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Forgiveness of loan to charity - cash or non cash?

Technical topics regarding tax preparation.
#101
Nilodop  
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Chay, my mood has changed. I no longer mean this. I admire your persistence.

Your hypothetical was flawed, as Nilodop pointed out way back at the beginning, making your analogy flawed as well.. Maybe even earlier, but #45 for sure.
 

#102
Chay  
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Jeff-Ohio wrote:That’s because you refuse to listen.

Interesting. When I rebut the points you make with reasoning and/or evidence, you call that "refusing to listen." I suppose "listening" only happens when I agree you're right?

You provided a hypothetical about “lending real estate.” Your hypothetical was flawed, as Nilodop pointed out way back at the beginning, making your analogy flawed as well.

You explained why you thought it was flawed in #83. I responded in #84. Your response to #84 was a non-sequitor and now a circle back to your original claim from #83. My response now will be to refer you to #84 again. It's up to you whether to actually respond to #84 or not, but let's not keep going in circles like this shall we?

Forget about accrued interest. That’s an accrual. We’re talking about principal.

We are talking about why The Blum Firm, when it comes to the preparation of Form 709, describes the best reporting practice as they do on Page 24 and 25 of the article you quoted. Page 25 has the accrued interest on it, and you're the one who brought it up. If it isn't relevant, let's forget the whole thing, accrued interest and all. If it is relevant, then you can either respond to my #99 answer to your question about the article or let that answer stand.

No mention of cash vs. non-cash in any of those sources. So they deserve zero consideration. And one of them involved the low level at the IRS, which I’ve already addressed.

See the discussion of relevance in #99 for why the sources are still relevant.

How is it a straw man argument? My donation of clothing worth $200 is “equal in force, amount AND value” of $200 in cash.

It's a straw man argument because I never used the term "equivalent" to mean equal in force, amount, value, or any combination of those three things. I used it to mean "corresponding or virtually identical especially in effect or function," which is the same way the Tax Court uses it when they describe cancellation of indebtedness as the "equivalent of cash."

Your argument is ridiculous.

Here's where you attack the straw man. While the argument you are saying I'm making is ridiculous, that argument is not the argument I'm actually making.

Here, let me argue in circles again: The donation of a Receivable isn’t a cash donation. Removing a Liability from a charity’s Balance Sheet, without the payment of cash “within the taxable year,” is not a cash contribution.

And let me reiterate that you haven't come up with any reason why constructive transfers don't apply to section 170.

You can’t have it both ways. Either you are saying that the Note is Cash or you are denying the existence of the Note as a separate, distinct and identifiable asset for all purposes and are merely using the Note to the peg the value of the deduction and also, the timing of the deduction.

This is another manifestation of your false dilemma. See paragraphs 3-4 of post #38 and paragraph 2 of post #51 for why the dilemma is false, and the last part of #57 for my best guess as to why you can't accept that.

The charity already had the cash.

Two words: constructive transfer.

I know, though, that you would like to nuance this and say, “The Note isn’t the Cash. The cash simply becomes unencumbered when the note is forgiven. As a result, it is the cash that is given within the current taxable year.” Fair enough. But wrong nonetheless. If the Note isn’t the cash, then the Note is a separate, distince and identifiable asset. The unencumbered cash is simply a fallout of the current year transaction that involves a separate, distinct and identifiable asset. You’d like to ignore the current year transaction and base your conclusion on the fallout.

Yes, the unencumbered cash is a fallout of debt extinguishment. But is the note transferred before it's extinguished or not? That's the central question. If it isn't transferred, then the only way to characterize the transaction is as a constructive transfer of cash. You would have us believe that any destruction or abandonment of the note IS a transfer of the note to the charity. Your arguments as to why this is so are centered on the nature of a lending arrangement. Why doesn't the creditor retain an interest in the cash after it's been lent out? You say it's because "the accounting entries prove it out" and because "the lender can't spend it, but the borrower can."

All we need to contradict your reasoning is the Story case. You keep trying to dismiss this case because it isn't conclusive regarding the cash vs. non-cash issue. That's effectively another straw man attack because I never made that claim about the case. My claim is Judge Drennen employed a line of reasoning that is inconsistent with your claims about the nature of a lending arrangement. Like I said in #82, either the reasoning in that case was flawed and it can't be applied to other fact patterns, or the reasoning is valid and your claim about the nature of a lending arrangement is disproven. Without that support, your false dilemma disappears and we are in a world where both non-cash property transfers of notes to the borrower and "cash equivalent" constructive transfers of a loan balance are possible. Welcome to reality.

I just want to know how to report it. That is the relevant part. And as the lawyer showed, it gets reported as a non-cash gift.

What we mean by "cash" in the charitable donation context is "monetary gift". To say that a gift is of "$3,830,800 of outstanding principal" is not to say that it is not a "monetary gift". On the contrary, it looks a lot like a "monetary gift" to me.

That’s not my implication. There’s no “either” involved. Both of these things happen (although I take issue with your word “control”). One (releasing control of the cash) is the result of the other (transferring the debt).

Ok, I'll reword your false dilemma: either both of these things must always happen, with transferring the debt the controlling event, or transferring the debt never happens and the event must consist only of a constructive cash transfer. After you cast things this way, you provide examples of debt being transferred to a debtor and declare victory, saying that because things have been that way in your examples, they can't ever be the other way. The crucial piece that you haven't proven is why this type of transaction must always be framed one way or the other; that's why I call your reasoning a false dilemma.

I’ve already shown how they’re controlling. No cash was transferred to the charity in the current year. We account for things accordingly.

Your reasoning again rests on the supposition that constructive transfers don't count, which you haven't shown to be the case.

There is nothing abstract about it.

Nothing abstract about intangible assets?

There is no contradictory precedent.

Nothing contradictory about the Tax Court saying "cancellation of his debt to the corporation was the equivalent of cash" (Kniffen) on the one hand and saying "[t]he cancellation of such a chose in action is, in effect, a distribution to taxpayer of 'property'" (Kellogg) on the other?

That is the thrust of the issue. It’s a point you conveniently bypass to get to end result of your theory. Again, if your equivalency theory is true, and I give $200 worth of clothes to a charity, then I’ve given $200 in cash.

More straw man attacks. If my theory is true, and your clothing memorializes a $200 loan to the charity, and you burn your clothing with donative intent toward the charity, then you get a $200 cash donation. That's all the theory says.

Here we go. Back to Story. Peripheral comments.

Peripheral to a certain line of reasoning, but not peripheral to my claim that Judge Drennen employed a line of reasoning that is inconsistent with your claims about the nature of a lending arrangement.

Moreover, inconsistent comments by the judge, as I have pointed out with the language preceding Footnote #3.

They're only inconsistent if we accept your false dilemma as a premise. I don't.

when I present cases involving the forgiveness of a Note and the courts directly and clearly state that it was a transfer of property other than money, somehow those cases are irrelevant.

The Kellogg case is not irrelevant, and I never said it was.

Those sources say nothing of the sort.

Wrong. In the PLR, for example, check out the top of page three.
 

#103
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Just got back from my victory lap…

Thereafter, I will go donate my $200 worth of clothes to a charity and take a $200 cash donation deduction. This is a donation of a cash equivalent, according to Chay. According to Chay, it corresponds to cash or is virtually identical to cash in effect or function. I don’t know what corresponds to cash means. So to be conservative, I’ll assume my clothes don’t correspond to cash (even though I can put a dollar value on them). I wouldn’t agree that my clothes are virtually identical to cash in function, unless you make a shirt out of dollar bills. But I would agree that my clothes are identical to cash in effect, since they’re worth $200. The charity could exchange my clothes for $200 worth of goods and/or services. Further, they could sell my clothes for $200.

I’m starting to like Chay’s theory, since if I give $6k worth of clothes, I don’t need an appraisal (although Chay would have us treat it as a non-cash donation for some purposes, but then have a file a F8275, and then he’d put it down as a cash contribution on his Schedule A). This reporting is about as sensical as Chay’s theory…but if you think about, that’s not surprising.

But I’m all ears about your constructive theory. Please tell us, specifically, about the constructive transfers that your theory would entail.
 

#104
Nilodop  
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Just got back from my victory lap…

Thereafter, I will go donate my $200 worth of clothes to a charity ...
. But they'll be laundered first, right?

But on a more serious note ... We have not carefully addressed the 6662 penalty. Depending on the numbers (in an actual, not hypothetical situation), there could be a substantial or even a gross valuation overstatement penalty assertion, and the Form 8275 or even 8275R does not protect from that, right?
 

#105
Chay  
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Jeff-Ohio wrote:But I would agree that my clothes are identical to cash in effect, since they’re worth $200.

Try using that argument with the grocery store the next time you go shopping. You'll have a lot less success than if you offer to reduce the balance on a note payable to you in lieu of paying cash.

Please tell us, specifically, about the constructive transfers that your theory would entail.

The constructive transfers would be along the lines of the following:

    Petitioner has stipulated that she had the ability to repay the loans, and it is clear that the forgiveness of these liabilities effectively transferred assets from Napa to petitioner in the amount of the balances due from these loans and the accrued interest thereon.
    Merriam v. Commissioner, T.C. Memo. 1995-432

    We recognize that Orem, itself, did not actually satisfy the accrued liabilities by direct payment to, or unrestricted crediting of the accounts of, the ultimate obligees. See note 5 supra. But in substance, by accepting less cash than it otherwise would have received, it made an actual payment to petitioner which was sufficient to justify the deduction.
    Commercial Security Bank v. Commissioner, 77 T.C. 145, 148 (1981)

    R. D. Walker, supra, involved a recapitalization wherein the taxpayer exchanged his common stock for a cancellation of his indebtedness and new preferred and common stock. The taxpayer there conceded, and we agreed, that cancellation of his debt to the corporation was the equivalent of cash and constituted "other property or money" within the meaning of section 112(c) (1) of the Revenue Act of 1928.
    [...]
    John L. Hawkinson, supra, involved a reorganization of two corporations in which the indebtedness of the taxpayer to one of the corporations was canceled. We there stated, "That the debt cancellation was the equivalent of cash is apparently accepted by both parties and finds support in R. D. Walker, 34 B.T.A. 983," and concluded that on the facts presented such cancellation of indebtedness resulted in the distribution of a taxable dividend to the taxpayer.
    Kniffen v. Commissioner, 39 T.C. 553, 567 (1962)

    On Date A, US Parent transferred all of its Sub 1 stock to Foreign Parent in exchange for cash, the payment of which was effectuated by the cancellation of US Parent indebtedness to Foreign Parent (the “Sub 1 Acquisition”).
    PLR 201016048

    And we see no reason why a taxpayer cannot advance money to a charity when it is needed and arrange the transaction in such a manner that he can take full advantage of the charitable deduction provisions of the income tax statutes over a period of years, provided he does not actually part with all dominion and control over the property contributed at the time it is advanced, and truly intends to make a contribution of the property advanced over a period of years rather than all at one time.
    Story v. Commissioner, 38 T.C. 936 (1962)
While you and Nilodop take your victory laps and discuss penalties, just remember that the version of my argument that you're "starting to like" is the straw man version which you invented. No one besides you is suggesting that a taxpayer could take a cash deduction for the contribution of the note itself.

