Imminent Domain issue

[Margaret CPA in OH]

I apologize if this is resent...I didn't see that it went anywhere the first time!

A client and friend is being forced to sell his house to a university which is expanding. The situation is complicated because he is legally blind, works for the university, and bought this house 20 years ago to walk across the street to work. Most issues have been somewhat settled except for his transporation. Anywhere he moves will involve something more than walking across a low traffic street.

The best place for him to move is about 8 miles away in a town where his brother lives. The university has offered to pay for his transportation. Cab fare will amount to about $11,000 annually plus some amount to account for the increase in tax. They propose to issue a 1099 for this. It isn't self-employment so would it just go on Line 21 as other?

I'm trying some projections as he is considering maximizing his options for deferred comp which would leave precious little to live on. The house would be paid for but he wants to mortgage it for the tax deductions and invest what he doesn't need to live on. He is about 55 but the university does not want to offer an early retirement package. He thinks he might want to retire in 2-3 years anyway as the travel will be a strain as will the relocation and having to learn so much about new surroundings.

This is making me a little crazy because every little change in one thing ripples through all the rest. Any suggestions or comments would be greatly appreciated! He and the university are both aware that if heavy pressure is applied, it will become a federal ADA case. A good friend of his is an ADA specialist who brought U of GA to its knees recently. However, since my friend is still employed there, he would like to settle as amicably as possible.

[JohnH]

Given his situation, he might want to re-think the idea of getting a mortgage so he can invest the difference. Depending upon his tax situation, the value of the tax deduction may be less than it appears since its real value is only the tax savings on the difference between his standard deduction and his itemized deductions. Plus, he will need to be pretty sure the money he invests will earn significantly more than the rate (6-7% ?) he will pay on the mortgage. The foregone interest expense is a guaranteed return, and he may learn the unpleasant truth that the risk he assumed in hopes of higher returns is way out of proportion to the potential return. And at his age & fiancial circumstances, that may be the last meaningful investment lesson he ever has the opportunity to learn.

These are just a few random thoughts and may be totally irrelevant to his situation. I don't have anything to offer concerning your main questions.

[Margaret CPA in OH]

Thanks for the reply. The mortgage was as much for current living expenses as current deductions. He is planning to maximize deferred comp to increase his retirement as much as possible in the short time remaining before retirement. But his gross salary next year would only be about $57,000. With $31,000 maxing out his deferrals, that didn't leave much to live on even including the $250,000 non taxable exclusion from the house sale with a conservative earnings of 4%.

The real estate taxes where he expects to move plus about $1000 in mortgage interest would put him over his standard deduction easily even with the blind additional deduction.

I want to meet with him to discuss how tweaking one aspect of this affects the others and show him that there probably is no perfect scenario. He will need to make some decisions. I do believe that his decision to maximize his retirement funding is correct, however, as he has fewer options than most folks.

Thanks again!

[jainen]

>>discuss how tweaking one aspect of this affects the others<<

WHAT are you talking about? "TWEAKING"? He has them cold on an ADA violation that they simply can not afford to risk losing. Get a lawyer if you need to, but go back and make the university pay what they owe him. No 1099 -- this whole arrangement is for the convenience of the employer. They can easily bury another $100,000 in the eminent domain compensation, still cheaper than going to court. He can put that into an annuity or something so he doesn't have to erode his home equity just to buy lunch at the cafeteria on campus.

[Lion EA]

>>discuss how tweaking one aspect of this affects the others<<

WHAT are you talking about? "TWEAKING"? He has them cold on an ADA violation that they simply can not afford to risk losing. Get a lawyer if you need to, but go back and make the university pay what they owe him. No 1099 -- this whole arrangement is for the convenience of the employer. They can easily bury another $100,000 in the eminent domain compensation, still cheaper than going to court. He can put that into an annuity or something so he doesn't have to erode his home equity just to buy lunch at the cafeteria on campus.

Definitely listen to Jainen. Just a tiny detail...don't forget the small nontaxable subsidy the U can make to his transportation (not at the office, but something like $110 per month). But, you must go after ALL his costs in excess of his current situation; the U must make him whole if they take his property. As has been mentioned, this is not just imminent domain -- it's ADA, too. Let him be as amicable as he wants, but make sure he gets a bulldog lawyer who won't let go until the clients rights have been protected. Good luck.

[Margaret CPA in OH]

Jainen and Lion, thanks for your replies. He does have a bulldog lawyer for ADA if needed (see my first post) but doesn't want this to get really ugly. He wants to continue working as long as possible and is concerned about a contentious resolution. The ramifications of that would surely shadow his daily worklife which, to date and for 21 years, has been a mostly pleasant experience. At age 55 with no good options to work anywhere else, he isn't ready psychologically to retire.

