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Showing posts with label 1098. Show all posts
Showing posts with label 1098. Show all posts

Sunday, August 14, 2022

A Foreclosure And A Mortgage Interest Deduction


I am looking at a case involving mortgage interest. While I get the issue, I think the taxpayers got hosed.

I am going to streamline the details so we can follow the key points.

The Howlands had two mortgages on their house.

The first mortgage started with Countrywide and eventually wound up with Bank of New York Mellon.

The second mortgage started with Haven Trust Bank and wound up with CenterState Bank.

The house was foreclosed in 2016. It sold for $594,000.

The Howlands owed the following when the house was sold:

            Mellon        CenterState

        Principal      $     $377,060

        Interest     $100,607

        Interest & other    $247,046

The Howlands deducted mortgage interest of $103,498 on their 2016 joint tax return.

Neither bank, however, issued a Form 1098 for mortgage interest.

Allow for a little computer matching (or nonmatching in this case), and the IRS disallowed any interest deduction and assessed penalties to boot.

This story partially happened during the Great Recession of the late aughts. That is when we learned of “too big to fail,” of “ninja” loans and of banks playing musical chairs to survive. Good luck guessing where a given loan would wind up when the music stopped. Perhaps a taxpayer borrowed from someone (let’s call them “A”). A was acquired by B, which was later merged into C and yada, yada, yada. The data platforms between A and B were incompatible, meaning there was a one-way data transfer. The odds that someone years later – especially after the yada, yada, yada - could get back to A were astronomical.

While not clarified in the opinion, I suspect that is what happened here. CenterState Bank was not going to issue a 1098 because it could/would not time travel to determine if their interest calculations were correct. In the absence of such assurance, they were not going to issue a 1098. Or perhaps they were lazy and problem-solving outside a comfortable, numbing rote was a request beyond the pale. I prefer to believe the former reason.

But there was a problem: under the terms of the second mortgage, payments were to be applied first to interest.

COMMENT: Seems to me the Howlands paid interest of some amount.

Let’s focus in on that second mortgage. The money available to repay the second mortgage (after satisfaction of the first mortgage) would have been:

$594,000 – 247,046 = $346,954

There should also have been some interest embedded in the first mortgage, but let’s ignore that for now.

There is $347 grand to pay $377 grand of debt and $100 grand of back interest.

The IRS argued there was not enough money left to cover the principal, much less the interest. That is why the bank did not issue a 1098.

But we know that interest was to be paid first, per the loan agreement.

The Tax Court had to decide.

You know who was not in Court to testify? 

CenterState Bank – the second mortgage holder - that’s who.

Here is the Court:

The record before us is silent as to how CenterState applied the funds received and whether petitioners owe any remaining principal balance. These facts (if favorable) could support a finding that petitioners in fact paid home mortgage interest ….”

True.

However, statements in briefs do not constitute evidence.”

Again, true, but why say it?

Petitioners bear the burden of proof and must show, by a preponderance of evidence, that they are entitled to a home mortgage interest deduction ….”

Oh, oh.

... we conclude that petitioners have failed to meet their burden.”

Sheeshh.

I am not certain what more the Howlands could have done. They were at the mercy of the bank, and the new bank that took the payoff was not the same as the old bank that originated the loan. 

The Tax Court did strike down the penalties. Small consolation, but it was something.

Our case this time was Howland v Commissioner, TC Memo 2022-60.


Friday, May 13, 2016

Getting The IRS To Believe A College Student Paid For … College



We can argue whether it is a good thing that so many economically-related transactions are reported to the IRS.

It is not just the drag on the economy - which would include practitioners like me, I suppose. It has also allowed the IRS to increasingly delegate its compliance responsibilities to computer algorithms, often functioning without human eyes sparing a glance at the endless notices the IRS sends every year.

And that sets up the problem.  

You see, the notice assumes that you are wrong, and the IRS will likely revise your account – and bill you - should you not reply. That means that you are spending time resolving the matter, or you are sending the notice to me and I am spending time. You and I are being deputized as ad hoc IRS employees.

Personally I want a paycheck and retirement benefits.

This arrangement works fine as long as there is a balance. You agree not to send works of fiction to the IRS and they agree not to contact you like a kid in college wanting money.

That balance is increasingly a thing of the past. Perhaps as a consequence, I am reading or hearing more often that taxpayers should be able to sue the IRS for professional fees incurred with these notices. I am not certain if that means that my client would pay me and then sue, or whether I would sue to receive my fee, but you get the idea. It would be a “reverse penalty” on the IRS. 

I am looking at a pro se decision from the Tax Court. As we have discussed before, “pro se” means the taxpayer is representing himself/herself. It does not technically mean there is no tax practitioner present (for example, I can represent a client in a pro se case), but it probably does mean that there is not a lot of money at issue.

Angela Terrell was a college student. During 2010 and 2011 she was attending Hampton University in Virginia. In the fall of 2010 she registered for the 2011 spring semester. In November, 2010 the University billed her $2,460 for the upcoming semester. In January, 2011 they billed an additional $1,230.


She was borrowing to go through school. In January, after the add/drop period ended, her student loan released $10,199 directly to the university. She paid her tuition and used the rest for living expenses.

Let’s go to the end of the year. The university sent a 1099 for 2011 (technically, a Form 1098-T, but we are on a roll). It showed $1,180 (the $1,230 billed less fees of $50). It did not show what she actually paid.

COMMENT: This reporting was allowable that year.

Angela filed her 2011 tax return and claimed the American Opportunity credit, one of the education credits in the Code. She claimed $2,500.

Wouldn’t you know the IRS sent her a notice? They saw the $2,500. They also saw the 1099 for $1,180.  

The IRS disallowed her credit – in full. They did not even spot her the $1,180.

Surely someone at the IRS would recognize what happened and close the file.

Perhaps in a galaxy far away. In our galaxy Angela and the IRS went to Tax Court.

Did I mention that Angela was a COLLEGE student?

She submitted an account statement from the University – on official letterhead – detailing her tuition charges and payments.

The IRS argued that the 1099 said $1,180, she provided a different number and consequently they could not verify the credit. There was nothing more to see.

Does it sound to you like the IRS even listened to her? 

Here is the Court:

The only dollar amount appearing on that form … is in the box that shows the ‘amounts billed’ for tuition during calendar year 2011. The amount billed to petitioner during 2011 does not control the size of her credit; the relevant number is the qualified tuition that she actually paid during 2011. The Form 1098-T has no entry in box 1, which was supposed to show ‘payments received’ for qualified tuition.”

The Court decided in her favor.

Angela’s case looks very much like the IRS pursuing a frivolous argument, not to mention the inability of IRS machinery to resolve a “duh”-level tax issue at the earliest possible point of contact. Reverse the situation and the IRS would not hesitate to hit you with every penalty imaginable.