You assert that this staw man version of the argument is unavoidable because there is only one "current year transaction," and that this current year transaction must constitute a transfer of the note because it is a "separate, distinct and identifiable asset." Your assertion is firmly rooted in an accounting mindset where the only assets that matter are the ones that show up in the books. In reality, where intangibles are concerned, there exist a plethora of assets that don't register on the books until there is some kind of monetary transaction associated with them, and monetary transactions conducted using loan balances are clearly possible. You also maintain in the alternative that cash isn't comparable to other assets and can't actually be lent because "the lender can't spend it, but the borrower can." But my property is not any less my property no matter how greatly I subject it to a risk of loss, and fungibility means that one dollar is as good as the next.

Rather than attempt to counter these points, support your assertions and prove that my argument really is as ludicrous as you say it is, you are taking that outcome as a foregone conclusion and making jokes about it. Perhaps some of the participants on this thread will be fooled into siding with you. Most of them, I trust, won't be, but will instead agree with the conclusion I came to in #99. The preponderance of evidence shows that a cash contribution of a loan balance to a charity is possible.
 

#106
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The constructive transfers would be along the lines of the following:

I want to know the specifics of your constructive transfers in the charitable situation at hand, not a bunch of references to cases. That’s why I used the word “specifically.”

In other words…we have a taxpayer that previously made a cash loan to a charity. Take it from there. What are the constructive/deemed transfers in the OP’s situation?

Your assertion is firmly rooted in an accounting mindset where the only assets that matter are the ones that show up in the books.

Again, just explain your deeming to us. Prior to forgiveness, taxpayer has a Receivable, charity has a Payable. There’s nothing improper about that. I think you’d agree with that accounting starting point. If you don’t, the issue isn’t about me being firmly rooted, given that this is basic accounting.

and making jokes about it.

There have been no jokes. My clothing donation equals a cash donation under your dominion/control/cash equivalency theory. It meets all the requirements.
 

#107
Nilodop  
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I'm guilty of jokes. Corny, old man jokes.
 

#108
Chay  
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Jeff-Ohio wrote:I want to know the specifics of your constructive transfers in the charitable situation at hand, not a bunch of references to cases.

The constructive transfers would happen no differently from any of the constructive transfers in the quotes I posted. Pick one and swap out a few words to change the context to a charitable one, or you can pick the last one and leave it as is.

While we're on the topic, I want to know why constructive transfers don't apply to section 170 when they do in so many other contexts. I've wanted to know that since post #61.

Prior to forgiveness, taxpayer has a Receivable, charity has a Payable. There’s nothing improper about that. I think you’d agree with that accounting starting point.

My clothing donation equals a cash donation under your dominion/control/cash equivalency theory. It meets all the requirements.

After responding to so many posts where these same ideas appear only to have you ignore the responses and re-state the ideas, I am honestly beginning to wonder if I'm being trolled.

I'd like to give you the benefit of the doubt on that, but I just can't see any other reason for you to keep this up. What is your goal here? Does repeating something make it seem more believable to you?
 

#109
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What is your goal here? Does repeating something make it seem more believable to you?

My goal is to get you to explain the constructive aspect of your theory to us, specifically and in detail, which you still haven’t done. I’ve asked twice now.

only to have you ignore the responses and re-state the ideas

So far, all we’ve gotten from you is “generalities” on your deeming/constructive theory…not a clear, concise, specific and detailed analysis as to the constructive transfers. If Story was all about constructive transfers, I missed it, since the words “constructive” and “deemed” weren’t used a single time in that case.

But that is neither here nor there. We just need you to lay out the constructive transfers in the OP’s case.
 

#110
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Much but not all of the following is repeating part of this thread, but I'm willing to do that and add more in the pursuit of persuasion of professionals.

First, I point out that, so far as I remember, none of the authorities cited so far have involved facts in which the borrower is unable to repay all (or any) of the loan at the point where a contribution is made by the lender. That's a critical difference in facts, as I will try to explain.

When the loan is made, the borrower/charity is financially in good shape, a good credit risk, and the promissory note is stipulated to be valid, i.e., not a donation at that point. As a result, the borrower has no accession to wealth, but does have dominion over the cash that it borrowed. In Westpac Pacific, the 9th Circuit stated it like so:
One may have “complete dominion” over money but it does not become income until it is an “accession to wealth.”   That is why borrowed money is not income, even though the borrower has “complete dominion” over the cash.11  “Because of this [repayment] obligation, the loan proceeds do not qualify as income to the taxpayer.” 12


The Code in general applies even to 501(c)(3) charities. So section 61(a)(11) and section 108 are both applicable, even to a charity. And sections 165 and 170 are certainly applicable to the lender. At the point where the lender makes the decision to, and does, with donative/charitable intent, discharge the loan (by cancellation, forgiveness, or transfer), it (the loan, represented by the note) is worth, say, half its face value/balance.

If the lender were to pursue collection, he'd get half the principal back and have a loss of some kind in the amount of the other half. The borrower/charity would have income in the amount discharged, possibly excludible under some provision in section 108, plus debt repayment.

But since the lender made a donation (charitable/donative intent) at a point where the value of what he discharged is half the face of the note, that amount is a charitable gift, deductible as such by the lender/dono (if substantiated and documented), and the rest is a loss.

Even though the entire note is discharged, there never was, nor could there have been, a constructive transfer of cash, because the actual transfer occurred when the loan was made and the charity got dominion and control of the cash.

Some may say all I've done is repeat parts of this thread, but I believe the authority for the dominion and control position is new, as is the 61/108/165 discussion.
 

#111
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As a result, the borrower has no accession to wealth, but does have dominion over the cash that it borrowed.

Yes, of course. Quite logically. And the borrower has control over it too.

Even though the entire note is discharged, there never was, nor could there have been, a constructive transfer of cash, because the actual transfer occurred when the loan was made and the charity got dominion and control of the cash.

Well, we’ll see what Chay has to say about that. He’s been banging the table about a constructive cash contribution. In doing so, he talks in generalities, repeatedly, and then accuses us of re-stating ideas. He asks us why…why why why, since Post #61, constructive transfers don’t apply to Section 170. Well, Chay, give us the exact specifics of the constructive cash transfers that you speak of and we can bat them around. If it turns out that there are not any valid constructive transfers, then your question leaves us with a false choice, at least with respect to the specific facts of the OP.

We need to know the specifics of your constructive cash contributions because your theory is hard to follow. I myself would start with the charity holding the cash. But I don’t know, given your theory. You have stated that it’s still your money even though the charity is holding it. So I really don’t know where you would start the analysis under your theory. Perhaps you would start it with the taxpayer still holding the money, even though he lent it to the charity. I’m not sure. We just need to know how it all plays out. If you really are starting there, that would be interesting, since you were lecturing us on what lending is…yet, here we have Chay making a loan, but stating that he is still in deemed possession of the money (even though it is sitting in the charity’s bank account). But maybe I’m getting ahead of myself. I really don’t know what Chay is going to say. We’ll see.
But my property is not any less my property no matter how greatly I subject it to a risk of loss

Fascinating. You lend $10k out and claim the cash is still your property. Now you have $20k of assets, the cash of $10k and the $10k value of the Note. And if you actually collateralized your loan with the borrower’s land, that is worth $10k, now we’re up to $30k in value. Amazing, a $10k loan creates $30k worth of assets to the lender. But you’ll probably recognize the silliness of all of this, or at least some of it. You probably recognize that you can’t count the cash and the land, so that would drop the $30k down to $20k. Not bad, though, still a doubling of value. But this presents a little problem with your theory: The minute you collateralize your loan, you really don’t have a pure claim to the cash anymore. You want cash, but you’ve agreed to take the land as a substitute. If, for whatever reason, the borrower doesn’t make a single payment, all you can take is the land. It follows, then, that if you forgive the loan and release the collateral, you’ve really given the land (under your theory).
 

#112
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Jeff-Ohio wrote:My goal is to get you to explain the constructive aspect of your theory to us, specifically and in detail, which you still haven’t done.

We just need you to lay out the constructive transfers in the OP’s case.

In #108, I told you to pick any of the quotes I posted in #105 and swap a few words out to understand what I'm talking about. At the risk of looking obsequious, I will indulge you and do the work myself with the understanding that in return, you won't keep arguing in circles and will instead advance the discussion, possibly by revealing at last what secret mechanism prevents the same theories from applying to section 170.

    OP's hypothetical client does not actually satisfy the charitable contribution by direct payment to, or unrestricted crediting of the accounts of, the charity. But in substance, by accepting less cash than it otherwise would have received, it makes an actual payment to the charity which is sufficient to justify the deduction.
The basis for that is Commercial Security Bank v. Commissioner.

I fully expect you to object to the application of this same analysis to OP's facts on the grounds that this case dealt with a sale in liquidation of a company rather than settlement of a loan and did not involve a situation where doubt as to collectibility may have arisen. These objections will be off base. As you can see from the wide range of situations in the #105 quotes, the deemed payment of cash via the waiver of cash that would otherwise be received applies to many areas of the Code. I also do not pretend to have mastered the nuances of when a court would accept a deemed cash payment and when it wouldn't; I only argue that the transaction is as possible in a section 170 context as it is in all of these other contexts.

Nilodop wrote:First, I point out that, so far as I remember, none of the authorities cited so far have involved facts in which the borrower is unable to repay all (or any) of the loan at the point where a contribution is made by the lender.

True. You will also note that at no point have I argued that a taxpayer can always claim the entire balance of a note receivable as a cash contribution no matter the circumstances. A complete lack of collectibility on all or a portion of a note is fatal to the deduction of the uncollectible portion as a cash donation. Some doubt as to collectibility might pose an issue or it might not. Like I said, I'm not a master of the nuances in such a situation and I don't pretend to be.

the actual transfer occurred when the loan was made and the charity got dominion and control of the cash

The 9th Circuit may have said the lender gets "complete dominion" in Westpac, but that's not what the Supreme Court said in Indianapolis Power & Light, which is the precedent they were invoking at the time. The Supreme Court said the following:

    IPL hardly enjoyed "complete dominion" over the customer deposits entrusted to it. Rather, these deposits were acquired subject to an express "obligation to repay," either at the time service was terminated or at the time a customer established good credit. So long as the customer fulfills his legal obligation to make timely payments, his deposit ultimately is to be refunded, and both the timing and method of that refund are largely within the control of the customer.
Does a debtor have dominion and control over borrowed funds? Yes. Do they have complete dominion and control? No, because those funds are subject to an obligation to repay. Likewise, a creditor doesn't have complete dominion and control. But they still have some dominion and control, and in many cases the level of control is enough to use the funds to make a payment or contribution to the debtor.

Jeff-Ohio wrote:
But my property is not any less my property no matter how greatly I subject it to a risk of loss


Fascinating. You lend $10k out and claim the cash is still your property. Now you have $20k of assets, the cash of $10k and the $10k value of the Note.

Jeff, you're killing me. You posted this right as I was starting this post, a post which I had hoped would get things moving forward and stop you from all your circular arguing. This is a false problem which was dealt with in paragraphs 3-4 of post #38 and paragraph 2 of post #51. No counterargument has been offered to those points aside from Nilodop's #41 and #45, which were answered in #42 and #46.

But since you can't be bothered to read prior posts, and since I started this post in a generous mood, I'm going to go ahead and bring those ideas forward for you. Yes, I'm going to repeat myself. But to keep things interesting, I'll do so by way of a new, detailed example that you can "bat around."

What is the value in your hands of a title to real property? The title secures your ownership of the property no matter who has physical possession of it, so presumably the value will be the same as the value of the property itself.

