I'm the Tax Man, yeah I'm the Tax Man.

http://www.signonsandiego.com/uniont...1b21taxes.html

You can't pay the mortage and the lien holder forecloses, putting up the property for auction. Nobody shows up, so the lien holder just bids $1 (which he pays you and you pay him). Well, you lost your house, but think your troubles are over?

No, the IRS says that since you owed say $100,000 and now don't, that was the equivalent of $100,000 *income*, and so they hit you with a tax bill on that.

How does it go, "One for you, nineteen for me", "If you drive a car, I'll tax the street." Oh, here it is:

Related:

http://www.boston.com/sports/basebal...onds_baseball/

Catch a baseball, get taxed based on its assessed value. If the value goes down, you may declare a loss (presumably from the original assessment, unless the baseball somehow sells for a negative value).

You know, I'm trying to figure the "on paper" logic of that being "income". There's a complication of how much equity the poor owner had in the house. Cap gains vs losses. But if the mortage holder had simply bid what the owner owed (which would just go around in a circle of course), then would that negate the purported "income".

This stuff gets crazy, and it reminds me of a good one. Several years ago, my mother inherited some mountain property when a relative died. Nearby, there was the summer camp thing for children, and they wanted to buy the property to just join up with theirs. My mother sold it, price was
a $130K, IIRC. It was sort of a charity thing. They couldn't pay the full price in one lump sum, and they paid it in three or four installments over a couple or three years.

No interest was even considered. Well, the accountant doing the taxes had a flying hissy fit when he learned about she did it. Don't hold me to the details, because I can't remember it, and stuff like this just makes so mad I don't want to know it anyway.

But, he said that would be considered an interest free loan of $130K. The IRS could construe that as a "gift". That is my mother was giving this summer camp outfit a gift of whatever the interest *could* have been on that loan. And they could hit *her* for the taxes on that gift.

Now, why it would be my mother and not party receiving the gift I don't know, but that's they way that worked, he said.

So they had to go through a bunch of hoops to re-do how the loan was done on paper. Essentially come up with a new, lesser sale price so that the standard interest rate on that over the 3 or 4 payments came out to
$130K.

Just think about that -- how something is done *on paper* that ends up being the same money either way can greatly effect the tax behavior.

-Richard

It's the usual logic.

Yes it would have, but it would also affect any gain or loss on his ownership of the property.

I think it is best to consider the loan and the property as two separate transactions. If someone loans you money, and you don't pay it back, why is that not income? It's cash you receive, and which you don't pay back.

The complication here is that there is an associated transaction on the house. If this individual had purchased the house for $100,000, and sold it for $1, that is a loss of $99,999, and income of $99,999 from the failure to repay the loan, for a net income of zero. Which makes perfect sense - at time of purchase, he paid nothing (he bought a house for $100,000 but borrowed it all), and at sale, he received nothing (he sold it for $1, and paid this amount to the lender). No cash paid or received at any time.

Now consider a different scenario. Suppose he paid $1 for the house. (A little silly, but let's run with it.) The house increased in value to $100,000, and he then was able to borrow this amount on the strength of the equity in the house. He then used the $100,000 to go on an ultra-luxury round-the-world cruise, and upon return, informed the lender that he was unable to repay the loan. The lender auctioned the house, which fetched $1. In this case, why would he not have income of $99,999? He borrowed $100,000, repaid only $1, and sold for $1 a house he purchased for $1. Sounds like income of $99,999.

The income sounds perfectly reasonable to me; the question is, how much associated loss did he realize by selling a house for less than he purchased it (presumably, he paid more than $1), and can the loss from the sale offset the income from forgiveness of the loan? I don't know the tax treatment on this.

To put loan forgiveness in another context, suppose one of your elected officials borrowed $5 million from a campaign contributor, voted for some legislation that is favorable to that contributor's business interests, and never repays the loan. Would you say this elected official experience income of $5 million?


If this is in the US of A, then gift tax is part and parcel of the inheritance tax, and is paid by the donor, not the recipient. If the amount is less than $10,000 per year, it should be OK.

I hate to break it to you, but this isn't exactly a shocking revelation. The good side of it is though that it is easy to change the way things are done on paper.

Willie the Shake's original version of Henry VI, Part 2 contained this lineFlat tax, please, and fire just about the entire IRS.

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So with a flat tax, you don't need a definition of income?

Take the total income of the US, divide by the number of people, and that's the average per capita income. For the flat tax, simplify the definition of income as value received, rather than paper pushed.

BTW, the Weimar Republic had a good definition of income as paper pushed, and their economy couldn't have been any stronger.

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So what do you think of the concept of "imputed income", something the Tax Man has been thinking about expanding.

You live in a house you own and pay no rent. The poor guy who rents has to pay income taxes on the money he makes to pay the rent. So the homeowner has a unfair advantage. Therefore he has imputed income of the rent he would pay to live there if he didn't own it.

