1099 for Mortgage Fraud - is it taxable?

[BulldogTom]

Client got a settlement in the mortgage fraud debacle from the bank that foreclosed on her personal residence. The note with the check said they would be issuing a 1099 MISC for the payment.

My first thought is this is a legal settlement and it should be taxable income. Then I started thinking that maybe it should be a continuation of the "sale or other disposition" of the home, and might be excludable under §121.

Have any of you dealt with this issue and is there any guidance on these payments from the IRS or courts?

Thanks

Tom

Hollister, CA

[Mr. Pencil]

Client got a settlement in the mortgage fruad debacle from the bank that forclosed on her personal residence. The note with the check said they would be issuing a 1099 MISC for the payment.

My first thought is this is a legal settlement and it should be taxable income. Then I started thinking that maybe it should be a continuation of the "sale or other disposition" of the home, and might be excludable under §121.

Have any of you dealt with this issue and is there any guidance on these payments from the IRS or courts?

Thanks

Tom

Hollister, CA

That's a real clever argument! You will need very complete documentation to pull it off. Was there an actual sale in direct relation to the foreclosure? The settlement money wasn't actually from the buyer, so it's hard to see it as an adjustment to price. But was there C.O.D. income, een if excluded? There was probably a law firm representing the victims; maybe they can give some background on how the settlement amount was calculated.

[BulldogTom]

_{That's a real clever argument! You will need very complete documentation to pull it off. Was there an actual sale in direct relation to the foreclosure? The settlement money wasn't actually from the buyer, so it's hard to see it as an adjustment to price. But was there C.O.D. income, een if excluded? There was probably a law firm representing the victims; maybe they can give some background on how the settlement amount was calculated.}

_{<<Was there an actual sale in direct relation to the foreclosure?>>}

_{Well, a foreclosure is a "sale or other disposition" of a property under §1001.} <<But was there C.O.D. income, een if excluded?>> I need to go back and check the client file, but if memory serves me, there was no COD income because the mortgage was an original purchase non-recourse mortgage.

[BulldogTom]

Sorry, that was a real hack job on the cut and paste above. What I am trying to say is the bank took the home for non-payment of the mortgage, and I believe the mortgage was non-recourse. Under § 1001 we have a sale or other disposition of an asset. Under §121, the gain, if any, is excludable up to $250,000.

But I don't know if I can link the foreclosure to an illegal act (?) or civil violation of a rule of law by the bank for which they paid damages (?) or a civil penalty (?) or just paid them as a business decision to move forward. If that is the case, then I think it is taxable income.

The more I type, the more I see the §121 idea as a reach.

But I would still like to know if the IRS or Courts have any concrete guidance on this matter?

Thanks

Tom

Hollister, CA

[Mr. Pencil]

I see the §121 idea as a reach.

You may not have to go to Section 121, because they probably had a non-deductible personal loss anyway. Depending on the DETAILS, maybe you can say the settlement was tantamount to a return of capital. With luck, the IRS won't notice that the taxpayer ended up with XXX dollars, whereas even if the property had been foreclosed at a higher value he still would have lost everything. So the economic substance from that point of view looks taxable.

[taxit]

the payment may be part of the Independent Foreclosure Review which started sending checks out in mid April. Your client would have received a letter with the check. I have a client who brought a letter & check in. On the letter there are two web sites listed for more information. www.occ.gov and www.federalreserve.gov I also found info at the BBB News Center. They will receive a 1099 Misc if the amount is over $600.00. My client received $3750.00.