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Disposition of business property question


Lucho

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Client had a truck used for his business; last year due to home mortgage modification issues he had to get rid of some of his assets as requested from the mortgage company so he could prove he was going to be able to make the mortgage payments in the future.

He entered into an agreement with a friend who took possession of the truck and continue making the payments to the GMC car dealer.

I have to remove (disposition) the truck from the asset entry.

This is the scenario: Truck original basis on date place on business $28,394.

Total depreciation before date of title of ownership transfer $10,514

Adjusted basis on date of title of ownership transfer $17,880

At the time of ownership transfer my client still owed $6,750 (amount that is being pay by new truck owner.

This is what I would do: Even though he did not get any money, in the disposition of asset worksheet (sale/abandonment) I would record the sale of this asset for the adjusted basis $17,880.

How would you do it? I am willing to read your opinions.

I could not find any answer on this matter in Pub. 544 and was looking for a Pub. on the subject of "Sale of business Property" but I think it does not exist

First time working on a case like this.

Thank you.

Lucho

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From pub 544: The amount realized from a sale or exchange is the total of all money you receive plus FMV of all property or services you receive. The amount you realize also includes any of your liabilities that were assumed by the buyer and any liabilities to which the property you transferred is subject, such as real estate taxes or a mortgage.

In pub 544, look under the section sales and exchanges.

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I hate myself when I do this.

"He entered into an agreement with a friend who took possession of the truck and continue making the payments to the GMC car dealer."

Does the foregoing mean that the taxpayer is still making the payments?

If so, I would do nothing. Because the taxpayer is still the "equitable" owner of the truck.

You see equitable ownership with houses.

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RoyDaleOne,

Further on in the OP, it says "At the time of ownership transfer my client still owed $6,750 (amount that is being pay by new truck owner."

It looks like ownership was transferred, the new person taking over the payments, and this disposition should be recorded with $6,750 as "proceeds."

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I hate myself when I do this.

"He entered into an agreement with a friend who took possession of the truck and continue making the payments to the GMC car dealer."

Does the foregoing mean that the taxpayer is still making the payments?

If so, I would do nothing. Because the taxpayer is still the "equitable" owner of the truck.

You see equitable ownership with houses.

No, my client is not responsible for the debt anymore.

I thank to you and to everybody else who posted. It has being helpful.

May God blesess this forum.

Lucho

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In my area, there is actually a higher demand for used trucks because of the poor economy many people can’t afford new ones

Judging by the amount of depreciation, this one may have only been in service for 2 years or less (assuming 100% business use and luxury rules do not apply). At any rate, it seems highly unlikely that the FMV would have dropped 75% in such a short time period. But if that is the case, it should be well documented in your files. In many cases an “agreement with a friend” does not include fair market value. (a)

(a)Probable price at which a willing buyer will buy from a willing seller when (1) both are unrelated, (2) know the relevant facts, (3) neither is under any compulsion to buy or sell, and (4) all rights and benefit inherent in (or attributable to) the item must have been included in the transfer.

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In my area, there is actually a higher demand for used trucks because of the poor economy many people can’t afford new ones

Judging by the amount of depreciation, this one may have only been in service for 2 years or less (assuming 100% business use and luxury rules do not apply). At any rate, it seems highly unlikely that the FMV would have dropped 75% in such a short time period. But if that is the case, it should be well documented in your files. In many cases an “agreement with a friend” does not include fair market value. (a)

(a)Probable price at which a willing buyer will buy from a willing seller when (1) both are unrelated, (2) know the relevant facts, (3) neither is under any compulsion to buy or sell, and (4) all rights and benefit inherent in (or attributable to) the item must have been included in the transfer.

The term "Fire Sale" comes to mind. If you need to sell something in a hurry, and you have a willing buyer, I would think it is reasonable to discount the value of the item for the "time is of the essence" value of completing the transaction.

I would take it at face value. Sale of a business asset for the debt assumed by the buyer.

Tom

Lodi, CA

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The term "Fire Sale" comes to mind. If you need to sell something in a hurry, and you have a willing buyer, I would think it is reasonable to discount the value of the item for the "time is of the essence" value of completing the transaction.

I would take it at face value. Sale of a business asset for the debt assumed by the buyer.

Tom

Lodi, CA

So you would take a $11,000 loss due to "an agreement with a friend" at face value. In my opinion that shows a lack of due diligence. Sounds to me like some more digging needs to be done.

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Yep. Thats my story and I am stickin' to it.

Fact, the vehicle is no longer in the possession of the seller.

Fact, the vehicle is now in the possession of the buyer.

Fact, the debt on the vehicle has been assumed by the buyer.

Fact, the buyer now has responsibility for the registration, insurance, and maintenance on the vehicle.

Fact, the seller no longer has the use or enjoyment of the vehicle.

Still looks like a completed transaction between a willing seller and a willing buyer who are not related to me. Unless there are other facts that we are not aware of, the disposition of business property has taken place and the adjusted basis and selling price can be established.

Tom

Lodi, CA

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Does GMAC consider your client to be the owner of the truck since his friend is just making payments to GMAC? Or, did your client pay off GMAC and the buyer make his own financing arrangements? Who are the personal property taxes in the name of? Is the friend just "holding" the truck until the mortgage company is satisfied with your client's loan-worthiness? Is your client getting the truck back someday?

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Yep. Thats my story and I am stickin' to it.

Fact, the vehicle is no longer in the possession of the seller.

Fact, the vehicle is now in the possession of the buyer.

Fact, the debt on the vehicle has been assumed by the buyer.

Fact, the buyer now has responsibility for the registration, insurance, and maintenance on the vehicle.

Fact, the seller no longer has the use or enjoyment of the vehicle.

Still looks like a completed transaction between a willing seller and a willing buyer who are not related to me. Unless there are other facts that we are not aware of, the disposition of business property has taken place and the adjusted basis and selling price can be established.

Tom

Lodi, CA

Those facts might be true, but that does not make it a bona fide loss. Reg § 1.165-1

In this situation the unfortunate taxpayer was compelled to enter into an agreement with a friend for personal reasons (home mortgage) instead of selling it on the open market in an arms length transaction. That fact was clearly stated by the original poster who seemed skeptical about taking the $11,000 loss until he received the blessing of this board.

There is glaring evidence that adequate consideration was not likely received by the taxpayer. That is where the taxpayer has burden of proof and tax preparer needs to use due diligence and professional standards. Very unlikely that FMV equals balance on note and that was the best price taxpayer could get on the open market. Also highly unlikely that FMV dropped 75% in such a short time period. (again we dont have the facts but based amount of depreciation shown it could have been less than two years.)

The non business purpose of the transaction, the unclear agreement with the friend, and the extremely low amount of consideration received indicates to me that this was not an arms length transaction and the taxpayer needs help in cleaning up this mess.

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