Surprise! Forgiveness of a Debt is Taxable Income

Category: Tax Law and Planning

A recent New York Time article "After Foreclosure, a Big Tax Bill From the I.R.S." highlights a not well publicized fact of income tax law - discharge or forgiveness of debt is income to the taxpayer.

A simple fact pattern - You have a house with a mortgage of $100,000. You can't make your mortgage payments, and the house is foreclosed for $80,000 and total forgiveness of the mortgage. You now have no house and no debt obligation. However, you originally borrowed an additional $20,000 that the bank did not receive from the sale, and that you no longer have to pay back. Under Internal Revenue Code Sec. 61(a) (12), you have earned $20,000 dollars of income that you now owe tax on. The problem? You never got $20,000 in hand - instead, it is "phantom income" to you, upon which you need to pay tax in real cash ($4000 of tax at a 20% tax bracket).

Why are you deemed to have earned $20,000? Because your total net worth has increased as a result of not have to pay back the $20,000 (assets - liabilities = total net worth; if liabilities go down, total net worth goes up).

This fact pattern also applies where credit card or other debts are forgiven - ie: the creditor accepts as full payment less than the total amount borrowed.

IRC §61 - Gross Income Defined
61(a) GENERAL DEFINITION. --Except as otherwise provided in this subtitle, gross income means all income from whatever source derived, including (but not limited to) the following items:

61(a)(12) Income from discharge of indebtedness;

Where a debt is forgiven, is discharge of indebtedness income always the case? No. Where you have (1) filed bankruptcy under Chapter 11 (IRC Sec. 108 (a)(1)(A)), or (2) are insolvent at the time of the discharge (IRC Sec. 108(a) (1) (B)), then IRC Sec. 61(a)(12) does not apply.

The first exemption is easy - you either filed Chapter 11 or you haven't. The second is not so easy - you may feel you have no assets but not be insolvent under the Code.

To avoid a nasty surprise, make sure when paying off a debt for less than full value that you get in writing what they will be supplying to the IRS about the transaction.

Aging at Home - A Community Bands together to buck Institutional Care

Category: Elder Law

Aging in place. It is no secret that most seniors want to stay in their homes. It is also no secret that long term care today has a bias towards institutional care, and not towards allowing a person the resources need to stay at home. From the New York Times is an uplifting report about communities of seniors banding together to buck the system and enjoy their golden years at home.

A Grass-Roots Effort to Grow Old at Home

On a bluff overlooking the Potomac River, George and Anne Allen, both 82, struggle to remain in their beloved three-story house and neighborhood, despite the frailty, danger and isolation of old age.

George and Anne Allen hope to continue living at their Washington home with help from a community group under development. Mr. Allen has been hobbled since he fractured his spine in a fall down the stairs, and he expects to lose his driver’s license when it comes up for renewal. Mrs. Allen recently broke four ribs getting out of bed. Neither can climb a ladder to change a light bulb or crouch under the kitchen sink to fix a leak. Stores and public transportation are an uncomfortable hike.

So the Allens have banded together with their neighbors, who are equally determined to avoid being forced from their homes by dependence. Along with more than 100 communities nationwide — a dozen of them planned here in Washington and its suburbs — their group is part of a movement to make neighborhoods comfortable places to grow old, both for elderly men and women in need of help and for baby boomers anticipating the future.

click here for full story

Be Nice to Your Banker - An Investment in your Business

Category: Business Law and Planning

A nice posting about the unsung partner of every business - no, not the tax authorities - the Bank (or any other investor who expects a fixed return of capital and interest). This is especially true where there is an environment of shrinking capital (see today's market news). Business Insights from Legacy Blog post of "What is Your Banker's Involvement?" is an excellent refresher of the ongoing banking - or investor - relationship any business should be maintaining. The article ends with some excellent advice:

If you haven't been meeting with your banker regularly, start now by trying this:

• Pick up the telephone and call your banker.

• Ask him/her to lunch this week.

• Be prepared to discuss... the good, the bad, and the ugly about your business.

• Tell him the truth about the status of your business and describe the challenges that you face.

• Also, use this time to get to know him/her more personally.