Or more simply, I fix my own car, and therefore have an imputed income of what I would've paid a mechanic to fix it.

Or, I dress myself rather than paying a butler named Jeeves to do it, and therefore have an imputed income of the butler's salary.

How does that grab ya?

-Richard

Are we discussing why a forgiven loan would be considered income, or is this still another politics thread that doesn't have anything to do with astronomy, space, or teaching science?

If we're talking about the issue of what would be considered income, a little logic shows that forgiven loans would make a nice loophole if they were allowed: I could say that I am willing to volunteer my time to work for you, but you give me a loan of, say, $100,000, with minimal interest rates. After I finish working for you, you (out of the kindness of your heart, naturally) forgive my loan. If it wasn't considered income, I wouldn't pay any taxes on it.

I'd be willing to bet there have been schemes like that, though probably a bit more sophisticated.

In this case, it looks like the issue will be corrected because, as the article says:

After a reporter inquired about the Stout matter, Wells Fargo Home Mortgage said last week that it had reviewed the Stouts' tax documents and was filing a corrected 1099 tax form to show that no debt was canceled, because the fair market value of the home was $132,844 – not $1.

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The guy who went on the cruise or the crooked legislator had something to show for the loan. The homeowner has nothing at the end of the day but a real net loss. What that amounts to is splitting nothing, zero into equal and opposite parts, and taxing the positive part:

Ie, 0 = ($100,000 - $100,000), so you had income of $100,000. And just add that 0 = (x - x) to anything with other +y's and -z's and come up with all sorts of ways one could look at things by comparing positive parts to negative parts.

When they let you do that with losses, I'll go along.

Or, when I have a real net negative income, then I pay negative taxes on that, with the full progressive rates too. So if I loose money one year, the IRS pays me.

And that ain't gonna happen.

-Richard

why am i not surprised they were involved in this...
i lost my house because of their way of doing business, and i know of a few others that had the exact same things happen.
but i never got a tax bill for the appraised value of the house after it was all said and done- which had gone up from $107,000 to $175,000 in the 3 years i lived there..

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First, again, in this case the bank filed a corrected form to show no debt was canceled.

But, let's say you loan me a $100,000 and I go blow all the money in Vegas. Then, you decide to cancel my loan. Should I be forgiven paying taxes just because I lost the money you gave me?

In the article, it points out that there are often a number of ways to mitigate the owed taxes depending on circumstances. Yes, I can see where it would be very confusing. Yes, I can see where there could be bureaucratic nonsense. But I can also see why the rule is there.

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Sorry to hear about your problem. Yes, Wells Fargo in this case appears to have made a mistake that caused this poor fellow a lot of grief.

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I loan you $100,000, and rather than blowing it, it was stolen. I forgive the debt. Exact same thing but would you say you owe the taxes on it now as income?

And, rather than setting it up as a loan on paper, if I just flat out give you the money, the I owe the taxes, you don't.

A proper defintion of income needs to involve some *real* work done, an exchange of money for something of value, not just moving money around. The case you mentioned of setting up a fake loan to pay you for you work done would be a loophole scheme.

If you do that, heck, you could start saying it was income to simply hold on to money. I have $100,000 in the bank, and that's equivalent to me paying myself that every year, or every month, or every second...... The only difference is real moving from an account in one name to another, vs sitting there in the same account.

It would actually work that way in a sense, now. Say I give you $100,000 gift, then you turn around and give it back to me. According to the gift tax logic, you and I both would owe taxes on $100,000.

-Richard

Yes, once the money changes hands and if you forgive the debt, it's income. What happens afterwards is not relevant to that.

Of course it would be - hence the requirement for rules to block loopholes (and why this stuff gets so complex). And, if that scheme was used, it would be income.

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Whoever says "perception is reality" is daft. It's merely an abstraction, and often not a very good one.

So what do you think of the concept of "imputed income", something the Tax Man has been thinking about expanding.

You live in a house you own and pay no rent. The poor guy who rents has to pay income taxes on the money he makes to pay the rent. So the homeowner has a unfair advantage. Therefore he has imputed income of the rent he would pay to live there if he didn't own it.

Or more simply, I fix my own car, and therefore have an imputed income of what I would've paid a mechanic to fix it.

Or, I dress myself rather than paying a butler named Jeeves to do it, and therefore have an imputed income of the butler's salary.

How does that grab ya?

I'm glad you brought up imputed income. If you hadn't I would have. The mental image I get of whomever thought up this particular brainstorm is a bunch of stoned undergrads sitting in a circle smoking a fat joint, "Hey man, how about this?" It's a dumb idea but don't put anything past their attempts to get even more of our money.

NC takes part of your federal standard deduction and calls it state income.

I think they finally figured out how crazy that was and ended it starting this year.

I understand the forgiven debt as income deal and see why it has to be that way.