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Forgiveness of loan to charity - cash or non cash?

Technical topics regarding tax preparation.
#51
Chay  
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Jeff-Ohio wrote:Yeah, but Chay doesn’t want to say he has a Receivable.

Not true. The cash, currently in someone else's possession, is attached to a note receivable and classified under that heading. It's like creating separate accounts for office real estate and rental real estate; one you can use freely in your operations, the other you have devoted to the production of income.

The Receivable is not a distinct asset under Chay’s theory. It is just the mechanism that determines the timing of the deduction.

A note receivable embodies the interest that the lender maintains in the cash they've lent. It's like a title to a property. The note also serves the function of a rental agreement. In an accounting sense, we don't typically create separate asset accounts for rental agreements or titles because assets only show up in the books if there is a dollar figure attached to them. There are plenty of meaningful assets that don't show up in the books, and in this way the note receivable and the cash are two different things even though they don't show up that way in the books.

Chay says his current year deduction is in the nature of Cash…cash he gave a long while ago. But he’s saying he really didn’t give it a long time ago, given that he wants to take a current year Cash deduction for it.

My current year deduction is for cash that I lent a long while ago.

Chay is calling it a “Cash I gave awhile ago, but I Haven’t Given It Yet” Asset.

It's a “Cash I lent awhile ago, but I Haven’t Given It Yet” Asset.

There is no Receivable Asset under Chay’s theory, and hence, there cannot be a loss deduction.

The "receivable asset" is there, and it consists of the cash that's been lent plus the note receivable. There is no problem with a loss deduction for cash.

What Chay’s asset sounds like, under Chay’s theory, is a prepaid expense

A prepaid expense arises when cash is actually paid, not when it's lent. Thus, your theory more closely resembles a prepaid expense than mine.

If the contributed amount was $10k, and Chay’s saying it was all cash, and any deduction flowing from the transaction would be a cash deduction, you cannot parse things apart at any point and say, “This much is deductible Cash and this much is non-deductible Cash.” You can’t do that with cash (unless some benefit was received in return).

You can if you incrementally forgive portions of a loan balance, e.g. Story v. Commissioner (see #48).

Or unless you have some misguided theory that ignores a Receivable as a separate asset, but uses its existence to determine the timing and value of the tax deduction associated with a long-ago cash advance.

My theory actually depends on the note receivable being a separate asset from the cash. Because the note is not the cash, but rather controls the terms of the loan of the cash, it doesn't prevent me from doing as I choose with the cash assuming I do so within the terms of the loan.

jerem200 wrote:Pitch solved it! All hail Pitch!

Indeed. Thanks for your contribution, Pitch.
 

#52
Nilodop  
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Code: Select all
Furthermore, the question here is not whether petitioners intended to collect the debt, but whether they intended to make a gift of the amount advanced when it was advanced, or to create an obligation portions of which could be forgiven from time to time as gifts in the future. We think the latter was the case here.
. (From Story).

In our facts, we are working anote where the intent was to collect.
 

#53
Chay  
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Under your theory, creating an obligation results in a loss of ownership of the cash and the cash can no longer be donated, although the obligation itself can be. If true, it shouldn't matter why the lender created the obligation or what they were planning on doing with it; they lose ownership of the cash all the same. Thus, the Story case conflicts with your theory.

I'd also like to point out that your quote doesn't imply that the petitioners did not intend to collect. It only implies that such question was not relevant to the case.
 

#54
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Pitch solved it! All hail Pitch!


It was solved before it started, quite frankly. Chay is merely presenting an alternative argument as to the “type” of deduction we get – cash vs. non-cash.

Indeed. Thanks for your contribution, Pitch.


LOL. LOL to your theory too.

So, the $10k in cash you “lent” to charity 5-years ago, which is now insolvent, magically becomes cash you gave in the current year by virtue of your current year forgiveness of a worthless Receivable. Seems you have a little valuation problem with your theory, as has been previously stated, given that cash donations are fully allowable. Add the valuation problem to all the other problems of your theory. Here is what the acknowledgement might say:

“Thank you kindly for your current year cash donation of $10k. The fair market value of your cash donation is $10k. Please consult your tax adviser about how much you can deduct. No good or services were received in exchange for the cash you gave to us in the current year many years ago.”

You should definitely claim a $10k deduction on your return, Chay, since that’s what the rules for cash donations provides.
 

#55
Chay  
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Jeff-Ohio wrote:Chay is merely presenting an alternative argument as to the “type” of deduction we get – cash vs. non-cash.

That's not an "alternative" argument, that's the central question of this thread.

So, the $10k in cash you “lent” to charity 5-years ago, which is now insolvent, magically becomes cash you gave in the current year by virtue of your current year forgiveness of a worthless Receivable.

No, it doesn't work if the charity is insolvent. See #43.

Add the valuation problem to all the other problems of your theory.

I believe I addressed the "valuation problem" in #42. I don't think there's anything relevant you or Nilodop have brought that I haven't been able to reasonably incorporate into my theory.

You and Nilodop, on the other hand, have yet to adequately address the issues in #40 and #48.
 

#56
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If true, it shouldn't matter why the lender created the obligation or what they were planning on doing with it; they lose ownership of the cash all the same. Thus, the Story case conflicts with your theory.


It matters if the “obligation” is bona fide or not. That was the seminal question in Story. If bonafide, forgive as time goes by and you get the deduction accordingly. If not bonafide, there was no debt to forgive in the first place. Therefore, the deduction all hits in Year1. That’s the gist of Story. No real mention of the type of the deduction – cash or non-cash. And back then, it might not have mattered. Story has no real relevance to OP’s situation. It doesn’t answer anything. Of course, the Code answers it. And so does the Regulation’s “actually paid” wording. But you apparently don’t like those authorities, nor the Rev Rul, instead opting for the esoteric, magical accounting theories of Post #51.

And here’s a newsflash: When you make a loan, you no longer own the cash. It’s basic. I’m pretty sure that when the charity records the entry to book up the forgiveness, there won’t be any credit to Cash.

Tons of holes in your theory – it applies to this, it doesn’t apply to that, it has to be modified for this, etc., etc., etc. Compare and contrast to a simple theory that passes muster no matter the situation.

In any case, just go tell your clients they don’t need appraisals. Not a big deal…
Last edited by Jeff-Ohio on 11-Oct-2019 7:10am, edited 1 time in total.
 

#57
Chay  
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Jeff-Ohio wrote:It matters if the “obligation” is bona fide or not. That was the seminal question in Story. If bonafide, forgive as time goes by and you get the deduction accordingly. If not bonafide, there was no debt to forgive in the first place. Therefore, the deduction all hits in Year1. That’s the gist of Story.

Correct. An obligation that isn't bona fide is no obligation at all, so it doesn't apply to our facts. The obligation in Story was bona fide, so it does apply to our facts.

No real mention of the type of the deduction – cash or non-cash.

Wrong. The mention is right here:

    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.
The contribution in Story was of "the property advanced". The petitioners did not advance a note receivable. They advanced cash.

But you apparently don’t like those authorities, nor the Rev Rul, instead opting for the esoteric, magical accounting theories of Post #51.

And here’s a newsflash: When you make a loan, you no longer own the cash. It’s basic. I’m pretty sure that when the charity records the entry to book up the forgiveness, there won’t be any credit to Cash.

Tons of holes in your theory – it applies to this, it doesn’t apply to that, it has to be modified for this, etc., etc., etc. Compare and contrast to a simple theory that passes muster no matter the situation.

Your problems with my theory all spring from the fact that you are stuck in an accounting mindset where nothing exists or has relevance unless a dollar figure is attached to it. In such a world, the complexities and nuances of actual property transactions may seem magical.

If you could clear your head of all that and approach things from a practical standpoint, you might find yourself wondering, as I did in #40, what it is exactly that prevents someone from lending money and getting it back later in the same way that any other asset may be lent and retrieved. You might reach the same conclusion I did, which is that the fungibility of cash means there is no problem with such an arrangement.

You, and anyone else who might agree with your accounting-centric theory, should broaden your perspective, read the Story case objectively, and understand that accounting systems don't control real-world transactions but only reflect them to the extent necessary to accomplish a narrow goal.
 

#58
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Wrong. The mention is right here:

You’re reading way too much into this case. The case involved one of these serial forgiveness situations, with some particularly unique facts. We don’t have any of that in the OP. This is presently a “no rule” area for the IRS and has been for a long time. And for good reason.

Your problems with my theory all spring from the fact that you are stuck in an accounting mindset where nothing exists or has relevance unless a dollar figure is attached to it.


I’m really not stuck on a single fact. All I know is that with Cash, basis always equals FMV. Your theory invokes the idea that it doesn’t. Guy lends $10k in cash to charity. He forgives later, when the value of his Receivable is lower than the amount he advanced. If this is really a donation of cash, in the year of forgiveness, there is no way possible for the deduction to be different than the amount advanced. And also note, your theory wouldn’t adequately cover a situaiton when then Receivable was actually worth more than the amount advanced. Seems odd that your theory doesn’t work when value is lower, doesn’t work when the value is higher, but does work when value equals basis. Your theory also falls flat as to the Sec 170 actual payment requirement within the taxable year.

If you could clear your head of all that and approach things from a practical standpoint


My head is pretty clear. Story’s situation was this: He funded construction…hard outlays by the church. Of great importance is that he wanted to control the management and supervision of the project, so he had the charity sign a promissory note. If the charity didn’t do things his way, now he has a backup plan. If the charity did things his way, then here, keep the money I advanced. That was the purpose of the Note and the reason it was bonafide. This is not the situation with a plain old loan, where the evidence of indebtedness exists just so the charity is forced to do things the lender’s/donor’s way. I have no problem with the result and analysis in Story. But it won’t hold up in any factually dissimilar situation, such as the OP’s situation, which involves an ordinary loan from what I can see and no serial forgiveness. And it won’t hold up because it would be inapplicable. Nonetheless, we are all in agreement that when we have bonafide indebtedness – in a serial and non-serial forgiveness situation – we get a deduction upon forgiveness. We’re not debating that point.

There is this passage from Story:

Of course, a gift or contribution to a qualified organization may be made in property and be the basis for a deduction authorized by section 170, and respondent does not argue that if there was a debt from Soldiers Chapel in Nelson's favor, he could not have made gifts or contributions to the organization in 1957 and 1958 by canceling portions of the debt.3

Given that said passage references the old Rev Rul, via Footnote #3, it’s clear that the word “property” is referring to the Note. But I digress, because the whole cash vs. non-cash thing wasn’t really taken up in the case. Like I said, back then, it didn’t matter. Take a look at the 1955 Form 1040. Again, you’re reading a cash vs. non-cash element into the case, and quite frankly, it wasn’t even an issue. In other words, even if the court came right out and said that the contribution was non-cash, in the form of a Note, it wouldn’t have mattered back then. Nowadays, though, it would, given the strict substantiation rules surrounding non-cash donations. With the changed landscape, I can totally see the IRS distinguishing current cases from Story, completely relying on the old Rev Rul, and putting the taxpayer that didn’t get an appraisal in a real bind. And I think the IRS would have a good chance of winning.

In Story, the real focus was on the bonafideness of the debt. Part of that discussion involved some comments about the charity’s financial condition. But that discussion wasn’t surrounding the valuation of the Note. It surrounded the intention of creating bonafide indebtedness and the ability of the charity to repay. But even so, the court was satisfied that the Note could have been paid off. I can totally see the IRS using this idea not just to determine the validity of the Note, but to value it as well. And guess what: The burden of proof is on the taxpayer. If the IRS argues that this is a non-cash contribution, and wins, it makes little difference that the charity could easily pay off the note through non-appraisal evidence.

Further, there is nothing more practical than pointing out that that cash has a basis equal to value. Any theory premised on the fact that I advanced Cash of $10k and my deduction might be something different falls short of being able to classify the donation a cash donation.