Business Owners - Don't Fail to Plan

Category: Business Law and Planning

It is a truism that "Business owners often feel that they -- and the business -- will always be around. But without some thoughtful planning about succession, it's common that businesses wither when the owner passes away or leaves."



In Keep Business Alive With Succession Plan from the Small Talk Column of WSJ Online, the author highlights "four steps to making sure your business lives beyond you." These are common-sense concepts to spur you to action. Some key points to consider:



* You need to have a plan as to what will happen to your business if you get hit by a bus.

* Your plan needs to be in writing

* Know who your successors are let them know so you can groom them to succeed

* Be able to finance your succession, whether through a buy-sell agreement, life insurance, etc.



Another truism all business owners should consider: Nobody plans to fail, just fails to plan.

ABA Webite adds Blawg Directory - Must Bookmark

Category: Miscellaneous Musings

The PA Elder, Estate & Fiduciary Law Blog tipped me off that "The American Bar Association now lists, on its home page, a link to "more than 1,000 legal blogs". This is a must bookmark site.

The blogs or blawg are listed by category according to legal practice area. Your and Yours Blawg is listed in Elder Law (13), Tax Law (20) Trusts & Estates (36), Business Law (58) and New Jersey (10) (the numbers in parenthesis are the total listing of blawgs to date in that category).

A neat feature is that if you click on any blawg listing, you can
* see all the related categories of that blawg, which will let you drill down to related blawgs;
* get the RSS feed
* see all the recent blog postings headlines

For example, click here for ABA Blog description of You and Yours Blawg.

Nursing Home Admissions Agreements - Be Aware, Be Very Aware

Category: Elder Law,

Admitting a loved one to a nursing home can be very stressful. In addition to dealing with a sick family member and managing all the details involved with the move, you must decide whether to sign all the papers the nursing home is giving you. Nursing home admission agreements can be complicated and confusing, so what do you do?

It is important not to rush, but rather to read. Read the agreement carefully because it could contain illegal or misleading provisions. If possible, try not to sign the agreement until after the resident has moved into the facility. Once a resident has moved in, you will have much more leverage. But even if you have to sign the agreement before the resident moves in, you should still request that the nursing home delete any illegal or unfair terms.

Two items commonly found in these agreements that you need to pay close attention to are a requirement that you be liable for the resident's expenses and a binding arbitration agreement.

Responsible party
A nursing home may try to get you to sign the agreement as the "responsible party." It is very important that you do not agree to this. Nursing homes are prohibited from requiring third parties to guarantee payment of nursing home bills, but many try to get family members to voluntarily agree to pay the bills.

If possible, the resident should sign the agreement him- or herself. If the resident is incapacitated, you may sign the agreement, but be clear you are signing as the resident's agent. Signing the agreement as a responsible party may obligate you to pay the nursing home if the nursing resident is unable to. Look over the agreement for the term "responsible party," "guarantor," "financial agent," or anything similar. Before signing, cross out any terms that indicate you will be responsible for payment and clearly indicate that you are only agreeing to use the resident's income and resources to pay.

Arbitration provision
Many nursing home admission agreements contain a provision stating that all disputes regarding the resident's care will be decided through arbitration. An arbitration provision is not illegal, but by signing it, you are giving up your right to go to court to resolve a dispute with the facility. The nursing home cannot require you to sign an arbitration provision, and you should cross out the arbitration language before signing.

Other provisions
The following are some other provisions to look out for in a nursing home admission agreement.
* Private pay requirement. It is illegal for the nursing home to require a Medicare or Medicaid recipient to pay the private rate for a period of time. The nursing home also cannot require a resident to affirm that he or she is not eligible for Medicare or Medicaid.
* Eviction procedures. It is illegal for the nursing home to authorize eviction for any reason other than the following: the nursing home cannot meet the resident's needs, the resident's heath has improved, the resident's presence is endangering other residents, the resident has not paid, or the nursing home is ceasing operations.
* Waiver of rights. Any provision that waives the nursing home's liability for lost or stolen personal items is illegal. It is also illegal for the nursing home to waive liability for the resident's health.