Now let's say that there are squatters on the property with a possible claim to equitable ownership of it that would be valid under state law. In a transaction with a third party, that's going to diminish the value of the title due to uncertainty as to the title's enforceability. We don't normally think of the real estate and the title to real estate as separate assets, but in that context it makes sense to do so. Holding title means holding partial dominion over the property. The other piece required for complete dominion is actual possession of the property, which the title doesn't confer.

When we examine a possible transaction with the very squatters who are the problem, it becomes possible to guarantee complete dominion and control over the transferred property because they already have physical possession. It becomes possible to say "I'm giving this property to the squatters" even though we would say "I'm giving legal title to this property" in the case of a third party.

Now, swap out "legal title to this property" for "a note receivable," "property" for "money," and "squatters" for "debtor." It becomes possible to say "I'm giving this money to the debtor" even though we would say "I'm giving a note receivable" in the case of a third party.

In either case, no accountant in his right mind, least of all Jeff-Ohio, would put forward the analysis that we now have double the assets due to the decoupling of the document securing ownership of the asset from the asset itself.
 

#113
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I fully expect you to object to the application of this same analysis to OP's facts on the grounds that this case dealt with accrued liabilities rather than a loan and did not involve a situation where doubt as to collectibility may have arisen.


I object because you won’t just take the OP’s situation – involving a loan to a charity – and then a discharge of that loan – and simply analyze that fact pattern. Instead, you try to sandwich the OP’s fact pattern into a cash basis taxpayer that sold its assets, including the accrued ones, and the buyer assumed the seller’s liabilities, including the accrued ones. So, it’s not just the non-loan issue I take exception to, it’s the fact that a sale was involved. There is no sale in the OP’s fact pattern. Further, the case involved an assumption of liabilities, not a discharge.

Why don’t you do it – why don’t you take the facts as the OP gave them to us and then tell us about the constructive cash transfers?

I only argue that the transaction is as possible in a section 170 context as it is in all of these other contexts.


Then put your money with your mouth is and detail out the constructive cash transfers in the OP’s situation.

Do they have complete dominion and control?


Now you’re altering your argument. And it matters little. When the utility customer conveyed the cash, he no longer “owns” the cash. What he owns is the asset that replaced the cash that he conveyed. If it were true that he owned no asset after the conveyance of the cash, except for the cash, then if the utility company just kept the cash and never gave it back, he would have no recourse to collect it. What allows him to collect it are the rights afforded him by the asset he does now own, which is the Receivable.

The title secures your ownership of the property no matter who has physical possession of it, so presumably the value will be the same as the value of the property itself.


A title is just evidence of ownership. A note isn’t. If the value of the title was really equal to the value of the underlying real property, well then, since I hold both, there you go again, doubling my asset value…

Holding title means holding partial dominion over the property.

No it doesn’t. You either own the property or you don’t. Title is just evidence of ownership. It’s not an asset in and of itself. If you retain the title in your deed-for-contract sale, as security in case you don’t receive full payment, guess what: You still have a sale for income tax purposes. You don’t keep the real property on your books and that’s because you sold it. Instead, you book up a Receivable. This “partial dominion” you speak of doesn’t hold back the transfer of property for income tax purposes…as much as you’d like to believe it does.

…which leads me back to what I’ve asked numerous times: What exactly are the constructive cash transfers in the OP’s situation? What is your starting point? Taxpayer lent cash to the charity. Are you going to start the analysis with the taxpayer still owning the case? I’m curious. The court in Indianapolis Power certainly didn’t say that the Power Company didn’t own the cash. It just said it had an obligation to repay it.

The other piece required for complete dominion is actual possession of the property

Wrong. In the case of a loan, or a utility deposit, the other piece required for complete dominion is for the debtor to also hold the Receivable. It is the possession of that property that is the deciding factor. And since the debtor did not hold that in Indianapolis Power and Light, at least not initially, there was no income inclusion in that case, at least not initially. Hence the court’s repeated use of the words, “at the time they are made.” The “right to collect” wasn’t held by the Power Company, at least not initially, such that the Power Company could merge it with its repayment obligation. The “right to collect” was only “forfeited” by the customer when the customer had an overdue, unpaid utility bill. In that case, the deposit would be applied to the overdue utility bill. No cash changed hands, but a constructive cash transfer for sure, in satisfaction of the overdue utility bill. But I digress, because OP’s situation involved forgiveness, not satisfaction.

It sure does seem that Chay, why provided us with a dictionary definition of lending, understands it this way: If I lend you $10k in cash, but retain just enough partial dominion over the money, then it is still my money. I own it. I haven’t transferred it. Therefore, I say to myself, if I own it, and haven’t transferred it, why don’t I just make it real clear and just create a Note for the loan, but I’ll keep the money in my own bank account for safe keeping. I don’t trust the debtor. Nonetheless, since we have a valid loan here, I’ll forward this repayment schedule to the “debtor” with respect to the money he never got.
 

#114
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Rev proc 2019-3 section 3 item 35. I think in addition to Story. I guess we can do whatever we want.

When they write “amounts” I equate it to cash. When they write it as value, I tend to think property.
 

#115
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Jeff-Ohio wrote:Why don’t you do it – why don’t you take the facts as the OP gave them to us and then tell us about the constructive cash transfers?

I did tell you about the constructive transfer. OP's hypothetical client does not actually satisfy the charitable contribution by direct payment to, or unrestricted crediting of the accounts of, the charity. But in substance, by accepting less cash than it otherwise would have received, it makes an actual payment to the charity which is sufficient to justify the deduction.

You can say you don't believe that applies to loan forgiveness all you want. I think it does. Let me just switch out the rest of the #105 quotes, all of which had to do with loan forgiveness:

    forgiveness of the loan effectively transferred assets from OP's hypothetical client to the charity in the amount of the balances due

    cancellation of the charity's debt to OP's hypothetical client was the equivalent of cash

    That the debt cancellation was the equivalent of cash is apparently accepted by both the charity and OP's hypothetical client and finds support in R. D. Walker, 34 B.T.A. 983

    On Date A, OP's hypothetical client received nothing of value besides intangible religious benefits from the charity in exchange for cash, the payment of which was effectuated by the cancellation of the charity's indebtedness to the client

    we see no reason why OP's hypothetical client cannot advance money to a charity when it is needed and arrange the transaction in such a manner that he can take full advantage of the charitable deduction provisions of the income tax statutes over a period of years, provided he does not actually part with all dominion and control over the property contributed at the time it is advanced, and truly intends to make a contribution of the property advanced over a period of years
This above reasoning was used by the Tax Court and the IRS, and I hereby apply the same reasoning to OP's facts. If you still won't accept it unless I provide a detailed analysis of why the Tax Court and the IRS agree that the reasoning is valid, then it must be because you'd prefer to attack bits and pieces of my analysis rather than acknowledge that no matter what you say about it, the reasoning is still valid precedent for tax purposes and accepted by the IRS. If that's your idea of "advancing the discussion," then you can count me out.

If you declare victory again due to my refusal to continue indulging your absurd line of reasoning, then I've won the argument. You will have shown yourself as unable or unwilling to distinguish the OP's facts from the facts in all of the examples above.

Now you’re altering your argument.

No, you just never understood the argument, apparently.

What allows him to collect it are the rights afforded him by the asset he does now own, which is the Receivable.

A fine parallel between real property and the title to that property, two distinct physical items which are capable of being regarded separately even though they usually aren't.

A title is just evidence of ownership. A note isn’t.

A distinction without a difference. Either way, each document lets you reclaim what's rightfully yours.

No it doesn’t. You either own the property or you don’t. Title is just evidence of ownership. It’s not an asset in and of itself. If you retain the title in your deed-for-contract sale, as security in case you don’t receive full payment, guess what: You still have a sale for income tax purposes. You don’t keep the real property on your books and that’s because you sold it. Instead, you book up a Receivable. This “partial dominion” you speak of doesn’t hold back the transfer of property for income tax purposes…as much as you’d like to believe it does.

Another distinction without a difference. In the real property example, we treat the transfer of the title as the transfer of the property, but in the case of the note we treat the transfer of the note as a transfer of the note. So what. It's obvious that from an accounting standpoint, my reasoning doesn't make sense because the money represented by the note doesn't show up anywhere. In the real world, things work differently. While the "real world" may not always be controlling for tax purposes, it sure seems like it comes into play in the area of tax law we're discussing based on the quotes I've provided.

In the case of a loan, or a utility deposit, the other piece required for complete dominion is for the debtor to also hold the Receivable.

Or for the receivable to be destroyed by the creditor.

The “right to collect” was only “forfeited” by the customer when the customer had an overdue, unpaid utility bill. In that case, the deposit would be applied to the overdue utility bill.

And it is that very right to collect which is the dominion and control over the borrowed funds. If you want to call a legally valid right to take back property that you previously had in your possession something other than "ownership," I'm fine with that. Just tell me what language you want to use. Whatever it is, it allows the creditor to retain enough dominion and control over the cash that they can still use it to make a deemed cash payment to the debtor.

No cash changed hands, but a constructive cash transfer for sure, in satisfaction of the overdue utility bill. But I digress, because OP’s situation involved forgiveness, not satisfaction.

Good, an attempt to distinguish the OP's facts. Let's explore this some more. You claim that while constructive cash transfers can happen in the case of "satisfaction," they can't happen in the case of "forgiveness." Why?

It sure does seem that Chay, why provided us with a dictionary definition of lending, understands it this way: If I lend you $10k in cash, but retain just enough partial dominion over the money, then it is still my money. I own it. I haven’t transferred it. Therefore, I say to myself, if I own it, and haven’t transferred it, why don’t I just make it real clear and just create a Note for the loan, but I’ll keep the money in my own bank account for safe keeping. I don’t trust the debtor. Nonetheless, since we have a valid loan here, I’ll forward this repayment schedule to the “debtor” with respect to the money he never got.

This is an example of the fallacy of equivocation. In the first underlined segment, you use the word "transferred" to mean "give ownership." As you progress, you switch your interpretation of the word to "give physical control."

So, no, that's not the way I understand lending.
 

#116
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j3cpa wrote:Rev proc 2019-3 section 3 item 35. I think in addition to Story. I guess we can do whatever we want.

When they write “amounts” I equate it to cash. When they write it as value, I tend to think property.

I agree that "amounts" translates to cash.

The source you referenced, I believe, shows that the question isn't fully settled, and may never be, due to "the inherently factual nature of the problems involved." In some situations the IRS might accept the cash argument while in others they might not. My guess is that the primary issue is the "doubt as to collectibility" concept which I discussed in #112. Whatever the case, we should be careful in this type of situation and cover our bases.
 

#117
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Rev proc 2019-3 section 3 item 35.


I pointed out, a long while ago, that this is a “no rule” area for the IRS.

I think in addition to Story. I guess we can do whatever we want.

You’re losing me. Rev Proc just says the IRS won’t rule on it. And the issue they won’t rule on is the year(s) in which the deduction is allowed. What you cited has no relevance to the cash/non-cash issue. As such, this comment:

When they write “amounts” I equate it to cash. When they write it as value, I tend to think property.


…is pretty meaningless. Not only are you reading too much into the few words under Item #35 in the Rev Proc, as if it is speaking to us about the cash vs. non-cash issue, your conclusion is off base. That is, not sure why you’d equate the word “amount” with cash only. Are you saying that if I donate my stock to a charity, I don’t get to deduct any “amount?” And are you saying that if I donate $100 in cash to a charity, I get no deduction for the value of my contribution?