Like I said, just tell your clients not to get an appraisal for their ordinary loans to charity…I myself wouldn’t want to chance it. The old Rev Rul is pretty clear when it comes to an ordinary loan.
 

#59
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If this amount of debate is generated from "cash or noncash?", then this is why Congress gets nothing done. ;)
 

#60
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In Story, the real focus was on the bonafideness of the debt.. Which is why I left it out of my posts. It sends some of us offtrack.
 

#61
Chay  
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Jeff-Ohio wrote:You’re reading way too much into this case.

No, the language used was quite clear. The best you can do in response is put up an argument as to why the problematic elements of the case no longer matter in "the changed landscape". Because the goal of a theory is to explain observations in the simplest way possible, your theory is still that much weaker.

All I know is that with Cash, basis always equals FMV. Your theory invokes the idea that it doesn’t.

Really? I wasn't aware of that element of my theory. I thought I was saying the exact opposite in #35 and #42.

And also note, your theory wouldn’t adequately cover a situaiton when then Receivable was actually worth more than the amount advanced.

Sure it would. Forgiving the balance of the receivable results in a cash donation and a deduction equal to the balance forgiven. Donating the receivable itself results in a non-cash donation equal to the value of the receivable.

Your theory also falls flat as to the Sec 170 actual payment requirement within the taxable year.

Only if you misinterpret the requirement to exclude constructive transfers such as forgiving a loan balance or signing over the title to real estate that is currently rented to the charity. Constructive receipt, and constructive payment by corollary, are concepts that stretch to all aspects of the Tax Code. What is your argument as to why they don't stretch to section 170? Why do you think the IRS didn't bother trying to make such an argument in the Story case?

I have no problem with the result and analysis in Story.

Then I assume you have no problem with the concept of retaining "dominion and control" over cash after it's been lent out and claiming a deduction under section 170 for relinquishing that dominion and control.

But it won’t hold up in any factually dissimilar situation, such as the OP’s situation, which involves an ordinary loan from what I can see and no serial forgiveness.

You seem to be saying that in order for Story treatment to apply, the lender must have intended to eventually make gifts from the beginning. But you also agree that the loan in Story was bona fide. The loan in this thread is bona fide. We don't know what the lender was thinking when they initially made the loan, but why should that matter? Does the recognition of COD income depend on the original intention of either the lender or the borrower? Does the ability to make donations depend on why the asset to be donated was originally acquired?

Any theory premised on the fact that I advanced Cash of $10k and my deduction might be something different falls short of being able to classify the donation a cash donation.

Fantastic. My theory doesn't say anything like this, so I'm in the clear.

The old Rev Rul is pretty clear when it comes to an ordinary loan.

Which one, and does it actually say that you can't forgive part of a loan balance for a cash deduction? Does it even address what happens in that situation at all?
 

#62
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No, the language used was quite clear.


The language was all over the place. And that’s because the case had nothing to do with cash vs. non-cash. “Property” was used to describe the Note in that case. It was also used to describe the Cash. And it might be used to describe the construction costs. If you are hanging your hat on that case deciding the cash vs. non-cash issue, it’s a real thin thread, given that the case had nothing to do with the main issue in this thread. There was a reason Nilodop wrote what he wrote in Post #60. It was perfectly expected that this bogus case would be seized on to decide the issue at hand. That case doesn’t decide the issue, it had no reason to decide the issue, and it didn’t decide the issue.

I wasn't aware of that element of my theory.

Sure it would. Forgiving the balance of the receivable results in a cash donation

Only because you want to parse the cash given up into cash given up, plus or minus something that isn’t cash. Makes a lot of sense, when in fact, all that was given was Cash.

Only if you misinterpret the requirement


Don’t think so. You don’t make a actual payment of cash without cash changing hands within the current taxable year. There’s not much to interpret.

Then I assume you have no problem with the concept of retaining "dominion and control" over cash after it's been lent out and claiming a deduction under section 170 for relinquishing that dominion and control.


Yeah, I have a big problem with that, because that’s not the case with a loan. The accounting entries prove it out.

You seem to be saying that in order for Story treatment to apply, the lender must have intended to eventually make gifts from the beginning.


No, I’m not saying that. I’m saying to stop reading so much into Story. It is not on point. The IRS made no argument about valuation in that case. The IRS made no argument about cash vs. non-cash. These days, there are strict substantiation requirements. The IRS will toss out your deduction if those are not met. They could care less if it really was a valid donation.

Fantastic. My theory doesn't say anything like this, so I'm in the clear.


Sure it does. Remember, your theory is practical. It’s simple. Charity ends up with $10k of my cash. My cash charitable deduction might be something different. It’s pretty incredible that you wish to recognize the Receivable, but not as an Asset. You just want to take certain aspects of it to determine the highly relevant cash deduction and then argue that that’s all your doing with it.

Does it even address what happens in that situation at all?


Only if you can put 2 and 2 together, which pretty much every judge can.

Just answer us this, in front of everyone:

Taxpayer lends $1m to a charity. Several years down the road, he forgives all of it. You would advise this taxpayer to not get an appraisal, since those are not needed for cash donations, is that right?
 

#63
Chay  
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Jeff-Ohio wrote:
No, the language used was quite clear.


The language was all over the place. And that’s because the case had nothing to do with cash vs. non-cash. “Property” was used to describe the Note in that case. It was also used to describe the Cash. And it might be used to describe the construction costs.

Seems pretty consistent to me. Anyways, I'm not concerned about what the donation is called or whether or not the court implied that the donation could have been construed as a donation of the note itself. Both cash and a note receivable are property, and both are capable of being donated. What I'm concerned about is the part at the end where the court characterizes an advance of money (i.e. a loan) as a transaction in which the taxpayer has not actually parted with all dominion and control over the money and still may make charitable gifts of that money at a later time. Put all the spin on that you want, you still can't deny it conflicts with your argument and not with mine.

Only because you want to parse the cash given up into cash given up, plus or minus something that isn’t cash. Makes a lot of sense, when in fact, all that was given was Cash.

I have no idea what you're talking about.

You don’t make a actual payment of cash without cash changing hands within the current taxable year.

You do if it's a constructive payment, such as the type made in the Story case. I'm still waiting on that argument as to why the concept doesn't apply to section 170.

Then I assume you have no problem with the concept of retaining "dominion and control" over cash after it's been lent out and claiming a deduction under section 170 for relinquishing that dominion and control.


Yeah, I have a big problem with that, because that’s not the case with a loan. The accounting entries prove it out.

Aha, so you do have a problem with the result and analysis in Story after all. Unfortunately for you, Story is precedent for tax purposes, while accounting entries and your opinions are not.

You seem to be saying that in order for Story treatment to apply, the lender must have intended to eventually make gifts from the beginning.


No, I’m not saying that.

So what are you saying? What would it take for the result and analysis in Story to apply to any other set of facts?

It is not on point. The IRS made no argument about valuation in that case. The IRS made no argument about cash vs. non-cash.

And it wouldn't have mattered if they did. The part that contradicts your theory would still contradict it.

Charity ends up with $10k of my cash. My cash charitable deduction might be something different.

Right, because there are different arrangements in place with regard to each portion of cash. I give up complete dominion and control over one portion but not over another. Constructive payments can be made. Lending really is lending.

It’s pretty incredible that you wish to recognize the Receivable, but not as an Asset. You just want to take certain aspects of it to determine the highly relevant cash deduction and then argue that that’s all your doing with it.

I'm taking all aspects of the arrangement into account. You're the one with the limited view based on accounting concepts and terminology.

Does it even address what happens in that situation at all?


Only if you can put 2 and 2 together

Looks like I must have missed that lesson back in school. I'm stumped. Please teach me how to put 2 and 2 together and determine the outcome of forgiving part of a loan balance based on your old revenue ruling.

You would advise this taxpayer to not get an appraisal, since those are not needed for cash donations, is that right?

No, I would chicken out and tell him he needs an appraisal because it may or may not be a non-cash contribution of a note receivable. Now, how about you answer in front of everyone how that helps to support your argument in any way?
 

#64
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No, I would chicken out and tell him he needs an appraisal because it may or may not be a non-cash contribution of a note receivable.


That’s what I thought.

Put all the spin on that you want, you still can't deny it conflicts with your argument and not with mine.


It doesn’t conflict with anything I said. The judge’s comments were just in response to the IRS’ argument that Story parted with dominion/control in Year1, making the loan not bona fide. That’s all that comment was addressing. The judge could have just as easily said, “While, yes, he did part with dominion and control of the asset. It was no longer under his dominion and no longer under his control. What he didn’t part with was the Note Receivable.” The judge didn’t make that comment because he didn’t need to. He was simply telling the IRS he didn’t buy the idea that the entire donation should have been accounted for in Year1. Again, you are reading way too much into this case. You are seizing on wording and language that is peripheral and tangential to the focal point in the case. You’re using it to resolve an issue that the judge wasn’t trying to resolve. That non-focal point – cash vs. non-cash - wasn’t even an issue. Even if the IRS said, “Your honor, we believe this was a non-cash donation!!!” You know what the judge would have said: “So what. Cash, non-cash it’s all the same in 1955.” If the IRS makes the same argument today, you know what the judge will say, “Okay, tell me more. Because if it is a non-cash donation, the taxpayer needed a qualified appraisal.” Again, the cash/non-cash thing wasn’t an issue in the case. Anything you are trying to read into that case to advance your cash vs. non-cash position is off point.

In any case, if we are to dissect the judge’s words, as if they are relevant to today’s inquiry, it's disturbing that you actually agree with the judge’s comments as applied to an ordinary loan. If I make a routine cash loan to someone, I do not control how those loan proceeds are used. Now, if the proceeds are to be used to buy a specific asset, you might say I am in control of things. But all I’m in control of is the decision as to how the cash will be momentarily used. When the cash is gone, I don’t control it. And when the asset is bought, I don’t control that collateral either. The borrower does. This is why the bank branch manager isn’t lying asleep in your bed right now. I have also parted with the cash. It is no longer in my dominion. If an asset was purchased, that is no longer in my dominion either. The only thing in my control is how I act when the borrower doesn’t make a scheduled payment, pursuant to the four corners of the note. And what is in my dominion and control is the Note Receivable, which is what I got back in the agreed-upon exchange of value. I say all of this with an ordinary loan in mind. In Story’s case, if we must, he forced the charity’s hand by forcing his specs on the charity. Further, he insisted he be the one to supervise and manage the project. A higher degree of control there, hence the judge’s comments being understandable. And again, only in response to the IRS’ argument.
I have no idea what you're talking about.


That’s odd. That charity ended up with $10k in cash. The donor is owed nothing back. But under your theory, the deduction might be higher, lower, or equal to that amount.

You do if it's a constructive payment, such as the type made in the Story case.


Again, more seizing on the irrelevant Story case.

Aha, so you do have a problem with the result and analysis in Story after all.


No, not really. I have no problem with the results in Story. IRS didn’t make a non-cash argument. IRS didn’t make a valuation argument. The reason the IRS didn’t make these arguments is because it didn’t matter. Their argument was that the note wasn’t bona fide. That was the issue. Once that was dispatched with, in the taxpayer’s favor, the taxpayer wins. My issue with the dominion and control argument is explained above. As stated, and first, the D/C argument was directed at the IRS’ argument. And second, as stated, Story involved very unique facts. Applying the judge’s words to an ordinary loan situation falls flat. And third, as stated, even if the judge said, “D/C was lost,” he still would have concluded that the Note had value and that’s what was given. But that wasn’t necessary, since all the judge had to do was to decide if a full gift was made in Year1.

