Accounting $385/685$

Spring $2024$

Research Project I

This project is due on March $28,2024$ in class in hardcopy, not email. Follow the format and other directions. You need to get used to the idea of following guidelines precisely as failure to do so may cost your client their entire tax case. Failure to follow all of the instructions for this project will cause a significant reduction in your grade. Your CPA firm $($you are the managing partner, of course$)$ has been retained by Wilma to assist her with the income tax issue described below. Wilma inherited a house from her uncle Bob, who passed away recently and she is the executrix of his estate $($she is to file all legal papers, such as tax returns, pay debts, and distribute assets according to his will$).$ Bob had taken out a reverse mortgage on his home a number of years ago. It is the only debt that Bob owed. A reverse mortgage means that he was paid money by the lender each month until his death and that this amount, plus accrued interest, accumulated to increase the balance of the mortgage. On Bob$$s death, the balance became due in full, immediately, though the bank will wait up to one year to foreclose on the property, if not paid. The mortgage cannot be enforced against any assets of Bob$$s estate, except the house, and none of his beneficiaries can be held liable otherwise for the debt; it is nonrecourse debt.

At the time of Bob$$s death, the balance of the mortgage was $$210,000,$ and the fmv of his home was $$90,000.$ Bob$$s other assets totaled to $$265,000.$ Bob used the reverse$-$mortgage money he received strictly for living expenses and did not invest any of it in the house, itself. Bob$$s basis in the house at the time of his death was $$120,000.$

Wilma consulted with $$cousin Billy$$ who prepares tax returns each March and April in the local QuickieMart parking lot from the back of his van. Based on Billy$$s advice, she removed all of the personal effects from Bob$$s house and then abandoned it$.$ That is$,$ she made no mortgage payments, she did not try to sell it$,$ she paid no taxes on it; she did nothing with it after removing Bob$$s things. She abandoned the property entirely from a legal point of view.

It is now one year later, and the bank has foreclosed on the property and sold it in a public auction for $$75,000,$ its then$-$current fmv$.$ The mortgage balance at the time of the sale, because of additional accrued interest, was $$230,000.$

On behalf of the estate and the heirs of the estate, she has consulted your CPA firm for advice on the income taxation of this transaction. Your firm$$s position is that the estate owes no tax on this transaction, but do discuss the arguments against as well as for this position.

Required:

Prepare a memo for your files in the format illustrated in the examples$1$ I have posted on Blackboard to support your firm$$s position for Bob$$s estate$$s tax return$2$ with regard to this house. The question is whether or not there is an amount realized from the mortgage forgiveness and an associated gain taxable to the estate.

To answer this question, you are to consider only the two U$.$S$.$ Supreme Court cases,

Crane v$.$ Commissioner, $331$ U$.$S$.1(1947)$ and Commissioner v$.$ Tufts, $461$ U$.$S$.300$

$(1983),$ and no other materials. Explain the reasons behind your answer with specific

references to the reasoning in these cases, only. Be certain to note any discrepancies

between what the Tufts court says about Crane, as opposed to what is actually stated in the Crane case, itself, and how this affects your conclusion.

Format:

This is to be an $$official$$ opinion letter that could be given to the IRS in support of your position in the event that Bob$$s estate is later audited. Be certain to include quotations from the cases, as needed, with proper citations $($first case reference, full, proper citation $($see the chapter on research in the text$)$ with later references also properly prepared $($see the use of citations by the judges in the cases, and the text$)).$

The maximum page length is five pages and the minimum is three. It is to be Single$-$sided, single$-$spaced, $12$ pitch, Times New Roman font, with $1$ inch margins on all sides.

There is an example of the format that is being referred to:

Facts: In $1922,$ all of the assets and liabilities of an existing corporation were transferred to create a

newly formed corporation. The new corporation's stock and debt were held in the same manner as

the stock and debt of the old corporation. The new company was formed to assume the debts and

manage the business of the old and was created to replace the old because of legal problems with

the old company's capital stock and the funding of its equity.

Issues: $1)$ Is there a provision in the tax law which allows a successor corporation to inherit the tax

loss carryovers of its predecessor? $2)$ Is the new corporation the same taxpayer as the old, for

purposes of utilizing the tax loss carryovers of the old corportation?

Analysis:

Conclusion: