Proceeds of Property Sale

Technical topics regarding tax preparation.
#1
TrueTax  
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If a taxpayer gives a power of attorney to someone else to sell property on their behalf and the designated attorney sells the property but pockets the proceeds and does not turn them over to the owner, would this need to be reported as a capital gain and casualty loss? Since the proceeds would actually be received by the taxpayer's attorney in fact, I'm thinking it would be difficult to avoid recognizing the gain, but if someone thinks otherwise, I'd be happy to hear it!
 

#2
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It sounds to me like the agent was not acting for the principal. So I'm inclined to say there was a theft, but no sale.
Steve
 

#3
novacpa  
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If memory serves, I think a theft victim must make a good faith effort to recover the money, that includes filing a Police Report and/or any other means under his control to do so. Bar complaint, lawsuit, etc. before the loss is allowed.
Was any of this done?
 

#4
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I don't see the benefit of engaging in worthless acts. Giving up on collection efforts should not affect the loss deduction unless there is more to the story.
Steve
 

#5
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gatortaxguy wrote:I don't see the benefit of engaging in worthless acts. Giving up on collection efforts should not affect the loss deduction unless there is more to the story.


Tax law specifically says you get no deduction unless you've exhausted your legal remedies.
~Captcook
 

#6
Nilodop  
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It sounds to me like the agent was not acting for the principal. So I'm inclined to say there was a theft, but no sale.. I think you made a similar point in another thread. I'd like to learn more about this concept. I thought that an agent, even though intending to steal, was, to his principal and to the third party involved, acting for the principal, until the moment he actually stole the money. Can you direct me to some more reading on the point?

The other thread was about a property manager who stole rent money.
 

#7
novacpa  
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On March 17, 2009, the Internal Revenue Service issued Revenue Ruling 2009-9 and Revenue Procedure 2009-20, clarifying the rules for deducting losses sustained by victims of convicted financier Bernard Madoff, as well as those defrauded by similar Ponzi investment schemes. The clarifying guidance is both timely and welcome, resolving substantially all of the tax questions confronting clients seeking tax refunds for their Madoff-related losses.

In the revenue ruling, the IRS confirmed that the losses sustained by an investor in a Madoff-style scheme are ordinary theft losses, and not capital losses. The IRS further confirmed that the losses should be classified as investment-related and not personal, which means that the losses are not subject to the 10 percent adjusted gross income limitation of section 165(h). Nor are the losses subject to reduction under the itemized deduction limitations of sections 67 and 68. The losses are deductible in the year of discovery, which, in the case of Madoff losses, means they are deductible on 2008 returns. Madoff's scheme was revealed, and criminal charges filed against him, in December 2008.

The amount of the deductible Madoff loss is calculated as follows, according to the IRS:

The amount of a theft loss … is generally the initial amount invested in the arrangement, plus any additional investments, less amounts withdrawn, if any, reduced by reimbursements or other recoveries and reduced by claims as to which there is a reasonable prospect of recovery. If an amount is reported to the investor as income in years prior to the year of discovery of the theft, the investor includes the amount in gross income, and the investor reinvests the amount in the arrangement, this amount increases the deductible theft loss.

Two key points should be emphasized here. The first is that the amount of the loss must be reduced by any claim as to which "a reasonable prospect of recovery" exists. In its 2009 Revenue Procedure, which provides a safe harbor procedure for claiming a Madoff loss, the IRS requires that an investor who directly invested with Madoff reduce his or her loss by SIPC investment account or other insurance coverage. The 2009 Procedure additionally requires that the investor claim only 95 percent of the resulting loss, on an arbitrary presumption that the 5 percent not deducted for 2008 is reasonably recoverable. And if the investor is pursuing any claim against investment advisors and similar third parties, the investor may claim only 75 percent of the loss. If less than 5 percent (or 25 percent) is ultimately recovered, the amount not recovered will be deducted as a theft loss in the year it is clear that no further recovery will be collected. If more than the amount is later collected, the excess is included in income in the year or years collected.

The second key point is that the IRS includes in the 2008 total theft loss any phantom income reported by Madoff to an investor in years prior to 2008, which the investor was taxed on in those years but which the investor had not withdrawn from Madoff. As a result, an investor need not file amended returns for pre-2008 years that remain open to claim refunds for "erroneously reported" income and is not faced with the concern that refund claims for phantom income reported in closed years might be barred.