Unfortunately for you, Story is precedent for tax purposes,


It's only precedent for cases involving identical facts, which makes it irrelevant to the OP. And the stuff in the case that was peripheral to the main issue (like if this was a cash or non-cash donation) has zero precedential value, because that case wasn’t deciding any peripheral issue. Yet, you continue to seize on these peripheral comments and use them to resolve an issue that that case was not trying to resolve. Of course, the minute that case was posted, Nilodop knew exactly what you’d do. I did too.

What would it take for the result and analysis in Story to apply to any other set of facts?


I would say you’d need identical facts. That’s why I said this case, with peripheral comments about the issue at hand, is irrelevant. And, mind you, those peripheral comments, when taken together don’t even support your theory. It is a hodgepodge of stuff that is referred to as “the property.”
And it wouldn't have mattered if they did.


With the unique facts as they were, maybe not. And because it was 1955, maybe not. But if we’re talking about an ordinary loan in today’s world, you better watch out if the IRS is hell-bent on calling that a non-cash donation. When you point to your Story case, they will shred it apart is irrelevant, as I have done herein.
Lending really is lending.


Right. Just like endorsing Notes back to the borrower are transfers of assets.

Whey they say, “If you give a Bond you bought back to the entity that issued it, and your deduction is based on the value of the bond so given,” it’s a pretty safe bet a judge would say, “Sure sounds like you gave the bond. It clearly had value, since that’s what the deduction is predicated on. If something has value and goes away, I’d say that specific thing is what was given, thereby causing it to go away.”

Now, with all that said, would I ever use Chay’s argument? Sure would, but only if client didn’t get an appraisal. I’d slap it down as a cash donation. But if we’re in the planning phase, I would undoubtedly advise the client to get an appraisal. If that advice is not given, you run a big, and unnecessary, risk.
 

#65
Chay  
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Jeff-Ohio wrote:That’s what I thought.

And just like I thought, it's not even relevant to your argument.

The judge’s comments were just in response to the IRS’ argument that Story parted with dominion/control in Year1, making the loan not bona fide. That’s all that comment was addressing.

It doesn't matter what the judge was trying to do or what reasoning he could have employed. The fact is that he employed a line of reasoning that is inconsistent with your claims about the nature of a lending arrangement. No matter how much you object around the edges, you can't change that fact.

You've also got cause and effect reversed in the IRS' argument. They argued that because the loan wasn't bona fide, there was a loss of dominion and control. And guess what? That implies that a bona fide loan maintains dominion and control.

In any case, if we are to dissect the judge’s words, as if they are relevant to today’s inquiry, it's disturbing that you actually agree with the judge’s comments as applied to an ordinary loan. If I make a routine cash loan to someone, I do not control how those loan proceeds are used. Now, if the proceeds are to be used to buy a specific asset, you might say I am in control of things. But all I’m in control of is the decision as to how the cash will be momentarily used. When the cash is gone, I don’t control it. And when the asset is bought, I don’t control that collateral either. The borrower does. This is why the bank branch manager isn’t lying asleep in your bed right now. I have also parted with the cash. It is no longer in my dominion. If an asset was purchased, that is no longer in my dominion either. The only thing in my control is how I act when the borrower doesn’t make a scheduled payment, pursuant to the four corners of the note. And what is in my dominion and control is the Note Receivable, which is what I got back in the agreed-upon exchange of value. I say all of this with an ordinary loan in mind.

All of this was dealt with way back in #38 and #40.

In Story’s case, if we must, he forced the charity’s hand by forcing his specs on the charity. Further, he insisted he be the one to supervise and manage the project. A higher degree of control there, hence the judge’s comments being understandable.

Yes, a higher degree of control. But we all agree the loan was bona fide, and the judge's reasoning that you keep trying to qualify was presented in a very broad and non-qualified way. And when we look further into that case to find what is really meant by "dominion and control", we find the following:

    Respondent also argues that no true obligation on the part of Soldiers Chapel to repay the amount advanced by Nelson arose in 1955; consequently, Nelson lost all dominion and control over the money advanced in 1955 and gave nothing by canceling portions of the principal of the note at the end of 1955 and in subsequent years. The notes, on their faces, evidenced a binding obligation to pay a sum certain, and there is no evidence upon which to conclude that they were without consideration, invalid, unreal, or otherwise than what they purported to be. So far as we can determine they were valid negotiable instruments, however collectible they might have been.
Whether the petitioners had "dominion and control" over the money was entirely a question of whether or not the obligation was bona fide. It was; hence, no loss of dominion and control. As you've said yourself, the entire case revolved around that particular point. All of the evidence, including the petitioners' desire to influence the charity, went toward proving that the obligation was bona fide, which in turn showed dominion and control. There was no corollary line of reasoning that linked the petitioners' influence over the chapel construction with their ability to control funds that were in the possession of the charitable organization.

That charity ended up with $10k in cash. The donor is owed nothing back. But under your theory, the deduction might be higher, lower, or equal to that amount.

I don't know where you're getting this. If the entire $10k is forgiven, then that's the amount of the deduction.

You do if it's a constructive payment, such as the type made in the Story case.


Again, more seizing on the irrelevant Story case.

And more of your reluctance or inability to state why the concepts of constructive receipt and payment don't apply to section 170.

I have no problem with the results in Story.

Then you admit that it's possible to retain dominion and control over cash after it's been lent out and later claim a deduction under section 170 for relinquishing that dominion and control.

It's only precedent for cases involving identical facts

I'm pretty sure that's not how case law works. I've seen opinions quoting non-central language from other opinions to build support.

What would it take for the result and analysis in Story to apply to any other set of facts?


I would say you’d need identical facts.

Alright. A starting point for consensus. So, the Story situation can be reproduced, and constructive payments are possible. This means you'll be backing off from your strict "actually paid" interpretation of section 170, right?

those peripheral comments, when taken together don’t even support your theory. It is a hodgepodge of stuff that is referred to as “the property.”

"[T]he property contributed", in the relevant context, refers to money. It can be constructively paid because there is dominion and control over it after it is lent so long as the loan is bona fide. This portion of the Story case conflicts with your theory but not with mine.

if we’re talking about an ordinary loan in today’s world, you better watch out if the IRS is hell-bent on calling that a non-cash donation

Point taken. That's a real possibility.

“If you give a Bond you bought back to the entity that issued it, and your deduction is based on the value of the bond so given,” it’s a pretty safe bet a judge would say, “Sure sounds like you gave the bond. It clearly had value, since that’s what the deduction is predicated on. If something has value and goes away, I’d say that specific thing is what was given, thereby causing it to go away.”

Sure. I never disputed that giving a bond as a noncash donation was a possibility.

Now, with all that said, would I ever use Chay’s argument? Sure would, but only if client didn’t get an appraisal. I’d slap it down as a cash donation. But if we’re in the planning phase, I would undoubtedly advise the client to get an appraisal. If that advice is not given, you run a big, and unnecessary, risk.

Depending on the size of the gift, I'd do the same. If the appraisal came back with a lower FMV than the balance remaining, I'd discuss whether or not to take the position that the donation is a cash donation with the client. If they wanted to go cash, I'd sign the return, no problem.

If we're talking about $10,000, I'd call it a cash donation and then call it a day.
 

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And just like I thought, it's not even relevant to your argument.

Rather, it is the crux of my argument. You have your theory – cash donation – no appraisal required. Yet, you’d get an appraisal. Those are only required for non-cash donations.

It doesn't matter what the judge was trying to do.


For good reason, Nilodop stopped talking about this irrelevant case a while ago – you know, the case that included tangential and peripheral comments, and sometimes unintelligible comments, about “the property” – the one where it’s unclear what “property” he’s actually talking about. I will cease discussing that case now as well. You say it stands as precedent to support your deduction. I say it stands for the proposition that if a bona fide loan exists, then 100% of the deduction doesn’t hit in Year1.

I don't know where you're getting this. If the entire $10k is forgiven,


No, Chay. Only a portion was forgiven. End result: We transferred $10k in cash to the charity. Charity got $10k in cash. Yet, our deduction is lower. Of yeah, I forget, you can’t apply your theory when the value of the Note changes.

And more of your reluctance or inability to state why the concepts of constructive receipt and payment don't apply to section 170.


Why in the world would they apply when there’s an actual transfer of a Note? You want constructive to over-ride actual. I don’t think so. Moreover, your constructive transaction simply flows from the real one.

I've seen opinions quoting non-central language from other opinions to build support.


Build support as you may, with those tangential, peripheral, and sometimes hard-to-follow comments…you still won’t have enough support to convince a judge that the cash you actually gave years ago, is constructively given this year and that constructive contribution over-rides the actual contribution of the Note. What you want to do is treat the actual contribution of the Note to create a fiction: Fiction being, charity repaid the loan (to the extent of value) and then I took that cash and made a deductible contribution. That is the fiction, but it’s only constructed out of the reality.

Point taken. That's a real possibility.


A real and scary possibility. One which I would not want to advise improperly on.
 

#67
Chay  
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Jeff-Ohio wrote:Rather, it is the crux of my argument.

I'm sure you don't really mean this. Your argument doesn't hinge on whatever action I would take in the planning stages of a charitable contribution.

I will cease discussing that case now as well. You say it stands as precedent to support your deduction. I say it stands for the proposition that if a bona fide loan exists, then 100% of the deduction doesn’t hit in Year1.

What I say is that Judge Drennen employed a line of reasoning that is inconsistent with your claims about the nature of a lending arrangement.

Only a portion was forgiven. End result: We transferred $10k in cash to the charity. Charity got $10k in cash. Yet, our deduction is lower.

Right, because there are different arrangements in place with regard to each portion of cash. I give up complete dominion and control over one portion but not over another. Constructive payments can be made. Lending really is lending.

Of yeah, I forget, you can’t apply your theory when the value of the Note changes.

I don't believe this follows from anything I've said, but please tell us why you think this might be the case.

And more of your reluctance or inability to state why the concepts of constructive receipt and payment don't apply to section 170.

Why in the world would they apply when there’s an actual transfer of a Note? You want constructive to over-ride actual. I don’t think so. Moreover, your constructive transaction simply flows from the real one.

You are contradicting yourself with every new post. In #58 and #64, you say you have no problem with the Story decision. The Story decision describes a constructive transfer of "the property advanced", which is the money and not the note. In #62 and now in #66, you say that constructive transfers can't trump actual transfers, implying that the deduction must be for the note and cannot be for the money. So which is it?

Build support as you may, with those tangential, peripheral, and sometimes hard-to-follow comments…you still won’t have enough support to convince a judge that the cash you actually gave years ago, is constructively given this year and that constructive contribution over-rides the actual contribution of the Note.

That is a possibility. But I will at least have enough support to show that under the current body of case law, the act of lending money does not preclude a subsequent contribution of that same money, contrary to what you and Nilodop have said. One source is better than no sources.
 

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Your argument doesn't hinge on whatever action I would take in the planning stages of a charitable contribution.

Your action speaks to your argument. And through your action, you have revealed that you have a low degree of confidence in your argument…by taking steps that are more consistent with my argument. All along, I’ve said it’s non-cash. That would require an appraisal. And here comes Chay wanting to get an appraisal…

What I say is that Judge Drennen employed a line of reasoning that is inconsistent with your claims about the nature of a lending arrangement.


There is no line of reasoning in that case, whatsoever, that said: Here’s why this is a non-cash donation…or here’s why this is a cash donation. And that’s because that issue was irrelevant. Further, I’ve already pointed to the passage that is footnoted with Footnote #3. Read it again. What property is he talking about? Two of the other four times the word “property” is used in that case, it is being used very loosely, simply to distinguish a gift all at once vs. over a period of time. And even there, he speaks of an advance of “money” and then references “property.” What’s the deal? Here’s the deal: It’s is a generic, loose and peripheral statement, with no intent to resolve any issue of cash vs. non-cash. Nilodop saw your improper reading coming.

The Story decision describes a constructive transfer of "the property advanced", which is the money and not the note.