Item #35 just says, “as contributions.” It is not trying to differentiate between cash and non-cash. It is speaking to the issue in general…just like Story was. And it is telling us the IRS won’t rule on it.

I agree that "amounts" translates to cash.


See above and good grief. The issue you say the few words are speaking to isn’t even being contemplated in those few words. #35 of the Rev Proc is speaking about the arrangement and deductions in general. It is not speaking to cash and/or non-cash specifically.

The source you quoted, I believe, shows that the question isn't fully settled


It shows nothing about the issue we are talking about here.

I did tell you about the constructive transfer.


Just stop. I’ve asked you repeatedly to walk us through the constructive transfers IN THE OP’S CASE. You refuse to do so. You continue to pull from other cases and replace words. I cannot even tell where you’d start your analysis. Presumably, it would start with you transferring cash to the charity, but arguing that you never transferred the cash. And then, if we pretend the charity spends all the money, you’d use some fungible theory to support the notion that it really is the charity’s money that has spent, so that charity should account for its spending on its books, even though you just told us that you didn’t initially transfer any money to the charity, owing to strings attached (i.e. retained partial dominion). I’m just guessing this is how you’d start your analysis, you haven’t told us and you refuse to answer the question.

If you declare victory again due to my refusal to continue indulging your absurd line of reasoning


When someone argues that constructive cash transfers have taken place, it is not absurd, whatsoever, for someone to say, “Please explain yourself – specifically and in detailed fashion – with a specific tracing of the constructive cash funds.” That is not absurd. It is not too much to ask.

But obviously, it is too much for you to answer. Your sloppy, messy theory isn’t so easy to explain when it comes right down to it. And you won’t answer it because you know Nilodop had it right when he said, in #110:

Even though the entire note is discharged, there never was, nor could there have been, a constructive transfer of cash, because the actual transfer occurred when the loan was made and the charity got dominion and control of the cash.


A distinction without a difference.


Rather, a highly important distinction that reflects your knowledge of property law.

This is an example of the fallacy of equivocation.


No, Chay. The only fallacy here is your idea that you retain ownership over the cash, even when it has been transferred. That is the equivalent of not transferring it at all. Ownership hasn’t changed.

I’ll say it again:

I will take your refusal as a full concession. Your arguments here are terrible and reckless.
 

#118
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I concede that your knowledge of tax laws is alot better than mine.

I understand the no ruling. The wordings to me implied that it can be treated as cash vs property, never mind the deductible periods.

what is the amount of the car you donated? or what is the value of the car you donated?

what is the amount of the stocks you donated? or what is the value of the stocks you donated?

there is a difference to me.

I said we can do whatever we want because of the no ruling. In OP's case, I'd treat it as cash and hash it out with the auditor if it gets to that stage. I'd make sure to come back to this thread as you have made extensive explanations one way or another.

I think you said plenty to make your case, which is very strong. Not sure why you have to go through a lot of lengths to prove your point further?
 

#119
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Jeff-Ohio wrote:not sure why you’d equate the word “amount” with cash only. Are you saying that if I donate my stock to a charity, I don’t get to deduct any “amount?” And are you saying that if I donate $100 in cash to a charity, I get no deduction for the value of my contribution?

In this context, you should equate "amount" with cash because the revenue ruling refers to a "taxpayer who advances funds" and subsequently wishes to deduct "amounts forgiven." "Amounts" refers to the "funds," and "funds" as used is defined as "available pecuniary resources." "Pecuniary," of course, means "monetary," and Treas. Reg. § 1.170A-15 provides for equivalent treatment between "other monetary gifts" and "cash."

Under your theory, the deduction is for the note itself and not for the monetary amount represented by the note. Thus, you would argue that a taxpayer may never deduct an "amount of funds forgiven" and must instead deduct the value of the portion of the note that has been contructively given to the charity by way of cancellation. To be sure, you would put an "amount" on Form 8283 when claiming the deduction, but the amount would be a measurement of the value of the note and would not be the "amount of funds forgiven," even if the numbers happen to be the same.

If your theory were as obviously correct and settled as you seem to think it is, the IRS would have no reason to decline to rule on whether or not a taxpayer "may deduct as contributions [...] amounts [of funds] forgiven."

#35 of the Rev Proc is speaking about the arrangement and deductions in general. It is not speaking to cash and/or non-cash specifically.

It's speaking, specifically, about whether or not a taxpayer may deduct amounts of funds forgiven via endorsements on a promissory note. "Funds" is specifically a term for money, and that's specifically what we mean on this thread when we say "cash."

I cannot even tell where you’d start your analysis. Presumably, it would start with you transferring cash to the charity, but arguing that you never transferred the cash. And then, if we pretend the charity spends all the money, you’d use some fungible theory to support the notion that it really is the charity’s money that has spent, so that charity should account for its spending on its books, even though you just told us that you didn’t initially transfer any money to the charity, owing to strings attached (i.e. retained partial dominion). I’m just guessing this is how you’d start your analysis

That is a surprisingly accurate synopsis of my theory. So, I suppose you have been paying attention but just couldn't be bothered until now to address what I was actually saying?

The only problem with the synopsis is that you're equivocating on the word "transfer" again, just like in #115. The argument would be that I never surrendered all dominion and control over the cash, not that I never transferred it.

When someone argues that constructive cash transfers have taken place, it is not absurd, whatsoever, for someone to say, “Please explain yourself – specifically and in detailed fashion – with a specific tracing of the constructive cash funds.” That is not absurd. It is not too much to ask.

You're right, that part isn't absurd. What is absurd is that you refuse to acknowledge that constructive cash transfers can happen due to forgiveness of debt and are willing to take my refusal to explain this concept to you as proof that they can't happen, when I've presented multiple IRS/Tax Court sources taking it as a granted that they can happen. You are essentially saying "Aha! Chay won't explain constructive debt cancellation cash transfers to me, so he, the IRS and the Tax Court must all be wrong, and I don't need to worry about whether they might apply to section 170."

I would rather see you declare victory on such laughable grounds, proving your position to be without merit, than help you to continue avoiding the real question. That question is one which you were refusing to answer before it was cool, all the way back in post #61, when I asked you for your argument as to why the concept of constructive transfers doesn't stretch to section 170.

A distinction without a difference.


Rather, a highly important distinction that reflects your knowledge of property law.

That's virtually the same thing you said in #83. I answered in #84 by pointing you to #42 but invited you to explain yourself if you actually had something new to say. So, do you have anything new or is this just more arguing in circles?

This is an example of the fallacy of equivocation.


No, Chay. The only fallacy here is your idea that you retain ownership over the cash, even when it has been transferred. That is the equivalent of not transferring it at all. Ownership hasn’t changed.

You're equivocating again. "Transfer" doesn't inherently mean "give ownership." That's just how you're using it in the underlined segment. It actually means "to make over the possession or control of."
 

#120
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what is the amount of the car you donated? or what is the value of the car you donated?
what is the amount of the stocks you donated? or what is the value of the stocks you donated?

#35 of the Rev Proc is speaking to “amounts” one “may deduct as contributions.” “Amounts” is referring to the deduction proper…the amount that shows up on the tax return. That amount could be tied to cash or non-cash property.

I said we can do whatever we want because of the no ruling.

Good for you. Just because the IRS won’t rule doesn’t mean a judge won’t. You have zero protection “just because” the IRS won’t rule. Further, the issue the IRS won’t rule on *isn’t* the issue that is the subject of this thread. So, your reliance on this “no rule” idea is misplaced on a few grounds.

In OP's case, I'd treat it as cash and hash it out with the auditor if it gets to that stage.

Yeah, and what would you do when the auditor won’t budge? You’d go to court and you’d have to rely on Chay’s Partial Dominion & Control Possession Constructive Cash Contribution Theory.

Not sure why you have to go through a lot of lengths to prove your point further?

Because Chay keeps responding, that’s why.
 

#121
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So, I suppose you have been paying attention but just couldn't be bothered until now to address what I was actually saying?


More like this: I’ve been shooting down, throughout this thread, the bastardized version of tax law ownership that you’ve created in your own mind.

"Transfer" doesn't inherently mean "give ownership."


It does when you’re talking about loan proceeds. If it doesn’t, then you don’t have a loan, so there’d be no loan to forgive. Anyway, enough about your bastardized version of tax law ownership.

The takeaway is that the cash was transferred, as you now admit. Any constructive cash analysis follows the cash. So Nilodop had in right in Post #110.

Case closed.

But maybe you’d like to alter your theory again…and start with the charity having the cash and then you’d take it from there?

Not sure if you’ll respond to that, since you haven’t responded to prior requests to explain, in detail, your constructive cash contribution theory…
 

#122
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Jeff-Ohio wrote:I’ve been shooting down, throughout this thread, the bastardized version of tax law ownership that you’ve created in your own mind.

I challenge you to point to a single criticism of my theory that you have actually supported with evidence and which I haven't countered with equal or better evidence.

"Transfer" doesn't inherently mean "give ownership."


It does when you’re talking about loan proceeds.

It doesn't. "To lend" means "to let out (money) for temporary use on condition of repayment with interest," according to the definition I posted in #84. Temporary use. Not permanent control. So, "transfer" doesn't mean "give ownership" in that context any more than it does in any other context.

But assuming arguendo that "transfer" does mean "give ownership," that wouldn't change a thing. The Supreme Court holds that taxpayers do not have complete dominion over funds subject to an obligation to repay. They, and you, agree that a constructive cash transfer takes place when a deposit liability is extinguished. The constructive transfer is accompanied by a transition from the depositor having a right to reclaim the money to having no right to reclaim the money. You are free to call that transition whatever you wish. Whatever you want to call it, it's real and it has a tax effect.

The Tax Court, the IRS and I are in agreement that this type of constructive cash transfer can happen when the liability is a loan and the method of extinguishment is forgiveness of the loan. You have a problem with this concept. I'm not sure whether you dispute that it can happen at all or if you only dispute that it can happen in a charitable donation context. Either way, you have completely failed to explain the distinction. Instead, you have been busy promoting non-dictionary definitions of words. You want to be creative with your words? Go ahead. Give us your own version of what happens during a constructive cash transfer on extinguishment of a liability, then tell us why that can't happen in the OP's facts.

But maybe you’d like to alter your theory again…and start with the charity having the cash and then you’d take it from there?

Not sure if you’ll respond to that, since you haven’t responded to prior requests to explain, in detail, your constructive cash contribution theory…

Sure, I'll respond to it. My response is that you already know how my theory works, as you showed in #117 with your synopsis. The only thing you don't know is that neither "transferring" nor "lending" means "giving ownership of."

But that doesn't matter anymore, and neither does my theory about "ownership," since I'm giving you a free pass to use those words however you want. Now, I wonder whether you'll be able to describe, at last, the secret mechanism that prevents constructive cash transfers on extinguishment of a liability from applying to section 170?
 

#123
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I challenge you to point to a single criticism of my theory that you have actually supported with evidence and which I haven't countered with equal or better evidence.

When you make a loan to someone, they own the cash, you own the Receivable. You don’t own both. There you go. This stops your theory dead in its tracks.

They, and you, agree that a constructive cash transfer takes place when a deposit liability is extinguished.

When it’s extinguished via satisfaction, not when it’s extinguished via forgiveness.

The Tax Court, the IRS and I are in agreement that this type of constructive cash transfer can happen when the liability is a loan and the method of extinguishment is forgiveness of the loan.