If the amount of the Madoff theft loss exceeds the investor's 2008 income, the excess will be deductible as a net operating loss that the investor may carry back up to three years and forward up to 20 years. In its 2009 Revenue Ruling, the IRS reached the beneficial conclusion that some investors may have the option of electing a four- or five-year NOL carryback for a 2008 Madoff theft loss under newly enacted carryback rules for an "eligible small business." The section 172(b)(1)(H) rules for determining whether a Madoff investor (or for that matter, any taxpayer with a 2008 NOL) can be quite complex and are beyond the scope of this report. It is a determination that we recommend any client with a 2008 NOL undertake, because more persons may qualify as an "eligible small business" than may be apparent from a quick review of the new carryback rules.

As mentioned, the 2009 Revenue Procedure provides a safe harbor for claiming Madoff (or other Ponzi scheme) losses on 2008 returns. In our opinion, the chief disadvantage of relying on the safe harbor is the 5 percent (or 25 percent) cutback in the amount of the theft loss deductible for 2008. The benefit is that the potential that the IRS will audit any theft loss claimed under the 2009 Procedure and seek to reduce the amount of the 2008 loss should be vastly reduced.
 

#8
Nilodop  
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Thank you for that. Seems to confirm, in a way, that OP had a theft loss, which would be hard to measure if he didn't first have basis from including th proceeds in gross income. Does it apply in some other way to OP?
 

#9
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Hi, novacpa,

Excellent post.

Hi, Nilodop,

In terms of theory I don't have any recommendations other than getting the correct words for a search. My understanding is that a third party has the right to rely on the power of attorney, and thus as between the third party and the TP, the sale is good unless the buyer had reason to know that the agent was breaching his duties. However, as between the TP and the agent, I also understand that the agent is not acting within his authority if he engages in an act ostensibly within his authority, but which is counter to the principal's interest. So from a return position perspective, unless the facts clearly indicated that the agent decided to steal the money after closing the sale, I would feel comfortable opining that there was no sale.
Steve
 

#10
keiser  
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This may depend on whether the agency was disclosed or undisclosed.
If the TP's name is on title, as in the expected case of real property, and the buyer relies on the power of attorney as the basis to pay and accept the transfer title, the agency is disclosed and the sale is usually valid.
The agent obtained the proceeds as TP's agent and subsequently stole the proceeds from the TP.
Sale + theft.
I am not following how this is not a sale on the TP's return?
The asset and depreciation magically disappear?
 

#11
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The agency was disclosed no later than the signature on the deed. And we agree that the third party is entitled to rely on the deed.

But a proper analysis depends on who the players are with regard to the particular question. Different players, different issues, different outcomes. There is no consistency requirement regarding the effect of the POA. The bottom line for me is that the sale and theft analysis is too simplistic.
Steve
 

#12
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There is a case for similar logic to to the treatment of Ponzi losses to be made here. Novacpa makes a good point by bringing it up. Just as in a Ponzi scheme there never was any investment just a theft of money, in this case there is not a sale from the taxpayer's point of view just a theft of the taxpayer's property. The taxpayer has a theft loss equal to his adjusted basis in the property, perhaps?
Because on T.A. ten was the most you were allowed
 

#13
dave829  
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I don’t see how the sale could be ignored. OP says that the taxpayer gave power of attorney to someone else to sell the taxpayer’s property. If the agent sells the property, then this is done pursuant to the power of attorney given. Up to the point that the taxpayer discovers that the agent had pocketed the proceeds from the sale, there was no theft loss.

But I have a different theory of the amount realized from the sale. If the taxpayer never received any proceeds, then the amount realized from the sale would be solely the discharge of liability. Reg. 1.1001-1(a) states, “The amount realized from a sale or other disposition of property is the sum of any money received plus the fair market value of any property (other than money) received...” And Reg. 1.1001-2(a) states, “… the amount realized from a sale or other disposition of property includes the amount of liabilities from which the transferor is discharged as a result of the sale or disposition.”

As a result, I believe that a sale occurred that must be reported, but the sales price is only the amount of money or FMV of property that the taxpayer received. It would not include the proceeds that were pocketed by the agent. And I believe that the taxpayer wouldn’t be entitled to any theft loss since the taxpayer has no tax basis in the proceeds that were pocketed by the agent. If the proceeds were never included in income, then the taxpayer has no tax basis in those proceeds.
 

#14
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Thanks for all of the discussion. dave829, you must not believe that the receipt of proceeds by the taxpayer's agent is the same as receipt by the taxpayer.
 

#15
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TrueTax wrote:dave829, you must not believe that the receipt of proceeds by the taxpayer's agent is the same as receipt by the taxpayer.