Quit talking about Story – a case involving very unique facts and a control-freak donor because the guy’s son died and he wanted to build a memorial. This case was not in 2019, involving an ordinary loan like in OP’s case, where the IRS could argue: This is a non-cash donation of the Note. As per the RR, the deduction equals the value of the Note. The taxpayer needed an appraisal and he didn’t get one. Therefore, his deduction should be $0.

But I will at least have enough support to show that under the current body of case law,


There is no current “body” of case law that supports your position. There isn’t even a single case.

In any event, you’ve told everyone what we need to know…that my argument is the better one. Why else would Chay get an appraisal?
 

#69
Chay  
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Jeff-Ohio wrote:Your action speaks to your argument. And through your action, you have revealed that you have a low degree of confidence in your argument…

Suppose you've got a client with a $1M loan to a charity that he wants to donate. The loan was not evidenced with a formal note, but the actions of both the lender and the borrower are sufficient to prove the loan is bona fide. In addition, if you take the position that there is a note that can be donated, the FMV is higher than the balance due on account of the creditworthiness of the charity and a precipitous drop in interest rates.

Your argument all along has been that you can't donate cash you've already lent out. So, you would conclude that a note receivable must exist for tax purposes, resulting in a non-cash donation of appreciated property when the debt is forgiven. But your argument isn't firmly rooted in case law or statute, and you would be foolish to move forward without considering that the IRS could argue that not only is a cash donation of a loan balance possible, it's the only way to characterize your client's transaction because they cannot donate appreciated "property" in the absence of a negotiable instrument that could reasonably be "sold" for a "fair market" value.

Now let's assume for a moment that you do consider that, and you advise your client accordingly. You discuss the risks and decide to take action to bolster your non-cash position in case it's challenged. Would your action "speak to your argument" on this thread? Would your standing against my similarly poorly-evidenced argument suffer at all?

There is no line of reasoning in that case, whatsoever, that said: Here’s why this is a non-cash donation…or here’s why this is a cash donation. And that’s because that issue was irrelevant. Further, I’ve already pointed to the passage that is footnoted with Footnote #3. Read it again. What property is he talking about? Two of the other four times the word “property” is used in that case, it is being used very loosely, simply to distinguish a gift all at once vs. over a period of time. And even there, he speaks of an advance of “money” and then references “property.” What’s the deal? Here’s the deal: It’s is a generic, loose and peripheral statement, with no intent to resolve any issue of cash vs. non-cash. Nilodop saw your improper reading coming.

The one thing you've said about this case that is relevant to my claim about it is "it’s unclear what 'property' he’s actually talking about." But that's not true. He's talking about property that's been "advanced". It is quite clear throughout the relevant paragraph and throughout the entire case that the property advanced is money. The fact that he calls money "property" may be suggestive to you of a non-cash contribution, but it shouldn't be. As you keep insisting, back in 1955 there was little difference between donating money and other property. If anything, the term merely broadens the line of reasoning so that it applies to other forms of property in addition to cash.

As to the rest of everything you've said about the case, none of it matters. Here's what matters:

  1. The IRS argued that the petitioners had lost "all dominion and control over the money advanced in 1955" because the note receivable was not bona fide.
  2. The evidence proved that the note was bona fide, defeating the argument that there was no dominion and control over the money advanced.
  3. Judge Drennen went one step further in the second to last paragraph, stating that he could not think of any reason why a taxpayer cannot "advance money to a charity" and then subsequently claim deductions "provided he does not actually part with all dominion and control over the property contributed at the time it is advanced."
Why does that matter? Because my claim is "Judge Drennen employed a line of reasoning that is inconsistent with your claims about the nature of a lending arrangement". You are seizing on aspects of the Story case that are irrelevant to that claim and railing on about how irrelevant they are to it and to everything else. But no matter how much you do that, it won't disprove my claim.

Quit talking about Story

I might do that if you would stop misrepresenting my claim about the case every time you post to this thread.

There is no current “body” of case law that supports your position.

Right, and I also didn't say there was. What I said was under the current body of case law, the act of lending money does not preclude a subsequent contribution of that same money. In case that's not clear, what I mean is that you won't be able to find anything in U.S. tax case law to support your position that I can't constructively contribute the balance of an outstanding loan to a charity.

In any event, you’ve told everyone what we need to know…that my argument is the better one. Why else would Chay get an appraisal?

I can't believe you're actually brandishing this as evidence that your claims are true. Am I going to have to spell out how fallacious that is?
 

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it's the only way to characterize your client's transaction because they cannot donate appreciated "property" in the absence of a negotiable instrument that could reasonably be "sold" for a "fair market" value.


Brilliant. Now you’ve just told the Factoring Industry that what they are doing cannot be done. And you’ve turned upside down any corporate tax law that says if you distribute a Receivable out of a corporation, to a shareholder, isn’t not a sale…

you won't be able to find anything in U.S. tax case law to support your position that I can't constructively contribute the balance of an outstanding loan to a charity.


What would negate your position is if the contribution of the balance of your Note (an asset, and hence property for federal tax purposes) to a charity is viewed as an actual transfer…which it is. You’ve got it backwards, in arguing that it’s an actual gift of cash, which then triggers the constructive contribution of the Note. And you’ve also got it wrong that there’s an actual gift of cash in the first place, because there isn’t. There was only a loan of cash, as you state. If you’re suggesting that the gift of a promissory note to a charity isn’t an “actual” gift of the Note, and there is no case law supporting that it’s an actual gift of the Note, just let me know and then I’ll go pull some cases.

And don’t forget…I could buy your Note Receivable from you and then donate it to charity. Will your theory still tell me that I get a deduction for the Cash you previously forwarded to the charity? I suppose you’ll tell us that your theory doesn’t apply to third party notes.

Also don’t forget that in Story, the Note was secured by the Land. Under you theory, wouldn’t that indicate that the land really isn’t controlled by the charity, because it was encumbered? Yes, I think so, under your theory. This means that when said encumbrance is lifted, by virtue of the Note going away, the Land now becomes free and clear to the charity. Seems to me, under you theory, that would mean Story made a charitable contribution of the land. Quite an amazing theory you have.

None of that matters. Here's what matters:


Right. Only the words you pick, from an off-point case, matter.

I can't believe you're actually brandishing this as evidence that your claims are true.


I can’t believe that you’d get an appraisal if you know your claims to be true. If you believed your theory, you wouldn’t need an appraisal. I’m not the one being inconsistent.
 

#71
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Jeff-Ohio wrote:Brilliant. Now you’ve just told the Factoring Industry that what they are doing cannot be done. And you’ve turned upside down any corporate tax law that says if you distribute a Receivable out of a corporation, to a shareholder, isn’t not a sale…

I haven't. But even if I did, it wouldn't change my question, which you didn't answer.

What would negate your position is if the contribution of the balance of your Note (an asset, and hence property for federal tax purposes) to a charity is viewed as an actual transfer

It's going to be difficult for you to find something that negates my position, because all I'm saying is that a cash contribution is still possible even when money has been loaned out. No matter how many sources you find that support noncash treatment, they won't support your assertion that cash treatment would have been impossible. It would be better to bring some sources that actually deny cash treatment. If you do, it's unlikely they will indicate that cash treatment is impossible across the board. It's the classical "prove a negative" problem.

And you’ve also got it wrong that there’s an actual gift of cash in the first place, because there isn’t.

I'm saying there can be a constructive gift of cash, not an actual gift of cash. I also agree there can be an actual gift of a debt obligation.

And don’t forget…I could buy your Note Receivable from you and then donate it to charity. Will your theory still tell me that I get a deduction for the Cash you previously forwarded to the charity?

It really depends on the facts surrounding the transactions.

Also don’t forget that in Story, the Note was secured by the Land. Under you theory, wouldn’t that indicate that the land really isn’t controlled by the charity, because it was encumbered?

No, it wouldn't.

Right. Only the words you pick, from an off-point case, matter.

Exactly. They are the only words that matter to my claim about the Story case, which is highly relevant to my point about the nature of a lending arrangement.

I can’t believe that you’d get an appraisal if you know your claims to be true. If you believed your theory, you wouldn’t need an appraisal. I’m not the one being inconsistent.

I don't know my claims to be true, and I don't know if a judge would agree with me or not. I also don't know if a judge would agree that my claims apply to a given situation even if the judge agrees in principle. You also don't know either of those things about your claims, or else you would have presented your clear and convincing evidence early on. As a professional, in the absence of knowledge, do you rely on faith or do you rely on sound, conservative tax planning? Based on your arguments so far I can only assume the former.
 

#72
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This discussion isn't close to setting a record, but I think it may get there. (A record for what? I don't know, but something.)

As interesting as the cash or property issue is, I'm jumping back in on the capital loss debate, to which we have given short shrift. Or medium shrift. For context, let's:

Assume:
The note was a bonafide $10k loan and there was no intent, when executed, to later forgive it;
Unfavorable changes in financial condition of the charity occurred over the years from the date of the loan to the date it was forgiven;
As a result, the FMV of the note is $5k, 50% of its face and actual value at date of execution;
No principal payments have been made;
Favorable changes in financial condition of the lender/then donor occurred over the years from the date of the loan to the date it was forgiven;
As a result the borrower/charity will have difficulty in repaying the loan, and the lender/then donor is willing to and can afford to, and does with donative intent forgive the note.
Or:
As a result the borrower/charity will have difficulty in repaying the loan, and the lender/then donor is willing to and can afford to, and does with donative intent transfer the note to the charity.

For the record, I still believe with a high degree of certainty that the tax treatment would be, under both scenarios, a charitable donation of the $5k value of the note. If Jeff-Ohio and I are correct on that conclusion, are we sure there is a capital loss for the other $5k? I'm not. At least, not yet.
 

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For the record, I still believe with a high degree of certainty that the tax treatment would be, under both scenarios, a charitable donation of the $5k value of the note.


Yeah, me to. And it wouldn’t matter if donor “forgave” the note or if he “transferred it to the charity,” such that that such charity effectively assumed it’s own obligation. These are identical and equal each other. And either way, this is not a Cash transaction.

If Jeff-Ohio and I are correct on that conclusion, are we sure there is a capital loss for the other $5k?


I’ve already made that point. Chay’s all over the place with his theory. He wants to use certain aspects of the Note for some things, but disavow it’s existence as an independent asset for other purposes.

It's going to be difficult for you to find something that negates my position, because all I'm saying is that a cash contribution is still possible even when money has been loaned out.


That’s possible if the charity physically repays the loan and then the former lender, now donor, contributes that cash back to the charity. Then, I will agree with you. Until then, I won’t. Until then, your fantasy fiction gets stopped at the door by the actual conveyance of the Note by the donor to the charity.

All we need is a simple case that says a contribution of a note is a contribution of non-cash property. This could be in the corporate context. This could be in the partnership context. This could be in the gift context. It could be a distribution from a corp or partnership and not a contribution. It could be any one of these things. Again, just let me know if we need a case that says a “Note” is non-cash property. I could link at least 1,000 such cases, but maybe I’ll limit it to 1 or 2, in the interests of time. Just let me know.

It really depends on the facts surrounding the transactions.


Of course it does because there is nothing simple about your theory. We now have to modify it for 3rd Party Notes that we acquired from someone else.

In the end, though, you already conceded, when you said you’d get an appraisal.
 

#74
Chay  
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Nilodop wrote:If Jeff-Ohio and I are correct on that conclusion, are we sure there is a capital loss for the other $5k?

No capital gain or loss would be recognized due to the property having been transferred as a gift.

Jeff-Ohio wrote:Chay’s all over the place with his theory. He wants to use certain aspects of the Note for some things, but disavow it’s existence as an independent asset for other purposes.

I'm wondering if it's worth asking you to elaborate on this. I have a feeling your explanation would be yet another mischaracterization of my argument. So, I'll just point out this is an unsupported claim and leave it up to you whether you want to keep going with it.

your fantasy fiction gets stopped at the door by the actual conveyance of the Note by the donor to the charity.