Adding more money potentially creates issues down the road. At the current offer, including $100,000 in expenses to make the new home "blind friendly" to accommodate his disability, means that he must spend $245,000 for a new place now (doable) but the deferred gain after his $250,000 exclusion gives him a negative basis of $210,000 for the new home (using Table 1-3 in Pub 544). It may be a challenge to sell the new home for $460,000 to allow for another exclusion and owe no tax. He may just have to be prepared for that.

Thanks again for any and all comments and suggestions.

[jainen]

>>The ramifications of that would surely shadow his daily worklife<<

I'm not sure what you mean by "negative basis," but he should not have to bear ANY economic loss for this land grab. That includes using his own equity to subsidize the university expansion.

How would his co-workers find out anything about this? It's not like the university will force it into open court. What could be uglier than throwing an old blind man out of his home?

It has nothing whatsoever to do with the people he works with. Let the lawyer do his job.

[kcjenkins]

Jainen and Lion, thanks for your replies. He does have a bulldog lawyer for ADA if needed (see my first post) but doesn't want this to get really ugly.

Adding more money potentially creates issues down the road. At the current offer, including $100,000 in expenses to make the new home "blind friendly" to accommodate his disability, means that he must spend $245,000 for a new place now (doable) but the deferred gain after his $250,000 exclusion gives him a negative basis of $210,000 for the new home (using Table 1-3 in Pub 544). It may be a challenge to sell the new home for $460,000 to allow for another exclusion and owe no tax. He may just have to be prepared for that.

I think you have to consider two things here. One, while he may not want to bring the lawyer into the actual discussions with the University at this point, that does not stop him from getting advice from him on how to ask, and what to ask for, and how to insist that it be reported. For example, as Jainen pointed out, at least part of the transportation can be paid as a 'subsidy' that does not get reported to him at all. Or the University could simply PROVIDE the transportation to him, again as a non-taxable fringe because it would be for their benefit. The University could even buy the new house, remodel it to meet his needs, then 'exchange' that new house for his old house. Let the lawyers deal with how to make this non-taxable to him. Just make sure that you get to review the deal for tax issues, since some great lawyers are totally ignorant about tax law.

Second, he should NOT be getting a 1099, either way. If they pay him extra for transportation, above the allowed 'subsidy', that should be on his W-2 as reimbursement of expenses, and then there is no issue of SE tax raised. At worst, he has some extra taxable income, but getting a 1099 will just cause him problems for no reason. Treating it the same way an employer treats the personal portion of use of a company car is much cleaner and does not raise compensation issues.

[TAXBILLY]

Agree with all that there are ways the University can treat a long time employee better.

taxbilly

[Don in Upstate NY]

Agree with all that there are ways the University can treat a long time employee better.

taxbilly

<humor>

But no one has yet addressed the urgency of this matter as described in the subject line ...

</humor>

[Pacun]

Margaret, you said on your original post "He is about 55 but the university does not want to offer an early retirement package. "

Trust me, once a lawyer is involved, the university will make this offer at once. Of course you still have the other issues to deal with, but why to try to maximize his returns on future years where you have an opportunity to make a bunch of money on the forced sale of his house?

No offense, let other professionals do their job, this job is for a lawyer and a tax professional as a consultant.

[Margaret CPA in OH]

Thanks to all of you for much food for thought. The client and I are trying to meet next week to discuss some of the great points many of you have made.

He does have a local attorney;

the ADA attorney provides some advice;

I did forget about the nontaxable amount for transportation but really like the idea that the University actually provide it;

the "negative basis" refers to the deferral of gain on his present home as I mentioned in following Pub. 544;

I especially appreciate KC's suggestion of the U buying a house and exchanging it;

he is expecting that the transportation income would be increased to cover the tax liability;

I am not in the least offended by the suggestion to involve legal help as 2 are already involved;

I'm not so sure how to take the "tax professional" comment, though, as I am a CPA with 20 years as a tax specialist and an MBA (coincidentally from this same university) with a tax specialty - this is one issue that I have not encountered in my career until now;

some of the options presented were already "discussed and decided" between the client and his attorneys before I was approached to determine the tax/financial impact of those decisions or options;

the client and the local attorney are not convinced that this is such a "slam dunk" to make out like a bandit;

as mentioned earlier, he has not been eager to consider retirement although this evening it seems to sound more appealing if he could just figure out what to do with all that time - his Scottish work ethic, I believe;

I came to the "watercooler" to sound out this great bunch of folks to raise issues perhaps not considered and you did just that! Thanks again so very much. It's quite likely there will be more to come...