The Tax Court never said such a thing. I’m pretty sure every TC judge understands that income from debt forgiveness, for example, is non-cash. This is why it’s sometimes referred to as “phantom.” And that is also why it referred to as “an amount.”

You want to be creative with your words?

It is you that is being creative. A transfer of cash in exchange for a Receivable. Chay says he owns both. That’s a great definition of lending. It’s a bastardization of reality, the transaction and the concept of tax law ownership. You’re acting like if anyone has a claim against your asset, that person owns your asset. If you give someone cash and tell them to repay you, but you also tell them you still own the cash, then there’s no repayment to be made. The charity is just holding your cash as your agent. No loan under your theory.

The only thing you don't know is that neither "transferring" nor "lending" means "giving ownership of."

Right, Chay. If that’s the case, then the business borrower wouldn’t get any deductions with the money you lent to him…because all those business expenses he paid was not with his own funds, they were with your funds.

Now, I wonder whether you'll be able to describe, at last, the secret mechanism that prevents constructive cash transfers on extinguishment of a liability from applying to section 170?

If you want the answer to a “real” situation, involving true facts, not bastardized facts based on your fantasy world, it would go like this:

Guy lends cash to a charity. Charity has the funds. Guy cancels the debt. The fiction is that the charity, who currently has the funds, repaid the loan and the guy, who now holds the funds, then made a cash contribution to the charity. This doesn’t work, given that the loan was paid off with these constructive transfers. That doesn’t reflect reality, since the loan was forgiven.

Change the sequence. After guy lends funds, he makes a constructive cash donation to the charity. Now the charity has double the funds. Charity is then deemed to repay the loan. This doesn’t work either, for the same reason as above.

What would work is if actual cash changed hands.

You can’t just make stuff up, Chay, and then argue that constructive transfers took place. If you could, then as I write, I just made 20,000 charitable loans to 20,000 different charities and the 20,000 charities just repaid me. That’s your world of constructiveness. But the real world of constructiveness would tell us there were no actual transactions, so there is no way possible for any constructive transactions to mirror reality.
 

#124
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I'm responding to post #123 in two parts. The first part relates to Jeff's claim that he's been "shooting down, throughout this thread, the bastardized version of tax law ownership" that I've asserted.

The reason I'm setting this first part off from the second is that as I said in #122, my "ownership theory" doesn't even matter anymore because I've got enough evidence to disprove Jeff's claims without even relying on that theory. So I suppose you'd say that I'm arguing "out of principle" at this point.

Jeff-Ohio wrote:
I challenge you to point to a single criticism of my theory that you have actually supported with evidence and which I haven't countered with equal or better evidence.

When you make a loan to someone, they own the cash, you own the Receivable. You don’t own both. There you go. This stops your theory dead in its tracks.

As far as I can tell, and please correct me if I'm wrong, your evidence to prove your "don't own both" theory is as follows:

  1. Transfer of ability to use: "Ownership entails a bundle of rights, one big one is the right to use and enjoy the asset. That big right does not extend to the guy who lent the money" (post #39) "If you give someone cash and tell them to repay you, but you also tell them you still own the cash, then there’s no repayment to be made. The charity is just holding your cash as your agent. No loan under your theory." (post #123)
  2. Mutual exclusivity: "A Receivable is not a distinct asset under Chay’s theory" (post #49); "Hmmmm, let’s see. Chay’s Note went away currently, and so did his Cash, but he says they are not one in the same. Remarkable." (post #81) "Either you are saying that the Note is Cash or you are denying the existence of the Note as a separate, distinct and identifiable asset for all purposes" (post #100).
  3. No physical possession: "All I retain is a 'claim' to the cash, not the cash itself (despite your erroneous dominion and control argument). When I forgive, I physically release my claim, not my cash, since the cash was already released." (post #86)
  4. Contradictory accounting principles: "When the charity records the entry to book up the forgiveness, there won’t be any credit to Cash." (post #56); "The accounting entries prove it out." (post #62); "maybe your charity issues financial statements. Can’t wait to see how they handled the debt forgiveness on its Statement of Cash Flows" (post #83); "[Accounting entries are controlling for federal tax purposes because] no cash was transferred to the charity in the current year. We account for things accordingly." (post #100). "You lend $10k out and claim the cash is still your property. Now you have $20k of assets, the cash of $10k and the $10k value of the Note." (post #111)
I may have missed a few manifestations throughout your many posts, but I believe those are your four points. Basically, I don't have any ownership interest in the cash anymore because I've given up the right to spend it, I now have a different asset which I can point to, I no longer have physical possession of the cash, and we don't treat me as having the cash anymore for accounting purposes.

Every one of these points was answered by my comparisons of a cash lending arrangement to arrangements involving real estate that is lent out, rented, or otherwise not available for use by the title holder. See posts #38, 40, 42, 82, and 112. Real estate and other assets in that situation behave exactly as I've described a cash lending arrangement, and you can't explain what makes cash so different.

Here are your and Nilodop's attempts to explain why cash is different:

Nilodop drew a distinction in #41 and #45 between a rental arrangement and a note receivable because "donating the lease only gives up the right to collect rent, but donating the note gives up the right to collect interest and principal." But the mere fact that the function of a title to property and a rental agreement are embodied in a single document in the case of cash doesn't defeat the analogy. There would also be a single document asserting ownership in the case of personal property for rent with no separate title, such as lawn equipment.

You accused me twice of not understanding property laws in #83 and #117, but both times you were unable to explain what you meant when I asked you directly.

In #113, you invoked accounting concepts and your own understanding of "ownership," but these superficial differences don't alter the substance of each arrangement, as I explained in #115.

In #83, you told us that "you don’t 'lend' real estate," but that's not true according to the definition of lend, and you haven't given any reasons why we should favor your special definition of "lend" that involves transferring ownership over the normal definition that doesn't.

So I'd say I've got "equal or better evidence" right here, and that's before we even start talking about my evidence related to "dominion and control" and deemed cash transfers within case law.

Right, Chay. If that’s the case, then the business borrower wouldn’t get any deductions with the money you lent to him…because all those business expenses he paid was not with his own funds, they were with your funds.

This criticism of the "ownership theory" is meritless due to the fungibility of cash, which I explained in post #32 before you even joined the discussion.

In the end, I think fungibility is what it all comes down to, more so even than the "accounting mindset" I've mentioned previously. You can't accept that a creditor "lends" cash in the sense one might "lend" real estate because most of the cash is spent and disappears shortly after the loan is made. But if you look at the other definition of "lend" from post #84, the one that applies to non-cash property, you'll see that the borrower can return "the same or its equivalent" and still meet their obligations under the arrangement. And no, that doesn't mean you can give me your clothes in lieu of returning my pen; what it means is that you can go out and buy me a new pen of the same type if you break the one you borrowed.

All of that having been said, what we really should have been arguing about are the deemed cash transfers that taxpayers are capable of making under tax law principles. My rationale for why they can happen is that the taxpayer retains a degree of "dominion and control" that allows them to dispose of the funds in that way. This is either a limited ownership interest or its functional equivalent. You don't agree with that, but you agree that the transfers can happen. So, we shouldn't really care as much about why they can happen as we should about when they can happen.
 

#125
Chay  
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This is the second part of my response to #123. In this post, I'm continuing to assume arguendo that Jeff is right in everything he said about the nature of a lending arrangement, and a creditor has no ownership interest in cash they've lent.

Jeff-Ohio wrote:
They, and you, agree that a constructive cash transfer takes place when a deposit liability is extinguished.

When it’s extinguished via satisfaction, not when it’s extinguished via forgiveness.

That's the same thing you said in #113. My response now, as it was then, is "why"? What crucial difference is there between a "satisfaction" and a "forgiveness" that allows deemed cash payment treatment for one but not for the other?

The Tax Court, the IRS and I are in agreement that this type of constructive cash transfer can happen when the liability is a loan and the method of extinguishment is forgiveness of the loan.

The Tax Court never said such a thing. I’m pretty sure every TC judge understands that income from debt forgiveness, for example, is non-cash.

If the Tax Court never said such a thing, then what are they saying in the following cases?

    R. D. Walker, supra, involved a recapitalization wherein the taxpayer exchanged his common stock for a cancellation of his indebtedness and new preferred and common stock. The taxpayer there conceded, and we agreed, that cancellation of his debt to the corporation was the equivalent of cash and constituted "other property or money" within the meaning of section 112(c) (1) of the Revenue Act of 1928.
    [...]
    John L. Hawkinson, supra, involved a reorganization of two corporations in which the indebtedness of the taxpayer to one of the corporations was canceled. We there stated, "That the debt cancellation was the equivalent of cash is apparently accepted by both parties and finds support in R. D. Walker, 34 B.T.A. 983," and concluded that on the facts presented such cancellation of indebtedness resulted in the distribution of a taxable dividend to the taxpayer.
    Kniffen v. Commissioner, 39 T.C. 553, 567 (1962)

    In this case, the profit-sharing trust did not forgive or release petitioner's obligation to repay the loans; petitioner in effect paid his debt. Petitioner offset the amount of his liability to repay the loan (either as the debtor under the notes or as a fiduciary of the trust) against the amount of his benefit in the profit-sharing trust. The discharge of that liability served as a medium for payment of an equal amount of his vested benefit under the profit-sharing trust. It is as if the trust had distributed the $181,225.41 to him, and he in turn had used those funds to pay his debt to the trust. Therefore, the debt discharge is treated as a constructive distribution to petitioner from the profit-sharing trust and is taxable as a distribution.
    Caton v. Commissioner, 69 T.C.M. 1937 (1995)

This doesn’t work, given that the loan was paid off with these constructive transfers. That doesn’t reflect reality, since the loan was forgiven.

So that's the big secret? A loan can't be deemed paid off when it's forgiven, therefore the cash can't make its way over to the creditor and then back to the debtor in a deemed series of transactions?

I think you're going to have to explain a little more why that can't happen in light of Walker, Hawkinson, and Caton, referenced above. It sure looks a lot like that's exactly what happened.

You can’t just make stuff up, Chay, and then argue that constructive transfers took place. If you could, then as I write, I just made 20,000 charitable loans to 20,000 different charities and the 20,000 charities just repaid me. That’s your world of constructiveness.

That's not my world. That was the world of Kenneth and Barbara Allen in Allen v. Commissioner, 92 T.C. 1 (1989). In that case, the petitioners tried to deduct money they gave to a charity which was borrowed from an organization related to the charity. The Tax Court shot them down, saying "〚i]n the circumstances of this case, the donee did not receive a benefit from the loan portion of the claimed contribution" because "[t]he same money was recycled again and again, through the money circle, with essentially no new infusions of cash."

Collins v. Commissioner, 60 T.C.M. 542 (1990) was a similar case in which "[t]he financial position of the charitable organizations before and after the alleged contribution was identical. Neither charitable organization was benefited or enriched in any way in 1986 by petitioners' signing of several pieces of paper."

But guess what happens if a charitable organization actually is benefited or enriched via a loan cancellation? The financial position of the charity improves by an identifiable dollar amount. Even if the only actual event was the "signing of several pieces of paper," there's still a monetary transaction, just like there was in Walker, Hawkinson, and Caton.
 

