Recent Developments

■ Bankruptcy:

When you make a mortgage
payment, part of each payment is interest, and the balance is principal, reducing
the amount you owe the lender, and increasing your equity in the house. The
Bankruptcy Code provides that: “…a debtor may not exempt any amount of
interest that was acquired by the debtor during the 1215-day period preceding
the date of the filing of the petition…” A recent case held that your
making regular mortgage payments, including principal payments that build
equity in your home, won’t be treated as your acquiring an interest in real
property under Section 522(p) of the Bankruptcy Code. In re Burns, 21
Fla. L.L. Weekly Fed. B487 (U.S. Bankruptcy Court, M.D. Fla. August 8, 2008.
Exercise caution extrapolating this to making payments larger than your regular
monthly payments. The courts might not view that as favorably.

■ S Corporation Tax Basis:

Tax basis is important
to your being able to deduct losses, and reducing gain on a sale of
stock.  Your basis in your S corporation stock is increased by your share
of income and reduced by your share of loss, etc. Once your tax basis in your S
corporation stock is reduced to zero, additional losses will reduce your tax
basis in loans to the corporation. IRC Sec. 1367(b)(2)(A). The taxpayers argued
that capital contributions should be treated as income restoring tax basis in
their loans. The Tax Court held that capital contributions are not income, and
the contributions did not increase the taxpayers basis in his loans. The court
noted that capital contributions increase a taxpayer’s basis in his stock. Nathel,
131 TC No. 17 (2008).

■ Private Annuity Respected:
The Tax Court held that a private annuity transaction should be respected and
capital gains tax could be deferred. Katz, TC Memo 2008-269. While this
case is somewhat helpful to the use of private annuity transactions, the
effective date precedes the proposed Treasury Regulations effective for sales
after 10/18/06  requiring the seller of property for a private annuity to
recognize all gain in the year of sale, rather then when payments are received
(which is why these are often structured as sales to grantor trusts).