[Julie]

I think that quote about a tax professional has a typo in it. You would probably have found it less insulting if it had said "a tax professional is a consultant."

Makes much more sense that way, doesn't it?

Thanks to all of you for much food for thought. The client and I are trying to meet next week to discuss some of the great points many of you have made.

He does have a local attorney;

the ADA attorney provides some advice;

I did forget about the nontaxable amount for transportation but really like the idea that the University actually provide it;

the "negative basis" refers to the deferral of gain on his present home as I mentioned in following Pub. 544;

I especially appreciate KC's suggestion of the U buying a house and exchanging it;

he is expecting that the transportation income would be increased to cover the tax liability;

I am not in the least offended by the suggestion to involve legal help as 2 are already involved;

I'm not so sure how to take the "tax professional" comment, though, as I am a CPA with 20 years as a tax specialist and an MBA (coincidentally from this same university) with a tax specialty - this is one issue that I have not encountered in my career until now;

some of the options presented were already "discussed and decided" between the client and his attorneys before I was approached to determine the tax/financial impact of those decisions or options;

the client and the local attorney are not convinced that this is such a "slam dunk" to make out like a bandit;

as mentioned earlier, he has not been eager to consider retirement although this evening it seems to sound more appealing if he could just figure out what to do with all that time - his Scottish work ethic, I believe;

I came to the "watercooler" to sound out this great bunch of folks to raise issues perhaps not considered and you did just that! Thanks again so very much. It's quite likely there will be more to come...

[kcjenkins]

I'm not so sure how to take the "tax professional" comment, though, as I am a CPA with 20 years as a tax specialist and an MBA (coincidentally from this same university) with a tax specialty

Perhaps you should add that info to your 'profile', Margaret.

Although I don't think that Pacun meant to be insulting, really. I think he just meant to suggest that you could best help in this as a consultant to the lawyers, on the tax issues, but that your client should let the lawyers do the negotiations. And I agree with him on that. Using a lawyer in such a complex issue should not be seen by the University as an attack. And a good lawyer will follow the clients wishes, if he wants his needs presented as non-confrontationally as possible. But it is a matter of legal issues, here, and so bringing in a lawyer is just plain old common sense, rather than a threatening move. Just as someone should use a 'closing agent' when they buy or sell a house, and they use a tax professional when they have complex tax returns, and they use a specialist when they have a serious health problem, they should use an employment law attorney when they negotiate a complex employment issue. That is just being sensible, and I hope you can help your client to see that.

[Margaret CPA in OH]

Thanks, KC, and others for insight and commentary. All is taken into consideration and the client is receptive to these considerations. We are meeting next week to further discuss. I do believe, however, that I may have not been very clear in stating the situation and for that, I apologize. He has retained a local attorney who is the negotiator. He has on call, so to speak, the ADA attorney should the university not play nice. He really would rather not have the situation become contentious, but, as I mentioned in one post, he is seriously rethinking all options, including retirement. I will have more info after our meeting.

Thanks again, so very much, for all the thoughtful comments posted here. I feel better prepared to assist this client with this, new to me, issue now that I have my "posse" prompting me!

PS Thanks, KC, for adding me to your friends list and for your last response. I guess I had best reveal more about myself at the risk of, well, whatever! I confess to being mostly a lurker for several years on the ATX and other boards.

[kcjenkins]

While you are welcome to 'lurk' if you wish, we appreciate all who jump in and share their experience. This give-and-take is a benefit to all, everyone learns things from it.

And I really do not think anyone risks anything by putting at least their state in their profile, and putting in more info can let others know who to ask, for example, with a specific 'regional' or 'state-related' question.

[Margaret CPA in OH]

An update: I met with the client this evening and, among other things, reviewed several comments posted here. He was very appreciative of the ideas discussed and has decided to fully engage the ADA attorney. He will call him this evening or tomorrow and ask him to come and meet with the university people face to face.

The friend who accompanied him and has helped him along the way strongly sided with the idea that he should not have to be doing all the work with this. We all are of the opinion that the ADA attorney will put clearly on the table that this client cannot simply be treated the same as the other real estate owners they have bought out. She and the client agree that passing notes and emails back and forth is not productive; it is now time to bring in the big boy. So stay tuned; we are hoping for a meeting with a couple of weeks. And an early retirement proposal should be offered for consideration, too!

Thanks again for all the input. I proudly presented my "colleagues" to my client and bragged about the collective expertise represented here.

[kcjenkins]

I'm so glad that we were able to help, Margaret. We will loof forward to the update when you get us one.

[jainen]

>>We will loof forward<<

I had to look that one up, kc. I find that "loof" is an old term for a paddle used to keep a vessel steering into the wind. It's a nice metaphor, and I was glad we could help Margaret do that.