WIXLIB

Newsbriefs - 6IRS Practice and ProcedureBy: Joshua A. NesserDEBT-CANCELLATION INCOME – Weidermanv. C.I.R., T.C. Memo. 2020-109 (2020)Why This Case is Important: While taxpayers aregenerally required to pay income taxes on the cancellation of any debts they owe, there is an exception formost debts incurred to purchase a primary residence.As this case demonstrates, though, not all home loansqualify for this exception.Facts: The taxpayer in Weiderman accepted a newjob that required her to move to Southern California.As part of her compensation package, her new employer provided her with an interest-free 500,000loan to help finance her purchase of a new home inthe area. She received the loan proceeds in February 2007 and signed a promissory note agreeing torepay the loan within 10 years or upon the termination of her employment, if earlier. The taxpayer usedthe loan proceeds to purchase a new home - the loanwas not secured by a mortgage on that home. In 2008,her employment with the new employer was terminated. As part of her severance package, her employeragreed to waive 255,000 of the outstanding balance,leaving her with a debt to the company of 245,000.On her 2009 income tax return, rather than reportingthis 255,000 as cancellation of debt (COD) incomeand paying taxes on it, she reduced her tax basis inher home by 255,000, under the COD exception for“qualified principal residence indebtedness.” Afterauditing the return, the IRS determined that the exception did not apply and that the full 255,000 wastaxable, resulting in a tax deficiency of over 30,000and penalties of over 6,000. The taxpayer filed a TaxCourt petition challenging this determination.Law and Conclusion: Under Section 61(a)(12) ofthe Internal Revenue Code, when a taxpayer’s debt isforgiven, the amount of forgiveness generally constitutes taxable income. One exception to this rule iscontained in Section 108(a)(1)(E), which excludesfrom taxation “qualified principal residence indebtedness.” The general requirements for debt to constitutequalified principal residence indebtedness are that it isused to purchase, construct, or substantially improvethe taxpayer’s residence, and that it is secured by amortgage on the residence. In this case, because theloan to the taxpayer was not secured by a mortgageon the home she purchased, the debt was not qualifiedprincipal residence indebtedness. That being the case,the Court determined that the 255,000 was taxable asCOD income and found in favor of the IRS.REAL PROPERTY AS CAPITAL OR ORDINARYASSET - Keefe v. Commissioner, Case No. 18-2357(2d Cir. 2020)Why This Case is Important: Whether an asset is a“capital” asset determines whether the sale of thatasset will result in capital or ordinary gain or loss,which, due to differing tax rates and rules for deducting losses, can have a substantial impact on incometax liabilities. At issue in this case was whether thetaxpayer’s sale of a home that he intended to rent butnever actually rented generated a capital or ordinaryloss.Facts: In this case, the taxpayer had purchased ahistoric mansion with the intention of restoring andrenting it. When the restoration process took longer and cost more than expected and when informaldiscussions with possible tenants were not productive,the taxpayer decided to sell the property, never having rented it. The property was sold in 2009 at a lossof over 2 million. On his 2009 income tax return,the taxpayer reported this loss as ordinary rather thancapital. With ordinary losses being 100% deductibleagainst taxable income (as opposed to net capitalContinued on Next Page

Continued From Previous Pagelosses, which are subject to a maximum annual deduction of 3,000), this characterization was extremelybeneficial to the taxpayer. This loss generated a largenet operating loss, which the taxpayer was able tocarry back and forward to eliminate unpaid tax debtsrelated to his 2004 through 2010 tax returns. After auditing the taxpayer’s 2009 return, the IRS determinedthat the home was a capital asset and that the saleof the home therefore resulted in a capital loss. Theresult of this recharacterization on the taxpayer’s 2004through 2010 returns was a tax deficiency of over 1.2million and over 230,000 of penalties. The taxpayerfiled a Tax Court petition contesting the determination.Law and Conclusion: Section 1221(a) of the InternalRevenue Code excludes from the definition of a capital asset any real property used in a taxpayer’s tradeor business. The rental of real estate is considered a“trade or business” for purposes of this exception ifNewsbriefs - 7the taxpayer engages in “regular and continuous activity in relation to renting the property.” In analyzingwhether a taxpayer was engaged in regular and continuous rental activity, the Second Circuit takes intoaccount factors such as the taxpayer’s efforts to rentthe property and whether, with respect to the property,the taxpayer performs maintenance and repairs, employs labor to manage the property or provide tenantservices, and/or purchases materials, collects rent, andpays expenses. In this case, because the taxpayer onlymade limited efforts to rent the property and never actually rented it, the Court agreed with the IRS that thetaxpayer did not conduct a rental business, meaningthat the home was a capital asset and the taxpayer’sability to deduct that loss was severely restricted.If you would like more details about these cases,please contact me at 312-888-4113 orjnesser@lavellelaw.com