In the case where there is no formal note receivable, there is only one actual asset held by either of the two parties: the cash itself. The other asset is fictional. Say the lender calls up the charity and tells them he's feeling generous, so they can go ahead and keep the cash they were planning on returning to him. Now, tell us why this transaction should be construed as the imaginary "actual" transfer of a fictional asset as opposed to a legal change of ownership over a real, non-fictional asset. After that, please tell us why the same contrivances should not apply in the case where any other property besides cash has been lent to the charity. For bonus points, you could also explain why you think all of that constitutes a simpler theory than mine.

All we need is a simple case that says a contribution of a note is a contribution of non-cash property.

If you think that will negate my argument, then go for it.

In the end, though, you already conceded, when you said you’d get an appraisal.

Is that what happened, or did you concede due to your unwillingness or inability to answer the questions I've asked you and address the points I've made directly? Perhaps your reliance on misdirection belies a weak argument.
 

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I'm wondering if it's worth asking you to elaborate on this.

Sure. A perfect example is what you just said:

No capital gain or loss would be recognized due to the property having been transferred as a gift.


In the case where there is no formal note receivable, there is only one actual asset held by either of the two parties: the cash itself.

Right, Chay. Just go tell the Factoring Industry that all those Trade Receivables they’ve been buying aren’t actual assets…
 

#76
Chay  
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Jeff-Ohio wrote: A perfect example is what you just said:

No capital gain or loss would be recognized due to the property having been transferred as a gift.

That doesn't show how I want to "disavow its existence as an independent asset for other purposes".

Just go tell the Factoring Industry that all those Trade Receivables they’ve been buying aren’t actual assets…

If you have a problem with my term "fictional asset", you can substitute the common law term "pure intangible". If a pure intangible right to collect money can be sold to a third party, that still doesn't mean it's relevant in dealings between the two original parties. In the case of a sale, you would first need to overcome the extinguishment doctrine. I don't think you can do that, so how about shifting back to the context of a charitable donation and addressing the points I raised in my last post?
 

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If a pure intangible right to collect money can be sold to a third party, that still doesn't mean it's relevant in dealings between the two original parties.


Right. The value of that right, as embodied in the Receivable, is irrelevant. That’s why in the old Revenue Ruling, the lender’s charitable deduction was predicated on the value of his Receivable. The lender and the charity were both parties to the original transaction.

P.S. I donated some clothes to goodwill the other day. They were worth $200. I originally paid $2,000 for them. Immediately prior to the donation, I had not released any cash to the charity, similar to the guy who made a $200 cash loan to the charity with that loan still outstanding. But now, I will release the $200 in cash that is embodied in the clothes, by transferring the clothes to the charity. Therefore, I get a $200 cash contribution deduction, as per your theory.
 

#78
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Jeff-Ohio wrote:Right. The value of that right, as embodied in the Receivable, is irrelevant. That’s why in the old Revenue Ruling, the lender’s charitable deduction was predicated on the value of his Receivable. The lender and the charity were both parties to the original transaction.

If you're talking about Rev. Rul. 58-262, I addressed that in post #35. In the context of our current discussion, I would point out that a building bond would never count as a "pure intangible", and few would call its inherent marketability into question. The bond doesn't need to be canceled in order to transfer value back to the issuer; indeed, the holder may not even possess the ability to "cancel" a bond as such.

But now, I will release the $200 in cash that is embodied in the clothes, by transferring the clothes to the charity.

I suppose you must have had a $200 note receivable scrawled onto the clothes somewhere?
 

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I suppose you must have had a $200 note receivable scrawled onto the clothes somewhere?


No, not at all. Remember, under your theory, the Note IS the Cash. When you get rid of the Note, you get rid of the Cash. Don’t you remember all that talk of yours about dominion and control? You’re saying that when you cancel the note, you’re not really giving/gifting/conveying/transferring the Note, but instead, you’re giving an amount of cash equal to the value of the asset you retained, which is the Receivable. If we use your theory with anything tangible, like clothes, we get to the same result: When I give my clothes, I’m giving an amount of Cash equal to the value of clothes. I’m just not giving the clothes. Under your theory, there is no such transfer.

I would point out that a building bond would never count as a "pure intangible",


You like to muddy the waters with words like “fictional asset” and “pure intangible.” Everybody knows that a receivable is an intangible, just like stock is.

indeed, the holder may not even possess the ability to "cancel" a bond as such.


Sure he can, as to himself, which is what this discussion is all about. He can just endorse it over to the borrower, just like Story did. But none of that matters, this recent splitting-hairs focus of yours on the difference between a cancellation and a conveyance. Nor do the irrelevant issues surrounding that, like, “Maybe the borrower will re-issue the obligation.” Yada, yada. It’s all noise. When you extinguish someone’s debt, without the transfer of Cash, you’re not giving them any Cash. This is the case if you tear the obligation up (if it is in writing), or if you send a letter, or if you do both, or if you endorse it back over the borrower or whatever. You are not satisfying the borrower’s obligation with a cash payment within the current taxable year. If the borrower were to make a single journal entry on it’s books, it would debit off the obligation and credit income. Neither side of this entry involves cash. While the borrower’s obligation might be denominated in dollars, it is not being satisfied with cash dollars when forgiven. No fiction can be invoked to overcome that truth. The only way to overcome that truth is to change it by having the lender make an additional cash contribution to the organization and then the organization can repay the debt.
 

#80
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Jeff-Ohio wrote:Remember, under your theory, the Note IS the Cash.

No it isn't. See for example paragraphs 3-4 of post #38 and paragraph 2 of post #51.

Everybody knows that a receivable is an intangible, just like stock is.

And yet the two asset classes aren't treated identically. Neither is treated the same as a pure intangible, or else the term wouldn't exist in the first place. The waters, I'm afraid, are already muddy.

But none of that matters, this recent splitting-hairs focus of yours on the difference between a cancellation and a conveyance

It's not recent. It's a point I made back in post #35 and elaborated on in #38. Nilodop answered the point with arguments about what is and isn't comparable to a loan. I didn't fully understand that counter-argument and it didn't seem convincing, so I think this point weighs in my favor.

You are not satisfying the borrower’s obligation with a cash payment within the current taxable year. If the borrower were to make a single journal entry on it’s books, it would debit off the obligation and credit income. Neither side of this entry involves cash. While the borrower’s obligation might be denominated in dollars, it is not being satisfied with cash dollars when forgiven. No fiction can be invoked to overcome that truth.

...and that brings us back to the point I made at the end of #57 and the questions I asked in paragraph 3 of #74. Your response to the #57 point was a straw man attack on things I never said and which my theory doesn't imply. You still haven't answered the questions I asked in #74. So, my position looks pretty strong here, as well.
 

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No it isn't.


Right. Here we have Chay saying, “What I gave currently is Cash. And I noticed that my Note went away currently also.” 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.

The fact that the charity gets to keep some asset you previously lent to the charity doesn’t mean you currently gave that specific asset (except under your theory). You did something else, currently, that freed that specific asset that you previously lent. And what you did was cancel the charity’s obligation to repay, a valuable right that you once retained (i.e. the right to receive repayment), but do not possess post-forgiveness. The fact that the charity “got to keep” all the cash it already had is just a fallout of the actual, current transaction. Up front, well before forgiveness, you substituted your cash for a Note. There is no going back, even if your theory tells us to.
 

#82
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And yet you don't have a good explanation for why all of that is not also true with non-cash property, as I pointed out back in #38 and #40. Your stance seems to be "the accounting entries prove it out" as you said back in #62. But like I said in #57, accounting entries can only partially represent reality, they can't control it.

Watch what happens when I swap out your words to make the situation into a non-cash one:

Here we have Chay saying, “What I gave currently is Cashreal estate. And I noticed that my Notetitle and rental agreement went away currently also.” Hmmmm, let’s see. Chay’s Notetitle and rental agreement went away currently, and so did his Cashreal estate, but he says they are not one in the same. Remarkable.

The fact that the charity gets to keep some assetreal estate you previously lent to the charity doesn’t mean you currently gave that specific assetreal estate (except under your theory). You did something else, currently, that freed that specific assetreal estate that you previously lent. And what you did was cancel the charity’s obligation to repaypay rent and eventually vacate the premises, a valuable right that you once retained (i.e. the right to receive repaymentrent and a return of your property), but do not possess post-forgiveness. The fact that the charity “got to keep” all the cashthe real estate it already had is just a fallout of the actual, current transaction. Up front, well before forgiveness, you substituted your cashreal estate for a Notetitle and rental agreement. There is no going back, even if your theory tells us to.

You see, your entire argument depends on the nature of a lending arrangement. If money can act like any other asset after it's been lent, then your theory falls apart. I don't even have to show that it always acts that way—all I need is one example of a fact pattern where a lender is considered to retain an ownership interest in cash that's been lent, because your claim is that this can't ever happen.

That's why Story is very important evidence for the validity of my theory. Although it fails to address the issue of cash vs. non-cash in the context of charitable donations, it presents an example of a judge discussing cash as though it does act like other assets when it's lent. There are two possibilities: either the reasoning was flawed and it can't be applied to other fact patterns, or the reasoning is valid and your claim is disproven.
 

#83
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Watch what happens when I swap out your words to make the situation into a non-cash one:


That’s funny. As I said long ago, you don’t “lend” real estate. If you “lend” anything, it’s one small right (i.e. occupancy) and on a temporary basis. Nilodop tried to point this out much earlier, but it apparently fell on deaf ears.
Your example is off base and completely misunderstands property rights.

If you really want to compare the situations of a cash loan to the “loan” of real estate, then in the latter case, what you would have is a sale of the real estate, wherein title is transferred and the seller (i.e. the donor) takes back a note. That is the only way for the seller to possess a Receivable (like the cash loan example) and also to have fully relinquished the property in question (also like the cash loan example). That is the only way to compare apples to apples. And then, later, we would have the forgiveness of the loan. At which point, with respect to the real estate transaction, you would say, pursuant to your bogus theory, “The seller/lender/donor currently gave real estate.” That would be wrong. The title already transferred, just like with the cash in the corresponding cash loan example. What the seller/lender/donor currently gave was cancellation of the debt.

In any cash, maybe your charity issues financial statements. Can’t wait to see how they handled the debt forgiveness on its Statement of Cash Flows….
 

#84
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Jeff-Ohio wrote:you don’t “lend” real estate. If you “lend” anything, it’s one small right (i.e. occupancy) and on a temporary basis.

Your objection completely misunderstands the definition of lend. You don't "lend" the right to occupancy on a temporary basis because that's not something you can ever get back in the future. Instead, you give that right to someone else, and that act of giving is what we mean when we say "lend". Here's what it says on merriam-webster.com:

    Definition of lend
    transitive verb
    1 a (1): to give for temporary use on condition that the same or its equivalent be returned
    / / lend me your pen
    (2): to put at another's temporary disposal
    / / lent us their services
    b: to let out (money) for temporary use on condition of repayment with interest
    / / The bank lent him the money for home improvements.
You will note that this definition, the one that underpins our understanding of what takes place in a lending transaction, construes money and a pen in the same way. In both cases, the temporary use of the item is given and the obligation to return the item is fulfilled even when an equivalent substitute is returned.

Your example is off base and completely misunderstands property rights.

With this I assume you are alluding to the relative ease with which a debtor can get out of repaying a cash obligation compared to the difficulty a tenant would have to claim ownership over occupied real estate. I addressed this objection back in #42, so there's no need for me to do so again unless you actually have something new to say.

If you really want to compare the situations of a cash loan to the “loan” of real estate, then in the latter case, what you would have is a sale of the real estate, wherein title is transferred and the seller (i.e. the donor) takes back a note. That is the only way for the seller to possess a Receivable (like the cash loan example) and also to have fully relinquished the property in question (also like the cash loan example).