#126
Nilodop  
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In Walker, the phrase "cancellation of indebtedness" is used loosely. It was part of an exchange in a recap.
In Hawkinson, the phrase "debt was canceled" is similarly loose wording. It was part of an exchange in a reorg.
In Caton, "discharge of that liability" is equally loose language for a transaction that was a repayment of debt with another asset. "... as if the trust had distributed ..." speaks to the result, not to whether it was a cs distribution.
And in each of these, the question of cash or property was not at issue in the sense that it is under 170.
 

#127
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In #83, you told us that "you don’t 'lend' real estate,"


That’s right. If you really did lend the entirety of your real estate to someone, inclusive of all rights attendant thereto, then they could sell it or even bulldoze it. But let me guess, your “lease” (not your lending document) didn’t convey those rights. This means you didn’t lend the real estate, although you continue to say you did.

This criticism of the "ownership theory" is meritless due to the fungibility of cash


Fungibility has nothing to do with it. You’re simply conflating a claim to something with actual ownership of that something.

In the end, I think fungibility is what it all comes down to


I don’t. Fungibility hasn’t nothing to do with it. What you really don’t understand is the modern theory of COD income and how and why the accounting period concept applies to it. That concept severs the cash string that you are so tightly holding onto.

All of that having been said, what we really should have been arguing about are the deemed cash transfers that taxpayers are capable of making under tax law principles.


You’ve already made your arguments in that area and they are meritless. And I’ve told you why.

…I’m on Victory Lap #100 at this point…

If the Tax Court never said such a thing, then what are they saying in the following cases?


that cancellation of his debt to the corporation was the equivalent of cash and constituted "other property or money"


You aren’t listening. I’ve addressed this once. First and foremost, do you not see that the phrase “other property or money” is really two separate categories of property??? It is one category known as money (which is property) and another category known as ‘property other than money’ (which is also property). So, when the judge says, “I think it was money or property other than money,” the judge doesn’t tell us which one it is. So, to quote such a sentence in support of your argument is kind of silly. Second of all, the judge doesn’t say the debt cancellation was cash. He says it was “the equivalent of cash.” Third of all, if you’ve ever seen a GAAP financial statement, where debt is exchanged for stock, it shows up as a non-cash investing/financing activity. This leads me to my fourth thing: The guy got something in exchange, which is Nilodop’s point.

All in all, you really need to do some research on COD history/theory.


A loan can't be deemed paid off when it's forgiven, therefore the cash can't make its way over to the creditor and then back to the debtor in a deemed series of transactions?

That’s right. Why would it be deemed paid off if it wasn’t? If it would be deemed paid off, then you could never have COD income. And that would make us wonder why the Tax Code has various provisions relating to COD income. Why would the Tax Code include such provisions if it was impossible for a loan to ever be forgiven?

The financial position of the charity improves by an identifiable dollar amount


Now you’re getting it…”an identifiable dollar amount.”

Even if the only actual event was the "signing of several pieces of paper,"


I’d say that when the judge uses such insulting language, he doesn’t believe these pieces of paper had any substance to them.

If the Tax Court never said such a thing, then what are they saying in the following cases?

In this case, the profit-sharing trust did not forgive or release petitioner's obligation to repay the loans;

Well, the judge is saying exactly what I’ve been saying: If the debt is paid-off/satisfied, there is no forgiveness. When the debt is paid-off/satisfied, constructive transfers are fine. When the debt isn’t paid off, constructive transfers do not fly…because those constructive transfers (resulting in the debt being paid off) do not mirror reality (debt wasn’t paid off, but was instead forgiven). But I do admire your idea that all debts are paid off and never forgiven. My credit score just went up 1,000 points. Anyway, as the judge said in the Caton case that you so nicely presented:

In this case, the profit-sharing trust did not forgive or release petitioner's obligation to repay the loans; petitioner in effect paid his debt. Petitioner offset the amount of his liability to repay the loan (either as the debtor under the notes or as a fiduciary of the trust) against the amount of his benefit in the profit-sharing trust.

Pretty much verbatim what I’ve been saying all along about constructive transfers. Also, I’d say that when the judge uses the word “discharge” in the material you excerpted, he clearly means “satisfied/paid-off” and not “forgiven,” in light of the italicized quote directly above. Further, when the judge says, “petitioner in effect paid his debt,” I’d say that he actually did pay his debt. Not sure why the judge used the words “in effect.” Maybe he wanted to emphasize that no physical cash changed hands, I’m not sure.
 

#128
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I was doing some reading for pleasure and I stumbled upon this, in a tax case from late in the past century. I quickly acknowledge that it's not directly relevant to this thread, but I found interesting the disdain that the judge applied to the constructive-payment doctrine.

Petitioner concedes it is a cash basis taxpayer. As such, it may only deduct expenditures in the year paid. See secs. 446, 461; secs. 1.446-1(c)(1), 1.461-1(a)(1), Income Tax Regs. While a cash basis taxpayer must include in income amounts actually or constructively received during the year, see sec. 451 and sec. 1.451-1, Income Tax Regs., there is no such provision for constructive payment. It is now horn-book law that "constructive payment" is not a necessary corollary of "constructive receipt," and what may be income to one may not be a deductible payment by the other. See Citizens Fed. Sav. & Loan v. Commissioner [Dec. 22,977], 30 T.C. 285 (1958); William J. Lemp Brewing Co. v. Commissioner [Dec. 19,050], 18 T.C. 586 (1952); Vander Poel, Francis & Co. v. Commissioner [Dec. 15,628], 8 T.C. 407 (1947); Sandoval v. Commissioner [Dec. 36,397(M)], T.C. Memo. 1979-430; 2 Mertens, Law of Federal Income Taxation, sec. 10:33.50, at 80 (1991 rev.).
 

#129
Chay  
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Nilodop wrote:I found interesting the disdain that the judge applied to the constructive-payment doctrine.

Let me be the first to say that I messed up back in #38 by introducing the phrase "constructive contribution," and again in #61 with the term "constructive payment." After researching these concepts more, I've discovered that "constructive payment" is bogus and also completely inapplicable to deemed cash transfers via loan forgiveness. This type of transfer is considered an "actual" payment for tax purposes because the payee actually has the money in hand after the series of deemed transfers takes place.
 

#130
Chay  
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Anyways, here's my response to posts #126 and 127. The three less-important parts about the "ownership theory" are at the top:

Jeff-Ohio wrote:If you really did lend the entirety of your real estate to someone, inclusive of all rights attendant thereto, then they could sell it or even bulldoze it. But let me guess, your “lease” (not your lending document) didn’t convey those rights. This means you didn’t lend the real estate, although you continue to say you did.

This is a rehash of your #83 argument. It still falls flat because you still haven't given any reasons why we should favor your special definition of "lend" that involves transferring ownership over the normal definition that doesn't.

Fungibility has nothing to do with it. You’re simply conflating a claim to something with actual ownership of that something.

And I say you're simply conflating the ability to exhaust a resource with actual ownership of that resource. What is your reason why we should accept your version of the situation over mine? Why does a lender's consent to the exhaustion of their property, so long as the equivalent of that same property is eventually returned, constitute a transfer of ownership? It doesn't, apparently, in the case of non-cash property, according to the dictionary. Why should it for cash?

What you really don’t understand is the modern theory of COD income and how and why the accounting period concept applies to it. That concept severs the cash string that you are so tightly holding onto.

Alright, so how does that work?

But anyways, assuming arguendo that you're right about all that...

Nilodop wrote:the phrase "cancellation of indebtedness" is used loosely.

Interesting. Please tell us more about your theory of "loose" debt cancellation and how it is distinct from...what would you call the opposite? "Strict" debt cancellation? How do I grant "loose" debt cancellation? Why can't I grant it to a charity?

And in each of these, the question of cash or property was not at issue in the sense that it is under 170.

Where were you with this observation when Jeff was assailing me with Rev. Rul. 58-262 and Commissioner v. Kellogg? He used these sources to support his view that debt cancellation is noncash for purposes of section 170. You should have jumped to my defense back then, because "the question of cash or property was not at issue in the sense that it is under 170." Should we comb through this thread and invalidate all sources that didn't directly address the question of cash or property in the context of section 170? That would leave us with exactly nothing to go on, since no one has been able to turn up anything where that question was at issue.

But let's say we did that for argument's sake. No more revenue rulings, no more case law, no more accounting principles and no more dictionary definitions. All of it wiped away because it fails to interpret the phrase "cash, check, or other monetary gift" within the context of section 170. All we're left with is Treas. Reg. § 1.170A-15(b)(1), which is, so far as I can tell, the only instance of any authoritative source addressing what we mean when we say "cash" for purposes of section 170. The Reg. provides that a monetary gift includes "a gift card redeemable for cash," and section 7701(c) tells us that it includes other, similar items as well. A gift card isn't something anyone would call "cash," but it's just as good as cash in the eyes of the government as long as it guarantees the availability of a certain amount of cash. Know what else does that? The forgiveness of an obligation to repay.

With your strict standards, the above is all there is to argue about. I don't think you'll be very successful. But then again, I also don't foresee much success in an attempt to argue that a dollar amount that the Tax Court agrees is the "equivalent of cash" is not also "monetary" without invoking your out-of-context rule. If you still insist my position is wrong, your only avenue will be to seize on the "gift" part of "monetary gift" and argue that a debt forgiveness can't be the "equivalent of cash" when it happens as a gift. That's what Jeff is trying to do anyways, so let's see how that turns out.

Jeff-Ohio wrote:So, when the judge says, “I think it was money or property other than money,” the judge doesn’t tell us which one it is.

True. But the judge does tell us which one it is immediately before he says that. It's as if the judge said: "the four equal lines were the equivalent of a square and constituted 'squares or other parallelograms' within the meaning of geometry." Now, you come in and say "Aha! The judge didn't say it was a square when he said it was a 'square or a parallelogram other than a square'." You are ignoring the fact that he also said it was a square, and it's a pretty goofy argument.

Second of all, the judge doesn’t say the debt cancellation was cash. He says it was “the equivalent of cash.”

A check, a money order, and a credit card payment are all the "equivalent of cash." Clothing is not "the equivalent of cash," despite what you may say. For charitable donation purposes, we put all of the "equivalents of cash" on one line and we don't get an appraisal. We put all the other property like clothing on a different line and we do get an appraisal when needed. So, when you point out that the debt cancellation was "the equivalent of cash," it sounds to me like you're saying I'm right.

Third of all, if you’ve ever seen a GAAP financial statement, where debt is exchanged for stock, it shows up as a non-cash investing/financing activity.

And why does GAAP matter in the slightest for tax purposes?

The guy got something in exchange, which is Nilodop’s point.

All of the taxpayers in these cases used debt discharge as a medium for the payment of a monetary amount. Is it your position that taxpayers are ineligible to use a debt discharge in this fashion when they receive nothing in return, such as when making a gift?

If it would be deemed paid off, then you could never have COD income. And that would make us wonder why the Tax Code has various provisions relating to COD income. Why would the Tax Code include such provisions if it was impossible for a loan to ever be forgiven?

So, based on this, it seems like your position is that when a taxpayer makes a gift via cancellation of a note receivable, the resulting income should be considered COD income and taken into account under the debt discharge rules. Is that correct?

I’d say that when the judge uses such insulting language, he doesn’t believe these pieces of paper had any substance to them.

Right, and they had no substance because the organization was not benefited or enriched, not because they were pieces of paper that were signed. If there was an enrichment, the judge would have used different language because the signing of the paper would have constituted a legitimate transaction.

