Forgiveness of loan to charity - cash or non cash?

Technical topics regarding tax preparation.
#81
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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.
 

#85
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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
 

#86
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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.
 

#87
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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!
 

#88
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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.
 

#91
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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.
 

#93
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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.
 

#94
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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.
 

#95
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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.
 

#97
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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
 

#99
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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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