Taxpayer Denied “Involuntary Conversion” Tax Benefit
You win some and you lose some – and usually the reason for losing is not dotting the Is and crossing the Ts. So learned Mr. and Mrs. Peters the hard way.
The Internal Revenue Code has long provided relief to taxpayers whose property is condemned or sold under a threat of condemnation, in cases where a large taxable gain would result. The law says that if you reinvest the sales or condemnation proceeds in similar property within a prescribed period of time, you can avoid paying tax on the gain.
So here comes Mr. and Mrs. Peters who executed a purchase agreement to sell certain real property. Unfortunately for them, however, the Missouri District Court in which their case was heard noted that “There is no indication in the record that Defendants’ sale of the….property was motivated by condemnation, threat of condemnation, theft, or seizure.” Aside from other factual complications in the case, the Court observed that “It is undisputed that Defendants did not reinvest the proceeds from the sale of the….property in replacement property ‘similar or related in service or use’” quoting the requirement of the Code.
The tax law’s relevant provision will apply where the taxpayer loses possession of property due to a situation out of his control, but not where a taxpayer voluntarily, albeit reluctantly, chooses to divest himself of a property.
In this case, the Defendants chose to enter into a contract to sell the property, but later refused to close the sale. When a court ordered Defendants to close on the deal, it simply required them to perform their contractual duty. Section 1033 (of the IRC) does not permit the deferral of tax on a gain resulting from court-ordered specific performance of a contract to sell property. Although the Defendants may have been reluctant to complete the sale, they voluntarily undertook the sale of the property and were obligated under the terms of their sales agreement to complete the sale. The Court noted that “There is simply no indication in the record that the sale was involuntary or that the property was destroyed, stolen, seized, requisitioned or condemned.”
Of course, even if the sale in question were deemed a compulsory or involuntary conversion, it certainly didn’t help the taxpayers’ case that they never obtained replacement property anyway!
And from the latest in our Obama fiscal fiascoes department comes word this week that the U.S. government is making roughly $100 billion in improper payments every year, due to clerical errors and insufficient IRS enforcement, as revealed in recent Congressional testimony.
“The amounts are absolutely staggering,” quoth Representative John Mica (R-Fl).
Ah, but take comfort in the immortal words of the present (and likely not for long) Commish Koskinen, who retorted that “This is an important issue to the IRS.”
The largest sources of improper payments are government health care programs, Medicare, and Medicaid, according to the Associated Press.
So what’s all the fuss over another measly $4 billion for immigration?
CONSULT YOUR TAX ADVISOR – This article contains general information about various tax matters. You should consult your CPA regarding the implications to your own particular situation.
Jeff Quinn, the author of this article, is a shareholder in Ashley Quinn, CPAs and Consultants, Ltd., with offices in Incline Village and Reno. He can be reached at 831-7288, welcomes comments at email@example.com, and invites readers to consider his other commentary at http://blog.nolo.com/taxes.