When the debt is paid-off/satisfied, constructive transfers are fine. When the debt isn’t paid off, constructive transfers do not fly

And what do you propose as the dividing line between debts that we should consider "satisfied," resulting in cash treatment, and debts that we should consider "forgiven," resulting in non-cash treatment?

Pretty much verbatim what I’ve been saying all along about constructive transfers. Also, I’d say that when the judge uses the word “discharge” in the material you excerpted, he clearly means “satisfied/paid-off” and not “forgiven,” in light of the italicized quote directly above.

Right, and I agree with what you've been saying about constructive deemed transfers, including this, except insofar as you maintain that an "equivalent of cash" doesn't count as cash and that constructive deemed transfers don't apply to section 170.

Further, when the judge says, “petitioner in effect paid his debt,” I’d say that he actually did pay his debt. Not sure why the judge used the words “in effect.” Maybe he wanted to emphasize that no physical cash changed hands, I’m not sure.

I agree with you here as well, and I think the judge was drawing a distinction between form and substance with her words. The form of the transaction was debt discharge, but the substance of the transaction was payment of the debt with funds from the trust. That effect is controlling for all tax purposes.
Last edited by Chay on 25-Oct-2019 9:37pm, edited 1 time in total.
 

#131
Nilodop  
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Nilodop wrote:
the phrase "cancellation of indebtedness" is used loosely.

Interesting. Please tell us more about your theory of "loose" debt cancellation and how it is distinct from...what would you call the opposite? "Strict" debt cancellation? How do I grant "loose" debt cancellation? Why can't I grant it to a charity?

It's not the debt cancellation that's loose. It's the use of that phrase to describe what happened in the facts of the several cases listed that's loose. They were exchanges.

Where were you with this observation when Jeff was assailing me with Rev. Rul. 58-262 and Commissioner v. Kellogg?
. Im guessing Jeff-Ohio can answer that concern pretty easily.

All of the taxpayers in these cases used debt discharge as a medium for the payment of a monetary amount. Is it your position that taxpayers are ineligible to use a debt discharge in this fashion when they receive nothing in return, such as when making a gift?
. That's addressed to Jeff, but as for me, Give me liberty or wait, I meant to say yes, that's my position. Having debt discharged is not paying it, with a medium or otherwise.

This type of transfer is considered an "actual" payment for tax purposes because the payee actually has the money in hand after the series of deemed transfers takes place.
. And before as well.
 

#132
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it still falls flat because you still haven't given any reasons why we should favor your special definition of "lend"

I don’t have a special definition of lend, you do. You’re the one saying the real estate is being lent.

And I say you're simply conflating the ability to exhaust a resource

The lessee doesn’t have the ability to exhaust the entirety of the real estate resource, because he wasn’t granted all the rights to exhaust.

Maybe look it at this way Chay, the lender is selling the cash to the borrower on an installment basis. Does that help?

It doesn't, apparently, in the case of non-cash property, according to the dictionary.

Of course it doesn’t, for the reasons already explained. When you give the cash, you grant all rights to it. When you grant one limited right in real property, you haven’t done the same.

How is a "cash string" different from an ownership interest?

How having real estate as collateral for a loan receivable different than owning the real estate outright and in fee simple?

He used these sources to support his view that debt cancellation is noncash for purposes of section 170.

In the case of the RR, I said a judge would put 2 and 2 together. Especially when confronted with the truth: debt forgiveness does not involve actual cash transacted in the current year, nor does it involve constructive cash transacted in the current year (as has been shown). And if it’s not cash, and if the IRS gives us a deduction equal to the value of the note, a judge would highly likely (100%) say that the “forgiveness of indebtedness” charitable deduction is a non-cash contribution.

But then again, I also don't foresee much success in an attempt to argue that a dollar amount that the Tax Court agrees is the "equivalent of cash" is not also "monetary" without invoking your out-of-context rule.

It could very well be monetary indeed…but just in a prior period. That’s why the COD rules don’t go so far as to say, “The asset you got in the prior period IS the exact thing you are taxed on now.” Rather, the COD income you have in the current period is an amount equal to the basis you got in a prior year. The COD income’s connection to the prior basis received is a loose one. I’ve already told you to look at the language in sec 61 and 108.

But the judge does tell us which one it is immediately before he says that.

No he didn’t. I’ll be the first to admit that non-cash COD income could be described a cash equivalent. The non-cash income you have now, in terms of dollar amount, is equivalent to the cash you got in a prior period. Big deal.

So, when you point out that the debt cancellation was "the equivalent of cash," it sounds to me like you're saying I'm right.

Only if you’re saying “the equivalent of cash” IS cash…which I don’t think you are. Again, current year COD income arises from taking the debt off your books. We attach a dollar amount to that. That dollar amount hits your 1040. It’s the equivalent of the same dollar amount of cash wages, or gambling winnings, for example. But, importantly, the COD is not cash. It’s just expressed in dollars.

And what do you propose as the dividing line

I propose it is the same dividing line that exists under current law. If constructive cash transactions can adequately mirror reality, fine by me.

you want us to believe that COD income is cash income. Sorry, but it’s not. While $100 of COD income might equal $100 of cash income, the COD income isn’t cash.

and that constructive deemed transfers don't apply to section 170.

I never said that as an across the board proposition. I’ve only said it in relation to forgiveness and in relation to your preposterous theory. Consider a charity that owes $1,000 in Rent. A friendly donor pays the bill. The fiction is, cash went to the charity from the donor and the charity paid the obligation. Donor gets a cash charitable deduction and charity’s obligation was satisified. That’s how constructive cash transactions work. We have all of the necessary elements to make it so: Cash transacted in the current year and the obligation was paid.

And why does GAAP matter in the slightest for tax purposes?

Why wouldn’t it? This isn’t like some technical thing where we might have a tax/book difference. It’s more like a real basic question: Is the transaction cash or non-cash?
 

#133
Chay  
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Regarding the "ownership" problem...

Jeff-Ohio wrote:I don’t have a special definition of lend, you do. You’re the one saying the real estate is being lent.

Ok, let's talk about my definition. It's from post #84: to give for temporary use on condition that the same or its equivalent be returned. You claim that this definition cannot be applied to real estate and it also cannot be applied to cash; I claim that it can.

The reason I called your definition of lend "special" is that the definition I'm using is the top definition provided on merriam-webster.com. Presumably, that should make it prominent or wide-ranging somehow in its application; in other words, we should list what it can't be applied to as exceptions rather than trying to enumerate all the many things it can be applied to.

Do you agree that the top definition of "lend" is generally applicable? If not, why not, and what is the true "general" definition of "lend" in your opinion? If you do agree, then what are the exceptions to the definition and why?

The lessee doesn’t have the ability to exhaust the entirety of the real estate resource, because he wasn’t granted all the rights to exhaust.

That's true, but it's also irrelevant. We weren't talking about real estate in that part of the post, we were talking about cash and other fungible resources.

You told me that a claim to something does not imply ownership over that thing. This, of course, begs the question: what is ownership?

I'm sure you would agree, as a starting point, that to fully own something implies that I have the exclusive right to do as I please with it and to prohibit someone else from taking any action towards it. But what about situations where my rights are limited? Suppose I gradually divest myself of all of the "strands" included in my "bundle" of property rights, as it was put in Andrus v. Allard, 444 U.S. 51 (1979). At what point have I lost ownership? Which is the crucial strand that tilts the balance?

I say it's my right to reclaim the asset. What's done while the asset is out of my possession doesn't matter. The asset may be demolished and reconstituted a hundred times over, but by the terms of my agreement I still look forward to a resumption of full rights thereto, just as it was before. What I granted was a mere temporary use on condition that the same or its equivalent be returned, not ownership.

So no, it's not a claim to something that implies ownership. It's the right to reclaim something already owned that maintains an ownership interest, however limited, while that thing is not physically possessed.

You say when you give the cash, you grant all rights to it, just as if the lender is selling the cash to the borrower on an installment basis. So, perhaps you agree with me that a right to reclaim implies ownership, and you simply disagree about whether the cash lent out is the same "thing" as the cash returned. Is that where we stand?

And either way, what is your reason why we should accept your version of the situation over mine?

But anyways, all of that notwithstanding...

Nilodop wrote:It's not the debt cancellation that's loose. It's the use of that phrase to describe what happened in the facts of the several cases listed that's loose. They were exchanges.

I see...so when there's a debt cancellation in exchange for something, that counts as a "loose" usage of the phrase "debt cancellation"? And I suppose that means it's really not a debt cancellation in substance, but rather a deemed cash transfer?

You did agree that payment of a monetary amount can be done by way of debt discharge (provided something is received in return), so I guess that's what you were saying before too.

What about you, Jeff-Ohio? You didn't answer my question about using debt discharge as a payment medium. You seem to agree that I can pay someone that way when there's an exchange involved. Does that extend to an exchange of money for services, such as when I pay a salary? If so, should the salary count as cash received in the current year, or do I have to apply special rules related to COD income and/or payments in kind?

Now let's say I have some cash I want to give to someone, but there's no exchange. It could be a donation, a bequest, maybe even a distribution of profits. This person happens to owe me money in a bona fide lending arrangement. Is there a tax principle that prevents me from applying the cash against the loan balance and treating it as if I had actually paid the cash to them? Must COD treatment apply in these instances?

Jeff-Ohio wrote:In the case of the RR, I said a judge would put 2 and 2 together.

Yes, and that had the potential to be a decent argument even though your source was only one half of the equation. That was my point: it's reasonable for us to draw conclusions involving sources that don't directly address the issue of contest.

It could very well be monetary indeed…but just in a prior period. That’s why the COD rules don’t go so far as to say, “The asset you got in the prior period IS the exact thing you are taxed on now.”

We weren't discussing "COD income" in that part of the post, apparently, according to Nilodop, because the phrase "cancellation of indebtedness" is used loosely in the examples at issue. I gather this means that none of the COD rules apply, including the above.

So what we've got in these examples is "the equivalent of cash," which you agree could very well be monetary, considered to be actually paid in the current period under a deemed transfer via debt discharge. The sole point of contention seems to be whether or not the same type of transfer can happen via gift. Right?

But the judge does tell us which one it is immediately before he says that.

No he didn’t.

First he said cancellation of his debt to the corporation was the equivalent of cash, then after that he said the cancellation constituted 'other property or money' within the meaning of section 112(c) (1) of the Revenue Act of 1928. Your claim is that because he said the second thing, he didn't also say the first thing. Sorry, but that's a goofy claim.

So, when you point out that the debt cancellation was "the equivalent of cash," it sounds to me like you're saying I'm right.

Only if you’re saying “the equivalent of cash” IS cash…which I don’t think you are. Again, current year COD income arises from taking the debt off your books.

Again, I don't think we're really talking about COD income in a "strict" sense. It's Nilodop's "loose" version which isn't really COD income, meaning section 108 doesn't apply.

I propose it is the same dividing line that exists under current law. If constructive cash transactions can adequately mirror reality, fine by me.

So are you saying that "mirroring reality" is the dividing line? In other words, if considering a debt "satisfied," resulting in cash treatment, mirrors reality, then that's how it should be treated? And if that arrangement doesn't mirror reality, the debt should be "forgiven," resulting in non-cash treatment?

And why does GAAP matter in the slightest for tax purposes?

Why wouldn’t it? This isn’t like some technical thing where we might have a tax/book difference. It’s more like a real basic question: Is the transaction cash or non-cash?