This argument is merely an illustration of your claim that ownership of property such as cash is fully relinquished when it is lent. It doesn't work to support the claim itself.

later, we would have the forgiveness of the loan. At which point, with respect to the real estate transaction, you would say, pursuant to your bogus theory, “The seller/lender/donor currently gave real estate.”

No. My theory would say the cancellation is the equivalent of a gift of cash. You should take the time to understand what I'm actually saying if you plan on continuing to argue against it.

What the seller/lender/donor currently gave was cancellation of the debt.

Yes, I agree with this. What I don't agree with is your claim that the cancellation of debt should be construed as the transfer of a note to the donor and valued at the FMV of the note.

Can you give me even one example of a case where the cancellation of an obligation to repay was valued at something other than the amount of the repayment? I've got a few gift tax cases where nothing of the sort was even considered: Haygood v. Comr., 42 T.C. 936 (1964); Estate of Kelley v. Comr., 63 T.C. 321 (1974); and Stinson v. United States, 508 U.S. 36 (1993).

Taking Haygood as an example, the note was non-interest-bearing and there was no actual intention to repay. What would the FMV of such a note be, and why wasn't that FMV used for gift tax purposes?

I'd say the FMV was significantly less than face value since a hypothetical purchaser would have to go through the trouble of seizing property and selling it for more than the note's purchase price to see a return. That lower FMV wasn't used or suggested in the case because the relevant event for gift tax purposes is the "[c]essation of donor's dominion and control" (Treas. Reg. § 25.2511-2), and cessation of dominion and control over borrowed cash doesn't happen until the obligation to repay it (i.e., the note) is cancelled. It's the same for Haygood as it was for Story.

In any cash, maybe your charity issues financial statements. Can’t wait to see how they handled the debt forgiveness on its Statement of Cash Flows….

And I can't wait for a real response to my observation in #57 and #82 that accounting entries can only partially represent reality, they can't control it.
 

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Taking Haygood as an example, the note was non-interest-bearing and there was no actual intention to repay. Since we're doing some looking back to previous posts, from #18 is this: If forgiveness was always intended, or maybe even contractually agreed upon, IRS would argue the note was a nullity and the contribution was made when the cash "loan" was made.. RR 77-299 confirms that. So if these are the facts in the case you cite (I have not read it), either the result is wrong or there are other facts.

What would the FMV of such a note be, and why wasn't that FMV used for gift tax purposes?
. Start with the cites in #21.

And there's still RR 58-262, cited in #33.

Upon reflection, I am changing my mind. No, not on the technical issue, on which I strongly and steadfastly disagree with Chay, but on my short-lived intention to go back and again refer to prior posts. It's a waste. This discussion is getting silly, and I don't have the patience that Chay and Jeff-Ohio have, so I'll let them continue.

But I'd really like to see some more input (or some input) on both of these threads (totally unrelated to this one, I'm just making another pitch for some help.
viewtopic.php?f=8&t=16256
viewtopic.php?f=8&t=16047
 

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Your objection completely misunderstands the definition of lend.

No it doesn’t and neither does Nilodop’s. 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.

Further, I wonder why this law firm, when it comes to the preparation of Form 709, describes the best reporting practice as they do on Page 24 and 25??? Why isn’t the best practice just to say “Cash” in Column B???

http://theblumfirm.com/wp-content/uploa ... utline.pdf

No. My theory would say the cancellation is the equivalent of a gift of cash.

Oh, so now you are changing your tune from “a gift of cash” to “the equivalent of a gift of cash.” Your Equivalency Theory doesn’t hold up in a world that involves Sec 170(f). The charitable substantiation rules would toss that idea aside. The gift of ANY property, with value, could be described the way you just described it. And if that actually was a valid theory, then I must have had it right when I donated my clothes and took its FMV as a cash contribution deduction. Further, no one is denying that we can attach a dollar amount to debt forgiveness. But that doesn’t mean the forgiveness is a cash transaction. No way, no how.

And why do you keep citing irrelevant cases? I’m familiar with those cases. In Haygood, for example, what did the IRS argue??? It argued that the entire gift was in Year1. Same thing as in Story. Once it’s decided that the entire gift didn’t happen in Year1, that’s all we need to know. And any discussion of what was gifted in years after Year1 is peripheral and not the focal point. Further, the IRS non-acquiesced to Haygood and Kelley, not that it matters, given the point of contention, which is not the cash vs. non-cash issue.

The word I used above is “claim,” because that’s was a Receivable is. It is an asset in and of itself with an imbedded property right known as the “right to collect a sum certain.” It is a claim to the debtor’s assets. It is not cash.

So, if we want to talk about wording, then look at a Supreme Court case involving bonds, like Jacobsen. See how many times the word “claim” is used in that case, like in this sentence:

While each seller thus knew that he was receiving from the maker of the bonds less than their face amount, there is no finding that any seller intended to transfer or release something for nothing or to make a gift of any part of his claim, as distinguished from making a sale and assignment of his whole claim for the highest available price.

So, if we want to have dueling cases, I’ll take the one from the Supreme Court…

Of course, you will come back and tell us how a Receivable by way of bond ownership, is different than a Note Receivable, is different than a Loan Receivable is different than any other Receivable…

and why wasn't that FMV used for gift tax purposes?

Another one of Chay’s forays based on misunderstanding. Whatever the face amount of the note is, it has to be accounted for. Pure and simple. That is the Receivable on the donor’s books. There is no gift, completed or otherwise, upon making a loan. The gift comes when the loan is forgiven – that is the transfer for transfer tax purposes. (Seems the law firm I previously referenced, completely agrees with me). For gift tax purposes, the gift “amount” is the face value of the note (assuming $0 accrued interest). If you have a non-business bad debt, your deduction isn’t $0 just because that’s the fair market value of note. When you have a charitable contribution of a note, your deduction is the fair market value of the note. In each of these instances, a different purpose is accompanied by a different tax rule. In the end, the entire face of the note (i.e. our basis) gets accounted for. The commonality among all of these situations is the event that actually causes the applicable accounting, and related tax rule, to kick in. And that is the forgiveness of the note, which is a transaction for tax purposes and a transaction that does not involve Cash.

In any case, since you brought up the gift tax, maybe we should look at Estate of Lang (on appeal), wherein statute of limitations ran out on collection of the debt:

The running of the statute of limitations, however, accomplishes much more than the taxpayer suggests. It serves to transfer control of a debt to the debtor at the end of the statutory period. Thereafter, it is the debtor rather than the creditor who decides whether and under what terms loaned funds will be repaid.3

Interesting…”transfer control of a debt.” A concept that is easy enough for most of us to absorb, especially in the “transfer” tax area…

And I can't wait for a real response to my observation in #57 and #82 that accounting entries can only partially represent reality, they can't control it.


And I can’t wait to get a response to my question about the charity’s Statement of Cash Flows…

But in response to your comment, the “proper” journal entries will always reflect reality. So here we have competing journal entries. In Chay’s corner, is a bunch of deemed cash transactions, when, in fact, no cash changed hands with respect to the transaction we must account for. In the other corner, we might have what is summarized, on the debtor’s end, as a debit to the Liability and a credit to some type of income (maybe taxable, maybe tax-free). That summarization seems spot on with reality, given that no cash changed hands. Someone else, though, might point out – like the judge did in Lang - that the single summarized entry is really two entries: Debit Note Receivable, credit some type of income. And then debit Note Payable and Credit Note Receivable, assuming the debtor wants his obligation to go away.
 

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I keep clicking on this discussion to see if you guys have peacefully wrapped it up. It seems like all your points have been made, each post is a reference to prior posts, and you're both at a point where you won't bend out of principle. Is an auditor going to care this much? I doubt it. They'll either agree with your copious amount of references, or they won't. Just like this thread.

Have your client get an appraisal of the note in case, claim what you think should be claimed (cash/face, noncash/FMV), and carryforward anything over 60%/50%.

Also, I guess you guys had everything wrapped up way before 10/15 with the amount of posting in this gladiator matchup :lol:

Speaking of charities... now it's time to finish all these 990's!
 

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Is an auditor going to care this much? I doubt it.

Have your client get an appraisal of the note in case

Now you’re talking out of both sides of your mouth, just like Chay is. If an auditor wouldn’t care, why would you get an appraisal?

I’m not only hard pressed to understand your logic, I’m hard pressed to agree with the premise behind it: That an auditor might not care. They really seem to care a lot about the guy who wrote a check to his church for $300, but failed to get a contemporaneous acknowledgment letter. Case after case proves that out. If something is easy pickings for the IRS, I doubt they’ll take a pass on it.
 

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I didn't say they wouldn't care. I distinctly remember saying they wouldn't care "this much" - it's in the quote you pulled, too.

Is it deductible? Yes. In what manner is it deductible - cash/face or noncash/FMV? Seems like you both made valid arguments and your (initial) outcome depends on the auditor (and their superior).

Getting an appraisal is a safety net. If the return is prepared with the contribution as cash, and auditor insists it is noncash, you have one. If you say cash and they agree, great, better to pay for an unnecessary appraisal than to have the whole deduction tossed out.

It's not "talking out of both sides of your mouth," it's just CYA.

And it doesn't seem like this issue would be easy pickings, since both camps came up with so much to defend their points.
 

#90
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jerem200 wrote:It seems like all your points have been made, each post is a reference to prior posts, and you're both at a point where you won't bend out of principle.

I'm inserting frequent references to prior posts to try and emphasize the fact that Jeff is starting to argue in circles, restating points that have been made without properly addressing my responses to those points. I think that will help establish my line of reasoning as the stronger one, but of course opinions will differ on that matter. That being said, there are still some new points emerging and I figure we may as well get them sorted out.

Also, I'm not the type of person to not bend out of principle. When I'm wrong, I'm wrong. In this case, after carefully considering everything that Nilodop and Jeff have laid out, I don't think it amounts to much and I'm not convinced.

It's not "talking out of both sides of your mouth," it's just CYA.

I agree with you 100% here. Even if you're sure you're right, that doesn't mean a judge would agree, especially regarding a previously un-litigated issue. From a professional standpoint it's better to consider all possibilities and act accordingly, within reason. There's a cost benefit analysis to be done, and over a certain dollar threshold it would make sense to suggest getting an appraisal.

And it doesn't seem like this issue would be easy pickings, since both camps came up with so much to defend their points.

This could be one of the reasons we haven't found any litigation specifically on this point. Claiming the amount of the loan balance as the value of the deduction seems like the obvious move, so I'm sure there have been at least a few taxpayers that have done it. If it doesn't look like the IRS can challenge the authenticity of the loan, the ability of the charity to eventually repay, the charitable intent of the gift, or the substantiation requirements aside from those particular to a noncash donation, I can see the noncash argument as not worth pursuing from their perspective. If the noncash argument prevails, the taxpayer could still get the deduction by invoking section 170(f)(11)(a)(ii)(II), and the amount of the deduction might actually go up depending on the movement in interest rates.
 

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Surely, Chay, if interest rates go down and the value of the note therefore goes up and all this happens before the donation, you'd claim the higher property deduction. Or would you?
 

#92
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I'd leave it up to the client. I'm flexible when it comes to uncertain areas of tax law, and I'll go with positions I don't personally agree with or which I think are less likely to succeed than others as long as there's a reasonable basis for the position. Judging from the last part of Jeff's #64, it sounds like he's the same way.
 

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I can see the noncash argument as not worth pursuing from their perspective.


And I can see it as a slam dunk from their perspective. It’s like you’re in another world here. There are cases where people have formed their owned charities, transferred money to it (as documented through banking records), but then say to themselves, “Why bother sending an acknowledgement letter to myself?”

Guess what the IRS has to say in such cases? “Sorry, no deduction.” And guess what the judges have to say? “The IRS is right.”

In the Villareale case, the contribution amount at issue was less than $3k if I recall. Like I said, the IRS likes to create case law to shine a light on certain areas of the tax law, as a stark warning for others who might try the same thing. And this area of the law is one of them. Yet, here we have Chay and Jerem saying it isn’t so…saying that it’s probably not worth pursuing from the IRS’ standpoint. You have it completely upside down. It’s more like, why wouldn’t they pursue it? It is so easy to make an argument that debt forgiveness isn’t a cash transaction.
 

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Seems like you both made valid arguments and your (initial) outcome depends on the auditor (and their superior).


While that is true, it is no consolation if the IRS holds fast to a non-cash position. We need to be thinking beyond the low level stage. I think it’s not only prudent, but mandatory, that an appraisal be obtained. Further, the appraisal needs to be a qualified one as put together by a qualified appraiser. And there is a window of time in which the appraisal must take place. History tells us that many a valid charitable deduction has been disallowed because of the substantiation rules, which again, is easy pickings for the IRS. That’s what I mean by easy pickings. The IRS doesn’t have to bring in experts to challenge values. Their case exclusively relies on the taxpayer’s failure to meet the substantiation rules. The IRS can’t audit everybody, so they take certain cases to court to send a message. That is the way they operate. They make an example out of someone. I am not comfortable letting that someone be a client of mine when the IRS has a pretty strong case, as they do here.

It's not "talking out of both sides of your mouth," it's just CYA.

If this is a cash contribution, there is no ass to be covered. Getting a qualified appraisal is inconsistent with this being a cash donation. And I’m also curious: If you do go through the trouble of obtaining a qualified appraisal, how will you report the deduction on the 1040 – will you still report it on Schedule A directly or on Form 8283 first? If the latter, will you have the appraiser sign the F8283 and also have the donee organization sign the same Form?

If this really is a cash donation, and the rule is we get to deduct the fair market value of the note, this means FMV could be determined by means other than a qualified appraisal. So I’m not sure why we’d go through the trouble and expense of getting a qualified appraisal when one is clearly not required for cash donations.

And it doesn't seem like this issue would be easy pickings, since both camps came up with so much to defend their points.


I don’t find Chay’s Cash Equivalency theory to be all that persuasive. Any property with value could be translated into a cash dollar amount. If a taxpayer went to court with Chay’s theory, and without a qualified appraisal, the IRS would limit its attack to the substantiation rules. They could care less if this really was a valid deduction with a true FMV equal to what was deducted. They would get us on a technicality. I take no comfort in any case that pre-dates the strict substantiation rules. While we might point to some seemingly favorable language in those cases that support our position, as Chay has rightfully done, I tend to think the IRS could swat that down pretty easily. Primarily, they’d say that the issue at hand wasn’t even deliberated in those old cases, meaning any discussion of what was or wasn’t “given” in years subsequent to Year1 is just off-point and peripheral commentary. Then they’d just as easily point to other cases that are in clear opposition to the idea that cash is given when a note is forgiven. Secondarily, and as a backup plan, the IRS would distinguish facts.

And you can bet the IRS attorneys would pound the table about how there was so much fraud in this area, that strict substantiation rules were enacted by Congress, etc., etc. And I’m pretty confident a judge would agree with them.

This could be one of the reasons we haven't found any litigation specifically on this point.


I wouldn’t agree with that statement. You can bet that any sophisticated taxpayer that made a large loan to a charity dotted his I’s and crossed his T’s, in the fashion that I’ve been describing. The would not result in a case “on the books” that we could examine. Also bear in mind that this situation, overall, isn’t all that common. And don’t forget about all the taxpayers that might concede the issue on a lower level. So, to suggest that we don’t have a recent case on the matter for the reason you cite is pure conjecture and doesn’t consider all the other reasons that I just mentioned.

taxpayer could still get the deduction by invoking section 170(f)(11)(a)(ii)(II)

Highly doubtful.

I think that will help establish my line of reasoning as the stronger one


It will help to establish that Jeff-Ohio finds your argument unpersuasive and isn’t going to waste his time re-reading your prior posts. And just let me know when you feel like responding to all the points I’ve made. And Jeff-Ohio isn’t arguing in circles. A big part of your argument is based misplaced peripheral language from old cases. So, what does Jeff-Ohio do? Since Chay won’t listen, Jeff-Ohio recently cites a Supreme Court case that is in direct conflict to your peripheral-language cases. You can call it arguing in circles if you’d like. I call it pointing to a case (of higher authority than all of yours) that supports everything I’ve been saying all along and disavows your theory. If you want more cases, let me know.

Or would you?


Chay says he’d leave it up the client. But Nilodop’s point is that this example pokes another hole in Chay’s theory. How could someone that lends $100k to charity end up with a cash contribution deduction of something more than $100k? In any case, this flaw in Chay’s theory has already been mentioned. What Jeff-Ohio was explaining at the end of #64 is what he’d do if the client didn’t do things right and was backed into corner. In that case, the only alternative to conceding outright is to make Chay’s argument. That’s not on plane with Nilodop’s FMV > Basis hypothetical, wherein Nilodop is addressing as aspect of your theory, not how would you handle things if you didn’t get an appraisal. He wants to know how an appreciated position squares with your theory.
 

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Jeff-Ohio wrote:And just let me know when you feel like responding to all the points I’ve made.

Probably tomorrow, maybe the next day. Since Jerem200 jumped in with his observations I figured I'd give it a rest for now so that some other discussion could happen. In the meantime, let me know if there's anything else I haven't responded to, besides #86 and now #93/94.
 

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In the meantime, let me know if there's anything else I haven't responded to, besides #86 and now #94.

Sure, no problem. I’ll just go through all the posts and see what you haven’t responded to.

And speaking of old cases. Here’s one (Kellogg) that involves cancellation of a debt, with the shareholder holding a Payable and the Corp holding a Receivable. This is does not seem to be peripheral commentary, given that it speaks directly to the cash vs. non-cash issue in an area I have previously touched on – corporate distribution of property.

The claim against taxpayer for a future noninterest-bearing debt was property, not money, in the hands of the corporation. It certainly would not have been regarded as money if sold to a third party or distributed in liquidation to other stockholders. If the taxpayer, instead of having it cancelled in liquidation, had procured another to assume the obligation, in determining his charge the party assuming it would have calculated the amount of money, less than the principal, which at some rate of cumulating interest would produce the principal sum at the taxpayer's death. The cancellation of such a chose in action is, in effect, a distribution to taxpayer of "property" in the hands of the corporation. We are unable to see how it can be regarded as a liquidating dividend of "money" to the taxpayer.
 

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Chay  
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Jeff-Ohio wrote:Sure, no problem. I’ll just go through all the posts and see what you haven’t responded to.

If you do, I don't think you'll find anything aside from what I've listed.

Here’s one (Kellogg) that involves cancellation of a debt

I can't seem to locate this case online. Could you provide a citation or link?
 

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I don't think you'll find anything aside from what I've listed.

I was just kidding.

Com. v. Florence Scripps Kellogg, (1941, CA9) 27 AFTR 57, 119 F2d 115, 41-1 USTC ¶9419
 

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Jeff-Ohio wrote:
Your objection completely misunderstands the definition of lend.

No it doesn’t and neither does Nilodop’s. All I retain is a “claim” to the cash, not the cash itself (despite your erroneous dominion and control argument).

In #90, I said you were arguing in circles. Half of that is that you keep restating points, the other half is that you don't properly address my responses. The above is an example of you doing both at the same time.

Your objection, found in #83, was you don’t "lend" real estate. If you "lend" anything, it’s one small right (i.e. occupancy) and on a temporary basis. I told you in #84 that you weren't using the word "lend" correctly. Lending means giving the right to use. It doesn't mean lending the right to use. In #86, quoted above, you countered by restating your central claim about the nature of a lending arrangement. Not only is that response a complete non-sequitor to the prior discussion about lending real estate (the "don't properly address" piece), it doesn't support any of the arguments you're making, but merely restates those arguments (the "restating" piece).

Further, I wonder why this law firm, when it comes to the preparation of Form 709, describes the best reporting practice as they do on Page 24 and 25??? Why isn’t the best practice just to say “Cash” in Column B???

You could ask the same question about the example on page 26 immediately after. Although both examples could be reported that way, there are additional details that the author is recommending be included in the return. Why? Because, as she states on pages 16-17, "[a] transfer is adequately disclosed on a gift tax return only if it is reported in a manner adequate to apprise the IRS of the nature of the gift and the basis for the value so reported." Unpaid and forgiven interest was never actually in the possession of the taxpayer and so the "nature of the gift" differs fundamentally from that of other cash. Likewise, page 26 describes yet another "variety" of cash.

And if we're pulling in other professionals and their opinions to the discussion, then the following deserve consideration as well:

    A Board or staff member can choose to forgive a debt and take a charitable deduction for the amount forgiven if there is valid evidence of an enforceable loan.
    Lawyers Alliance for New York: Board Talking Points: Loan Repayment Challenges

    Some years ago, we were involved in an IRS examination where the deductibility of a charitable contribution was brought in to question. This contribution was not your standard charitable donation. In this case, the contribution resulted from a taxpayer forgiving a loan to a charitable organization. [...] The taxpayer had a timely signed and dated acknowledgement from the charitable organization for all contributions made during the year under examination, including the amount of the loan forgiveness.
    Henry+Horne "Charitable contribution through loan forgiveness" blog post

    You don't get a deduction because you haven't given anything away (it is a loan, after all - not a gift). Of course, if you subsequently forgive the loan (or any portion of it), you get a deduction for the amount forgiven. Nelson Story III, 38 T.C. 936 (1962).
    Thomas J. Ray, Jr., JD, "Interest-free loan to charity" blog post

No. My theory would say the cancellation is the equivalent of a gift of cash.

Oh, so now you are changing your tune from “a gift of cash” to “the equivalent of a gift of cash.” Your Equivalency Theory doesn’t hold up in a world that involves Sec 170(f). The charitable substantiation rules would toss that idea aside. The gift of ANY property, with value, could be described the way you just described it. And if that actually was a valid theory, then I must have had it right when I donated my clothes and took its FMV as a cash contribution deduction. Further, no one is denying that we can attach a dollar amount to debt forgiveness. But that doesn’t mean the forgiveness is a cash transaction. No way, no how.

"Equivalent", in the way I used it, means "corresponding or virtually identical especially in effect or function." Your response misconstrues my meaning to be "equal in force, amount, or value" and is essentially a straw-man attack on my argument. That's kind of funny, considering you were responding to the part of #84 where I suggested you take the time to understand what I'm actually saying if you plan on continuing to argue against it.

And why do you keep citing irrelevant cases?

The question we are trying to answer is "is cancellation of a charity's debt treated as a transfer of non-cash property for federal tax purposes." Non-cash property, such as a bond or promissory note, has an FMV that is lower than its face amount if there is doubt as to collectibility or below-market interest rates. The cases I cited involve cancellation of indebtedness where the cancellation did not have an FMV lower than the face amount of the debt instrument in spite of the presence of these factors. This contradiction, while not conclusive, is notable and has probative value. Thus, it isn't irrelevant.

The word I used above is “claim,” because that’s was a Receivable is. It is an asset in and of itself with an imbedded property right known as the “right to collect a sum certain.” It is a claim to the debtor’s assets. It is not cash.

The above is yet another example of you "arguing in circles." You keep trying to prove that a note receivable is not treated as cash, because apparently you think that's what I'm arguing. But it isn't. That should have been settled back in post #80 after the following exchange...
Jeff-Ohio wrote:Remember, under your theory, the Note IS the Cash.


No it isn't. See for example paragraphs 3-4 of post #38 and paragraph 2 of post #51.