Not under these facts. For the taxpayer to have received the proceeds or to have constructively receive the proceeds, there must be some facts to indicate that the taxpayer would ultimately receive the proceeds or receive the benefit of the proceeds. For example, there are cases where the taxpayer was held to have constructively received proceeds of a sale that were withheld due to a lien, or a pending judgment, but ultimately the taxpayer would either receive the funds or get the benefit of them by having the creditor or judgment paid off. Here, the taxpayer never received or constructively received the sales proceeds because the agent embezzled them.
 

#16
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With research, the closest I come to gatortaxguy's theory is an old BTA case (BTA is predecessor to Tax Court), Rossi v. Commissioner, 41 B.T.A. 734 (1940). While an excerpt does not tell the whole story, I'll show one that could be argued as supporting gatortaxguy. Here it is.
We do not think, however, that Houston was the agent of the partnership at the time he received the check, cashed it, and spent the money for his own personal use.
. However, it really is necessary to carefully read the case in order to see why the facts of that case clearly are distinguishable from OP's facts, namely that the agency relationship had terminated before the theft. Here's the case. https://cite.case.law/bta/41/734/

So from a return position perspective, unless the facts clearly indicated that the agent decided to steal the money after closing the sale, I would feel comfortable opining that there was no sale.. So now the rule has become when did the agent decide to steal the principal's money, rather than when did he actually steal it? With no regard to the fact that the agency still existed and the third party believed the agent to be an agent?

But a proper analysis depends on who the players are with regard to the particular question. Different players, different issues, different outcomes.. That's a new one on me. I guess I'm a glutton for punishment, but gatortaxguy, can you please explain it?

I'm unable to fit this into the Madoff ruling.

I stand with my position, along with some others in this thread.
 

#17
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Nilodop, I applaud you for finding the Rossi case. Good work researching. But for some reason, your link only reports the Opinion section of the case, not the Facts. Try this link:

https://scholar.google.com/scholar_case?case=16639469168109645288&hl=en&as_sdt=6&as_vis=1&oi=scholarr

You state that the case supports gatortaxguy’s position that there was no sale. I disagree.

In the Rossi case, Houston (the agent) had been made the assignee of a partnership’s assets for the benefit of creditors, received a check from one of the partnership’s customers, he cashed the check and spent the money for his own personal use. The IRS argued that since Houston was the partnership’s agent, the amount of the check was included in the partnership’s income. The court sided with the taxpayer, concluding that Houston was not the agent of the partnership at the time he received the check.

In reaching the conclusion that Houston was not the partnership’s agent at the time he received the check, the facts showed that Houston was to sell the partnership’s assets, that he sold the assets and was finished with this work in 1936. The check was issued in 1937. The court said, “ It is a recognized principle of law that an agency terminates after the purpose for which it was created has been fulfilled.”

The court went on to say that in 1937 when Houston received the check, he was not an agent of the partnership, he had no right to cash it because there were no further creditors to pay, and that he should have immediately turned the check over to the partnership or its partners. The sale of the partnership’s assets had been completed in 1936.

In my opinion, this case supports my position that there was a sale but the taxpayer is not required to report the proceeds that were embezzled by the agent. Just like in Rossi, the taxpayer’s agent did what he was given power of attorney to do, which was to sell the property. Just like in Rossi, when that was done, the agency relationship terminated. Just like in Rossi, the agent had no right to cash the check for the proceeds from the sale, and therefore, the taxpayer is not taxed on the proceeds. But the taxpayer, as a result of the sale, is required to report relief of the mortgage loan (if any) because the sale did occur and relief of liability (if it existed) did occur.
 

#18
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I’d like to know how exactly the POA holder pocketed the proceeds. Did he give the closing attorney/title company his own bank account information, for example, for direct deposit/wire purposes?
 

#19
Nilodop  
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You state that the case supports gatortaxguy’s position that there was no sale.. No I don't. I say While an excerpt does not tell the whole story, I'll show one that could be argued as supporting gatortaxguy.. And then I say However, it really is necessary to carefully read the case in order to see why the facts of that case clearly are distinguishable from OP's facts, namely that the agency relationship had terminated before the theft.

And I believe the agency relationship terminates when the proceeds are turned over to the principal, not when the agent receives the proceeds. Agent holds the proceeds as agent.
 

#20
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I don't know what else to say. The agent was not acting for the principal. The existence of the POA means the third party buyer is entitled to rely on agent's apparent authority. So as between the buyer and seller, the buyer prevails. But that by no means that the sale conducted by an agent acting outside his authority is binding on the principal for any other reason.

In practice I seriously doubt I would bother to investigate whether the agent changed his mind after the sale and I seriously doubt it would be challenged on audit. The only exception would be if there were other facts indicating the agent was not acting for himself.
Steve
 

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