Ok, I concede this point. We want to know if something can be called "cash, check, or other monetary gift." The only direct source, Reg. § 1.170A-15(b)(1), provides a non-exhaustive list. So, we should fill in the blanks using concepts from outside the Tax Code, such as from accounting or economics.

In a GAAP financial statement, a stock repurchase via debt cancellation is considered non-cash. So that's a point against me. But we still have all these judges saying what we really have is a series of two deemed "cash equivalent" transfers. I'll bet those don't show up on the statement of cash flows...and maybe that's because GAAP is a bit more concerned with form over substance than tax law?

So, it still seems like I come out slightly ahead here. And further, I think I'll follow your lead and look outside the Tax Code for the meaning of "cash" and "monetary." I wonder what someone who prioritizes substance over form would say...
 

#134
Nilodop  
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I see...so when there's a debt cancellation in exchange for something, that counts as a "loose" usage of the phrase "debt cancellation"?. You mean like when I pay off my debt in full using my cash? That's not what section 61 means by "discharge of indebtedness" nor is that a cancellation of debt that triggers income. Under the law (IANAL) I'd guess it's a payment of debt that fulfills the contract that created the debt.

And I suppose that means it's really not a debt cancellation in substance, but rather a deemed cash transfer?. Nope, it's a payment of the debt, both in form and substance, and it's actual, not deemed.
 

#135
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I say it's my right to reclaim the asset.

If you lease your real estate for 3-years, you don’t have a right to reclaim your real estate. And that’s because you never transferred it.
It's the right to reclaim something already owned that maintains an ownership interest, however limited, while that thing is not physically possessed.


It falls flat. If I sell my real estate to you on a non-recourse, seller-financed, basis, with the real estate acting as the collateral, that means I have a right to reclaim the real estate (but only if you don’t pay, mind you). Under your new reclamation theory, that means I still own the real estate. I’d say the buyer would have a real problem with your theory.

You continue to attempt to draw parallels between apples and oranges. You want to compare “lending” real estate to lending cash. It’s a phony comparison. If you really wanted to compare the situations, you would compare:

A $100k cash loan, wherein $100k of cash is advanced, including all rights therein, and a $100k Note Receivable is taken back in exchange; to
A $100k sale of real estate, wherein $100k worth of real estate is advanced, including all rights therein, and a $100k Note Receivable is taken back in exchange.

That is the proper comparison. And I’ve mentioned it more than once. What you have in the case of the real estate is a sale, which is the only way to transfer the entirety of the bundle of rights.

Your claim is that because he said the second thing, he didn't also say the first thing. Sorry, but that's a goofy claim.


That’s not what I said. What I said, and what I’ve said throughout, is that “equivalent of cash” isn’t the same thing as cash. It’s not actual cash and it’s not deemed cash (even though we might describe it as an amount that is equivalent to $X of cash). The debate ends there. I simply made the further point that the judge’s continued comment was meaningless for our debate, yet fine for the issue in that case, given that the item only needed to fit into one category or the other in that case.

In terms of the “loose usage” issue, the word “discharge” could mean you paid off a debt or it could mean the debt was forgiven. In both cases the debt goes away. You just have to review the context to see which one is at play. Of course, you don’t have Discharge of Indebtedness income when discharging a debt via full repayment. Likewise, if someone discharges their duties faithfully, they won’t get in trouble, since that means they discharged their duties in the way they were supposed to.

So, it still seems like I come out slightly ahead here.

C'mon Chay - Only in your Fantasy World. The idea the lender has retained ownership of his cash is stupid. Once that string is severed, which it was a long time ago, you lose. Your latest Reclamation Theory of Ownership is just you twisting and turning, trying to maintain a firm grip on your thin and stubby cash string. End result is that no cash was actually given or constructively given in the current year.
 

#136
Chay  
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Jeff-Ohio wrote:
I say it's my right to reclaim the asset.

If you lease your real estate for 3-years, you don’t have a right to reclaim your real estate. And that’s because you never transferred it.

My claim, which you quoted, is that in the context of a lack of physical possession, the right to regain physical possession of an asset is what maintains ownership.

In your claim, you are using the word "transferred" to mean "transfer ownership," just like you did in #113 and #117. So, your point is that I cannot regain ownership of real estate which I've put on lease because I never transferred ownership of it.

In making this claim, you have completely failed to address my points. I gave you my take on ownership, asked you for yours, and then challenged you to support why we should favor your definition over mine. Instead, you declare that if I still have ownership over something, I can't lose ownership over it. You're avoiding the issue and again begging the question of what "ownership" is.

If I sell my real estate to you on a non-recourse, seller-financed, basis, with the real estate acting as the collateral, that means I have a right to reclaim the real estate (but only if you don’t pay, mind you). Under your new reclamation theory, that means I still own the real estate. I’d say the buyer would have a real problem with your theory.

If, as I say, the "right to reclaim" is "ownership," then a "conditional right to reclaim" means "conditional ownership." You own the property, but only if a certain set of facts unfolds. We're not discussing a conditional ownership situation in either the OP's facts or in the questions I've posed to you; we're discussing actual ownership in a lending/leasing/borrowing situation.

Now you might use the fact that a "conditional right to reclaim" even exists to attack my idea that a right to reclaim implies ownership. How can that be the deciding factor in a case where the right is uncertain? In response, I would point out that your conception of ownership, which appears to be centered on the right to exhaust or destroy property, is equally useless in a collateralized sale of real estate. By the terms of the sale agreement, neither party can demolish the building. So we are at an impasse here. Clearly, the discussion doesn't apply to all complex forms of ownership; what it does apply to is an uncollateralized lending/leasing/borrowing situation, and that's what it should stay centered on.

If you really wanted to compare the situations, you would compare:

A $100k cash loan, wherein $100k of cash is advanced, including all rights therein, and a $100k Note Receivable is taken back in exchange; to
A $100k sale of real estate, wherein $100k worth of real estate is advanced, including all rights therein, and a $100k Note Receivable is taken back in exchange.

In your first example, cash goes out and cash comes back in.

In your second example, real estate goes out, but cash comes back in exchange. In my analogy, it's real estate for real estate.

So how is your analogy better than mine? I'm saying we've got apples for apples on the one hand and oranges for oranges on the other, and I want to know what makes the apples and oranges so different that you can't say you own the apples in between but you can say you own the oranges. We all know that apples and oranges are different things, but why are they different in that particular sense?

Your protest to the question, copied above, is that "oranges for oranges" should really be "oranges for apples." It doesn't make much sense to me, and I think the question remains valid.

The idea the lender has retained ownership of his cash is stupid. Once that string is severed, which it was a long time ago, you lose.

So the idea is wrong because 1) it's "stupid" and because 2) "that string is severed"? You're essentially saying there is no longer any ownership interest in the cash because 1) you know what ownership means and I don't, and 2) ownership doesn't apply to cash that's been lent. You are once again begging the question, which now appears to be your preferred method of argument. If you're so in tune with the meaning of "ownership," then why don't you simply define the term and show why we should favor your version over mine? Twice I've asked, and twice you haven't answered.

It looks like we're getting nowhere fast with your approach to the "ownership" issue, and I'd like to move past that and focus on the "deemed transfer" issue anyways. That would involve you answering the questions I asked in #133. So how's this: if you can't or won't engage with the "ownership" points I've raised here and at the beginning of #133, I'll take your side of the argument. In my next post, I'll put forward the best possible answer you could have to support your version of ownership. It's a very good one. I'll also explain what my response would be and why the question ultimately turns on the deemed transfer issue.

Either way, please look at those deemed transfer questions in #133. I'm having a hard time understanding what your position is regarding deemed transfers. I don't know where we agree and where we disagree, and so I don't yet know how to approach the arguments I'm going to make.
 

#137
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My claim, which you quoted, is that in the context of a lack of physical possession, the right to regain physical possession of an asset is what maintains ownership.


Yeah, see, this stuff about “physical possession” - What does it matter if you never relinquished all your rights?

So far, out of your mouth has come a dominion and control argument (or some partial version)…”transferring” the money, but not giving up ownership of the lent money…giving up “physical possession” of the money and that’s it. Telling us why constructive cash payments have occurred, when all the case law says they haven’t.

You invite us to walk with you to help understand and flesh out the ownership issue as it relates to Cash, based on your phony real estate parallel, which isn’t even parallel.

You can take that walk yourself. To everyone else, it’s pretty easy to understand.

Further, if you didn’t give up ownership, then why does a Note even exist? Why would the “receiver of the money” sign a document saying he’ll pay you back if you never gave him anything, or, if he was merely holding ‘your money’ as an agent?

Makes no sense.

You're avoiding the issue and again begging the question of what "ownership" is.


I already told you ownership entails a bundle of rights. And you haven’t transferred all those when you “lend” your real estate. Which is something else I already told you. And see above.

Enough with your bogus argument about transferring cash to a “borrower” who wants it, who needs it, who controls it, etc…but he doesn’t get ownership over it. You would be laughed out of the courtroom if you tried this nonsense.

I would point out that your conception of ownership

My concept of ownership is exactly as the Tax Law would have it, which entails which party bears the benefits and burdens of the property in question. You’re acting like you can lend cash, but you still own it, so you still enjoy the benefits and suffer the burdens. That’s silly. We all know the borrower enjoys the benefits and suffers the burdens. If the borrower couldn’t enjoy the benefits, then why in the hell would he borrow in the first place?

So how is your analogy better than mine?


Because mine compares apples to apples – the transfer of all rights in the cash to the transfer of all rights in the real property. Any other comparison is fake and phony. And you use your phony comparison as support for your phony theory…acting like Chay is the only person in the world who understands how cash ownership works.

And let me remind you: If you, as the lender, really do own the cash then guess what…THE BUSINESS BORROWER GETS ZERO TAX DEDUCTIONS WITH THE CASH THE BORROWER BORROWED FROM YOU AND THEN SPENT. THIS IS BECAUSE IT’S NOT – AND NEVER WAS - THE BORROWER’S MONEY, PER YOUR THEORY, IT IS STILL THE LENDER’S MONEY FOR TAX PURPOSES.

Also let me remind you: If we accept your theory, that means the charity is your Agent, which it isn’t.

Also let me remind you: If we accept your theory that you still own the cash, it’s double counting, since you also hold a Note Receivable.

It doesn't make much sense to me, and I think the question is valid.


I know it doesn’t…but only to you. You’re the only one here that has trouble understanding that a lease does not convey all rights in real property.

if you can't or won't engage with the "ownership" points


I have sufficiently engaged with your stupid points about ownership. Your concept of ownership doesn’t comport with the tax law. Your concept of ownership hinges on a phony comparison to a real estate lease. Your concept is such that you give the borrower the money, but you haven’t given up anything. I hereby dispute that silly claim.

Either way, please look at those deemed transfer questions in #133. I'm having a hard time understanding what your position is regarding deemed transfers.

Does that extend to an exchange of money for services, such as when I pay a salary?


I really don’t know what the heck you are saying. Are you asking if you exchange money for services is there a deemed transfer? I’d say that’s an actual transfer.

Are you asking if an EE gets a $200 loan from his employer, and then the EE “works it off” by providing services worth $200 to the ER, so as to satisfy the debt, do we have a deemed transfer of cash wages from the ER to the EE, with the EE then repaying the loan? Yeah, sure. That’s fine. The debt was satisfied.

You seem to have real trouble with the idea that the courts won’t cast a forgiveness situation akin to, or as, a repayment situation. Go take that up with the courts. To me it makes complete sense.
 

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