...but it's not settled. I wonder why? In #94, you say Jeff-Ohio finds your argument unpersuasive and isn’t going to waste his time re-reading your prior posts. Based on your continued failure to comprehend what I'm actually saying, I'd go one step further and say you aren't even reading my current posts. And the reason for your refusal to read my posts, apparently, is that you don't find them persuasive and don't want to waste your time. But consider this: you're wasting even more of your time, and everyone else's, when you write counter-arguments to points that no one ever made.

For gift tax purposes, the gift “amount” is the face value of the note (assuming $0 accrued interest).

Wrong. See Treas. Reg. § 25.2512-4, which provides guidelines for FMV valuations of notes receivable. My "foray" isn't based on a misunderstanding any more than it is irrelevant. It continues to stand as yet another point that you have failed to counter.

Interesting…”transfer control of a debt.” A concept that is easy enough for most of us to absorb, especially in the “transfer” tax area…

You've got a false dilemma fallacy here. Your implication is that we are discussing a single type of transaction, the substance of which must be construed as either a creditor transferring debt on the one hand or a creditor releasing control over cash on the other. In fact, either analysis could apply depending on the circumstances. Your best argument against this observation was in #79 when you suggested that either way you look at it, I'm not actually giving the charity cash. But that argument rests on the presumption that constructive transfers don't apply to section 170. I challenged you to show why they don't apply to section 170 multiple times starting with #61. Instead of answering the challenge, you've continued to circle back to other points such as this one.

And I can't wait for a real response to my observation in #57 and #82 that accounting entries can only partially represent reality, they can't control it.


And I can’t wait to get a response to my question about the charity’s Statement of Cash Flows…

That was my response. Accounting entries won't mean anything until you show that they are controlling for how a transaction should be treated for federal tax purposes.

Someone else, though, might point out – like the judge did in Lang - that the single summarized entry is really two entries: Debit Note Receivable, credit some type of income. And then debit Note Payable and Credit Note Receivable, assuming the debtor wants his obligation to go away.

And why doesn't the "proper" accounting entry that "reflects reality" for debt forgiveness involve debiting cash, crediting note receivable, debiting some type of expense and crediting cash? The real gift here is not the note but the act of considering the note to be satisfied. Debt satisfaction is usually accompanied by a debit to cash.

I can see the noncash argument as not worth pursuing from their perspective.


And I can see it as a slam dunk from their perspective. It’s like you’re in another world here.

I'm in a world where section 170(f)(8) doesn't have any exceptions but section 170(f)(11) has an exception for reasonable cause. The "slam dunk" cases like Villareale involve section 170(f)(8), but the noncash argument involves section 170(f)(11). Given that the argument turns on an abstract point of law with sparse and contradictory precedent, and that professionals apparently favor the cash interpretation, I think a showing of reasonable cause would be pretty easy.

Getting a qualified appraisal is inconsistent with this being a cash donation. And I’m also curious: If you do go through the trouble of obtaining a qualified appraisal, how will you report the deduction on the 1040 – will you still report it on Schedule A directly or on Form 8283 first? If the latter, will you have the appraiser sign the F8283 and also have the donee organization sign the same Form?

There's nothing inconsistent with taking a position on a return and also taking protective measures in case the IRS challenges the position. In this case, the "property" would be listed on Form 8283 as "forgiveness of $_____ in principal owed on note receivable." The entire form would be completed as normal, except the "amount claimed as a deduction" would be an amount equal to the principal forgiven. The same amount would be included on Schedule A, line 11, and a Form 8275 would be attached to the return explaining the position.

If this really is a cash donation, and the rule is we get to deduct the fair market value of the note, this means FMV could be determined by means other than a qualified appraisal. So I’m not sure why we’d go through the trouble and expense of getting a qualified appraisal when one is clearly not required for cash donations.

That's not the rule. The rule is that we get to deduct the amount of cash over which we cede all dominion and control to the charitable organization by way of a cancellation of part or all of the note. If you're still not sure why getting an appraisal might be a good idea, just go back and read every post where you warn me and others about the possibility of the IRS taking a noncash position.

Since Chay won’t listen, Jeff-Ohio recently cites a Supreme Court case that is in direct conflict to your peripheral-language cases.

No. What really happened is that since Jeff-Ohio won't listen, he recently cited a Supreme Court in order to prove that a note receivable is not treated as cash. Since that point was never at issue, and since the fact that it was never at issue had already been pointed out to him, he ended up arguing in circles.

How could someone that lends $100k to charity end up with a cash contribution deduction of something more than $100k?

You first accused my theory of resulting in this outcome in #58, and I showed you why that wasn't true in #61. From #62 through #66, you posted a series of cryptic statements supporting your accusation. In #67, I said I don't believe this follows from anything I've said, but please tell us why you think this might be the case. You ignored that comment, and now your accusation has resurfaced in #94. Call that whatever you want; I call it "arguing in circles."

He wants to know how an appreciated position squares with your theory.

If my theory is to be applied to the transaction, the deduction would be for the basis and not for the FMV. Still, there may be a way to line up the facts with Rev. Rul. 58-262 and take the donation as noncash, even under my theory. And even if it looks unavoidably like cash to me, I'd still sign a return filed under your theory because it seems to have a reasonable basis.

The cancellation of such a chose in action is, in effect, a distribution to taxpayer of "property" in the hands of the corporation. We are unable to see how it can be regarded as a liquidating dividend of "money" to the taxpayer.

Finally we're back on track. The Kellogg case speaks directly to the question "is cancellation of a charity's debt treated as a transfer of non-cash property for federal tax purposes." I hope you'll continue to focus the discussion on that question and not keep going in circles.

My own research shows that when a corporation cancels the debt of a shareholder, the transaction is usually treated as a non-cash distribution of the loan. See Rev. Rul. 2004-79 and section IV.C. of this article. The Kellogg case is consistent with this finding as well.

On the other hand, there are many examples of cancelled debt being treated as a cash transfer. Kniffen v. Commissioner, 39 T.C. 553 (1962) cites two cases where that interpretation was applied; PLR 201016048 is another example.

Clearly, either analysis is possible depending on the circumstances. The only example anyone has posted to this thread that involves the circumstance of a creditor canceling the debt of a charity and claiming a deduction for it is Story. In that case, the donation was analyzed to be for "the property advanced." While you have succeeded in showing that the matter is not fully settled, you don't have the preponderance of evidence on your side. Also, your attempts to defeat my reasoning have completely missed the mark. So, at this point, the cash argument looks better than the non-cash argument.
 

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Half of that is that you keep restating points

That’s because you refuse to listen.

it doesn't support any of the arguments you're making

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.
Unpaid and forgiven interest was never actually in the possession of the taxpayer and so the "nature of the gift" differs fundamentally from that of other cash.

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

And if we're pulling in other professionals and their opinions to the discussion, then the following deserve consideration as well:

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.

Your response misconstrues my meaning to be "equal in force, amount, or value" and is essentially a straw-man attack on my argument.

How is it a straw man argument? My donation of clothing worth $200 is “equal in force, amount AND value” of $200 in cash. Your argument is ridiculous. The charitable substantiation rules break things down into cash and non-cash. If the rules were as you say they are, then any donation of property with any value would constitute a cash donation. The rules speak to “What was donated – money or property other than money?”

It really is that simple. 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.

You keep trying to prove that a note receivable is not treated as cash, because apparently you think that's what I'm arguing. But it isn't. That should have been settled back in post #80 after the following exchange...

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. Either way, it’s a flawed argument. No one is denying that the cash is freed when the claim to it is extinguished. But, as previously stated, that is just a fallout of the transaction, of the elimination of the liability, it is not what was “given” in the forgiveness transaction. The charity already had the cash.

But consider this: you're wasting even more of your time, and everyone else's, when you write counter-arguments to points that no one ever made.

Every counter-argument I’ve made in this thread is directed at one or more of your arguments, implicit or otherwise. And when a Receivable goes away, and you conclude “it’s a cash donation,” you are effectively arguing – whether or not you know it – that the Receivable is the Cash. 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.

Wrong. See Treas. Reg. § 25.2512-4, which provides guidelines for FMV valuations of notes receivable.

When it comes big gifts to family members, I have a feeling the IRS will find an end around to the donor who “lends” $1m to his kid, and then writes it off, and then argues the gift was $0. Of course, these situations are factual, but this guy has a real big risk that if the IRS goes along with a $0 gift in the current year, they will find a way to tag the son with COD income or to go back and treat the loan as a previously unreported gift. That’s what I was getting at. I don’t really care so much about valuation anyway for gift tax purposes. 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.

Your implication is that we are discussing a single type of transaction, the substance of which must be construed as either a creditor transferring debt on the one hand or a creditor releasing control over cash on the other.


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). You just want to chalk up the “one” as being the sole current year transaction. The fact is, the “one” isn’t even a transaction. It is the fallout of the “other” transaction and that “other” transaction IS the current year transaction. The problem with your argument is you just wish to look at the end result, or the fallout.

Accounting entries won't mean anything until you show that they are controlling for how a transaction should be treated for federal tax purposes.


I’ve already shown how they’re controlling. No cash was transferred to the charity in the current year. We account for things accordingly.
Given that the argument turns on an abstract point of law with sparse and contradictory precedent,


There is nothing abstract about it. There is no contradictory precedent. You would have zero reasonable cause when you try to argue that debt forgiveness is a current year cash contribution.

There's nothing inconsistent with taking a position on a return and also taking protective measures in case the IRS challenges the position. In this case, the "property" would be listed on Form 8283 as "forgiveness of $_____ in principal owed on note receivable." The entire form would be completed as normal, except the "amount claimed as a deduction" would be an amount equal to the principal forgiven.

The same amount would be included on Schedule A, line 11, and a Form 8275 would be attached to the return explaining the position.

That is even more inconsistent than your theory. Good grief. Fill out an 8283, then report it as a cash contribution on Schedule A and then complete a Form 8275. Brilliant, just brilliant.
The rule is that we get to deduct the amount of cash over which we cede all dominion and control to the charitable organization by way of a cancellation of part or all of the note.

Maybe under your theory. The law says no such thing.

he recently cited a Supreme Court in order to prove that a note receivable is not treated as cash. Since that point was never at issue,

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.

the only example anyone has posted to this thread that involves the circumstance of a creditor canceling the debt of a charity and claiming a deduction for it is Story.

Here we go. Back to Story. Peripheral comments. Moreover, inconsistent comments by the judge, as I have pointed out with the language preceding Footnote #3. Yet, 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…

On the other hand, there are many examples of cancelled debt being treated as a cash transfer.

Those sources say nothing of the sort. Not sure what led you to believe that. In the PLR, for example, if you’re seizing on the “amount of money” language, which you probably are, that’s not saying “money.” When I give my $200 worth of old clothes to charity, I could phrase it up like this under your theory, “My deduction is equal to an amount of money that represents the FMV of the clothing.” That’s not anything close to saying that what I actually and physically gave in the current year is money. It is simply prescribing the valuation metric in dollars. Further, if you every look at a debt to equity conversion on GAAP financials, you see it listed under non-cash activities on the Cash Flow Statement.

I’m sorry Chay, I will take a victory lap at this point. All of your points have been dispatched with. Your theory is entirely, 100% bogus, with nothing to support it. It is an esoteric, highly theoretical, inconsistent deep dive into the waters when all we need to do is stay on the surface. You want to recognize the Note in a haphazard kind of way, by using the date of it’s forgiveness as driving the current year transaction, and then argue that it is the “fallout” that gets reported on the 1040, not the transaction itself – the debt forgiveness - which involves the Note and doesn’t involve cash. That is a fundamental flaw. Any part of your theory that flows from that fundamental flaw, therefore, flawed as well. Your theory is like playing Whack-a-Mole. Every time it gets shut down, you pop back up and say it isn’t so…
Last edited by Jeff-Ohio on 21-Oct-2019 12:19pm, edited 1 time in total.
 

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