent if the person only performs one or more of the following acts related to the transaction:

Receipt and disbursement of any part of the consideration,
Recording of any document,
Typing, copying, and other clerical tasks,
Obtaining title Insurance reports and reports concerning the condition of the property, or
Transmitting documents between the parties.
A Withholding Agent is personally liable for the full amount of FIRPTA withholding tax required to be withheld, plus penalties and interest. A Withholding Agent is any person having the control, receipt, custody, disposal or payment of income that is subject to withholding. Generally, the person who pays an amount to the foreign person subject to withholding must do FIRPTA withholding.

References/Related Topics

FIRPTA Withholding
Reporting and Paying Tax on U.S. Real Property Interests
Withholding Certificates
Format for Applications
Road Map to Regulations
Definitions of terms and procedures unique to FIRPTA
Note: This page contains one or more references to the Internal Revenue Code (IRC), Treasury Regulations, court cases, or other official tax guidance. References to these legal authorities are included for the convenience of those who would like to read the technical reference material. To access the applicable IRC sections, Treasury Regulations, or other official tax guidance, visit the Tax Code, Regulations, and Official Guidance page. To access any Tax Court case opinions issued after September 24, 1995, visit the Opinions Search page of the United States Tax Court.

This law is not that complicated… but it does lead to some awkward and difficult questions.
If you are asked to sign this and you are unsure about what you are signing, ask to speak with an attorney.

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Escrow, Real Estate Witholding Certificate, Selling Your Home

John McConnin — Tue, 17 Jan 2012 18:31:37 +0000

This is the Real Estate Withholding Cerftificate with creates a great deal of questions for home sellers

Escrow CA witholding certificate, selling your home

If you take the time to look up the sections on this website by looking on the links, you should get a headstart. You may wish to check with the IRS or FTC to make sure I have the most recent forms. Write a message down below if I need to update a from.

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