Dear Tutor,

Please help to solve a revised memo include the recent court case to the attached memo file .

Best,

Facts In 2020, Bob Hod purchased a new residence in Las Vegas for $660,000 with two bank loans totaling $600,000. PROBLEM: On January 1, 2020, Bob Hod acquired a new principal residence in Las Vegas for $660,000 after relocating from The loans featured an initial interest-free period followed by a 3% interest rate. Both loans were secured by a mortgage on the property - $400,000 primary recourse loan and $200,000 non- Hawaii. To fund this purchase, he secured two bank loans, both featuring an initial interest-free period for the first year, followed by a 5% simple interest rate for the remaining 9 years. The loans, totaling $600,000, were recourse loan. collateralized by a mortgage on the newly acquired property-$400,000 from First Bank as the primary mortgage Mr. Hod defaulted on the loans in 2022 due to job loss. and $200,000 from his Hawaii bank as the secondary mortgage. Notably, the primary loan was a recourse loan, The Hawaii bank (secondary lender) foreclosed and bought the property for $300,000 in 2023. while the secondary loan, based on broader family connections with the Hawaii bank, was structured as a non- Mr. Hod claimed a $50,000 mortgage interest deduction for 2023 but received no 1098 forms. recourse loan. Both loans stipulated that payments should first be allocated towards interest, with any remaining The IRS disallowed the deduction and alleged civil fraud based on Mr. Hod's past tax offenses. amount applied to the principal balance. However, a significant turn of events occurred on January 1, 2022, when Issues Mr. Hod lost his marketing job due to the impact of artificial intelligence (AT). Consequently, he ceased making 1. Deductible Mortgage Interest for Foreclosed Property (IRC $ 163(2)). can Mr. Hod deduct mortgage interest payments on both loans. in the year of foreclosure (2023) despite the foreclosure sale not covering the entire principal balance? 2. Allocation of Foreclosure Sale Proceeds and Potential Debt Discharge (IRC $5 1001 & 108). How are the foreclosure sale proceeds ($300,000) allocated between the two loans, and are there any potential tax At the foreclosure sale on Jan. 1, 2023, the Hawaii Bank was the highest bidder for the house at $300,000. "No consequences for debt discharge? Internal Revenue Service (IRS) Form 1098, Mortgage Interest Statement, was issued to Mr. Hod from either bank for 3. Civil Fraud Penalty (IRC $ 6663): can the IRS sustain its civil fraud penalty assessment based on Mr. Hod's tax year 2023 for the home mortgage interest. Mr. Hod claimed a $50,000 mortgage interest deduction for 2023, past tax offenses and his pro se representation at the appeal? despite the lack of Form 1098. The IRS disallowed the entire interest deduction. The IRS agent believed that Conclusions since the $300,000 foreclosure bid "did not cover the principal balance due from petitioners to the Hawaii Bank, A preliminary analysis suggests the following: after payment of the first mortgage balance due to no interest amount paid to either Bank at the time of the 1. Mortgage Interest Deduction Disallowance: Likely correct based on foreclosure proceeds 2. Allocation of foreclosure proceeds and potential debt discharge may have tax implications. foreclosure sale. " On Jan. 1, 2024, the Hawaii Bank sold the house to an unrelated third party for $500,000. 3. The IRS might face challenges in proving civil fraud based solely on Mr. Hod's past offenses and his representation of being unsophisticated in tax matters. The IRS also alleged civil fraud by Mr. Hod A decade earlier Mr. Hod had lied to the IRS Revenue Agent List of Applicable Law conducting a civil examination of his 2014 through 2016 tax returns and to an IRS Special Agent conducting a Internal Revenue Code (IRC) 5 163(2): Deduction for Interest on Certain Home Mortgages criminal investigation into his 2014 through 2018 tax returns. As a result of that criminal investigation, Mr. Hod was RC $ 1001: Determination of Amount of Gain or Loss IRC $ 108: Exclusion of Discharge of Indebtedness Income convicted of tax perjury and was sentenced to a 30-month prison term. In January 2024 at an IRS administrative IRC Section 6663: Imposition of fraud penalty. appeal Mr. Hod represented himself pro se (without a lawyer). Mr. Hod contested the fraud determination and testified that he was clueless and unsophisticated regarding tax matters. Discussion of Law INSTRUCTIONS: Issue 1: Deductible Mortgage Interest for Foreclosed Property (IRC $ 163(2)) IRC $ 163(2) generally allows homeowners to deduct qualified mortgage interest on their tax return. However, the Mr. Hod is your client. Write a tax research memo identifying the three most important deductibility of interest in the year of foreclosure can be complex. sophisticated tax issues for your client one of which relates to a penalty. (To Case law suggests that deductible interest for the year of foreclosure is limited to the interest accrued up to the ensure you address the three most important issues you may foreclosure sale date. In Mr. Hod's case, determining the deductible interest requires: identify a maximum of five issues). Each issue must include relevant Reviewing the loan agreements to identify the interest accrual period. critical facts and precisely where in the code each issue arises. Calculating the accrued interest for both loans up to the January 1, 2023, foreclosure date. Issue 2: Allocation of Foreclosure Sale Proceeds and Potential Debt Discharge (IRC $5 1001 & 108) Use the following subheadings which are expected in a tax research memo. The $300,000 foreclosure sale proceeds need to be allocated between the two loans. The allocation method depends Use the following order: Facts, Issues, Conclusions, List of Applicable Law, Discussion of Law, on the loan agreements and state law. and Application. . The primary recourse loan ($400,000) might be fully satisfied first, leaving a potential discharge of For the revised memo you must discuss and apply the three most relevant court cases. (To indebtedness for the non-recourse loan ($200,000). ensure you address the three most important court cases you may discuss and IRC $ 108 generally excludes discharged debt from taxable income. However, exceptions may apply if the discharged debt is secured by real property (IRC $ 108(a)(1)(A)). apply a maximum of five court cases). Only one court case should focus on the relevant penalty as applied to your client's situation. Issue 3: Civil Fraud Penalty (IRC 5 6663) The IRS alleges civil fraud based on Mr. Hod's past tax offenses. However, the burden of proof for civil fraud is a "clear and convincing" standard, which is higher than the usual "more likely than not" standard. Mr. Hod's pro ge representation and claim of lack of knowledge might make it challenging for the IRS to prove the specific intent to defraud. APPLICATION Given the facts, Mr. Hod may not be able to claim the mortgage interest deduction for 2023. The foreclosure sale could result in cancellation of debt income, but Mr. Hod may qualify for an exception under IRC $108(2). The IRS may impose a civil fraud penalty if it proves fraud on Mr. Hod's part