Newsbriefs - 8Northwest Suburban Bar AssociationAnnual Golf OutingWednesday, September 23, 2020Schaumburg Golf Club401 N. Roselle RoadSchaumburg, IL 6019411:00 AM - Registration11:30 AM - Lunch12:00 PM - Shotgun Start4:30 PM - Patio PartyGOLF, LUNCH & PATIO PARTY OPTIONS:GOLF, LUNCH & PATIO PARTY: 130.00 Per PersonName:I am ALSO paying for:Golfer #2Golfer #3Golfer #4PATIO PARTY ONLY 20.00 Per PersonSPONSORSHIP OPPORTUNITIES*All sponsorships include 24”x24” sign, recognition of sponsorship during patio party,in the program booklet and in Newsbriefs*Sponsorships do not include patio party unless otherwise noted below.TITLE SPONSORExclusive; Golf for 4; Hole Sponsorship;Additional 2 patio party tickets 2,500SPECIALTY SPONSORExclusive; Hole Sponsorship plus Patio Partyfor 4 1,500PACKAGE “A”Non-exclusive 250PACKAGE “B”1 sponsor per hole;opportunity tohave a representative at the hole. 500BEVERAGE HOLE1 sponsor per hole (limited availability) 450TOTALplus cost of product NAME: Email (Required)COMPANY NAMECredit Card: MC/Visa Exp. 3-digit codeBilling Address on Card: Phone:Return Form to: NWSBA, 2340 S. Arlington Heights Road, #510, Arlington Heights, IL 60005or to jbarth@nwsba.org

Newsbriefs - 9THANK YOU TO OUR GENEROUSEVENT SPONSORSPresidential SponsorBob Rohrman Arlington AcuraAttorneys’ Title Guaranty Fund, Inc.Chicago Title Insurance CompanyEuclid Title Services, LLC

Newsbriefs - 10Beyond the Courtroom: Community OutreachBy: Brian FreimanMy idea when I started this monthly column was tocirculated through every news and social media outlet.use this platform to showcase how the court systemHowever, it was not only the killing of Mr. Floyd thataffects people outside the courtroom. In these times,caused me to go into an emotional downward spiral. Itrace has been on the forefront of this country and towas the hateful rhetoric I read on various social mediapretend these issues do not affect what happens in andoutlets. It was a lack of compassion and empathyoutside the courtroom would be remiss.from people I love and consider friends. It was thatone comment I received on Facebook from someoneTo properly address these issues I asked a friend andI thought was a close friend, “I don’t understand whyfellow attorney to compose this article. She is an Afri-black people are rioting and protesting. Why can’tcan American and a member of the LGBTQ commu-black people let the courts handle the matter?”nity. At this time, I believe it is more important to hearher voice on this issue instead of my own. She hasI gasped at the comment. Is she serious? Since whenasked to remain anonymous and I am going to respectdoes the law protect blacks in this country? Did sheher request. The following is her article on this matternot see the officers in the Eric Garner and Tamir Riceunedited by myself:cases walk? Delete, and unfriend from social mediaand my life. I was devastated, but did I have a rightCOMING FULL CIRCLE: RACE IN AMERICAto be? She was merely speaking from her side of thetracks the white female side. She did not mean anyWhy is this breaking me? Why do I feel overwhelmedharm. Am I the problem because I expect my whiteby the world around me? Why do I no longer feelfriends to understand my brown issues?safe? Why am I avoiding television? Why am I avoiding the news? Why do I feel like I am drowning? WhyI found myself thinking about her question over thedo I feel like people around me hate me for existing? Inext few days. “Why can’t black people let the courtsCAN’T BREATHE.handle the matter?” But we did allow the courtshandle the matter. We let approximately 41 bills, 3On May 25th, 2020, Derek Chauvin, a Minnesota po-Constitution Articles, 5 Ratified Amendments, 2 Un-lice officer, forcefully kneeled on the neck of Georgeratified or Proposed Amendments, 44 Federal CourtsFloyd for over eight minutes. Even after Mr. FloydDecisions, and 12 Executive Orders and Proclama-was rendered unconscious and paramedics arrived,tions handle the matter.officer Chauvin continued to pin Mr. Floyd under hisknee like nothing more than an animal. The worldwatched in horror as the video of Mr. Floyd’s deathContinued on the Next Page

Continued From Previous PageNewsbriefs - 11There is no one solution to the systematic racism inthis country. However, I think we can attempt to endAt the hands of the police, what happened to Georgethe tragic killings of black Americans at police offi-Floyd is just one symptom of a far deeper system ofcers’ hands. We can start with the courts. We can useinequality. Blacks have turned to legislation and thethe law to hold officers accountable. For too long, wecourts to “handle the matter” for centuries. It has beenhave allowed the ghosts of cases such as Dred Scottunsuccessful because legislation and the courts helpedv. Sandford to haunt the hallways of justice. When acreate the problem. Let us not forget historical casespolice officer kills a black American, the black com-such as Dred Scott v. S

Past President Mike Rothmann is working on getting computer research to the attorney room at the court house, and heading up the Veterans Committee and Mentoring Committee. Ernie Blomquist is helping us start a monthly history CLE via Zoom. Don Cosley, Lee Dewald and Martin Glink are actively involved in committee work.