The entire governement’s response to foreclosure fraud is a tragic disappointment and worse a disturbing error.
The fraudclosure settlements were macabre theater, the banks spitting in the face of Americans while the government sits and watches, sharing in the financial rewards.
The latest tragedy built into the OCC settlement? The tax hit….
That’s right, consumers will have to pay taxes on whatever settlement they received….
nice huh?
Oh, and one other piece of theater….the check states help is available in 200 different languages….really? 200? 200 different languages? Wow.
From New York Times:
Relief checks issued as part of a multibillion-dollar settlement over foreclosure abuses have bounced, an unfortunate twist for consumers who have already been caught up in problems over reviews of troubled mortgage loans.
Months after brokering a $9.3 billion settlement with the nation’s biggest banks, the Federal Reserve and the Office of the Comptroller of the Currency announced last week that 1.4 million checks would be sent out to struggling homeowners, many of whom have been languishing for two years without assistance.
NEW YORK TIMES
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“Relief checks?” The payment is for damages. No wonder the mortgage servicers are getting away with crimes. The term “relief checks” suggests that the IFR review payments are a form of government welfare, concealing the source of the payments (which should be from the profits of the servicers) and making it appear that this is a failed government program. It is a failed government program of a different kind: it is the failure of regulation by which the government protects the mortgage servicers from accountability for crimes and covers the crimes with a stamp of approval for a small payment, or as one commenter said yesterday, a small “payoff.”
The IRS, which has wholly failed to investigate and penalize the REMIC trusts for receiving assets after the passive-trust cutoff date (although I do not think that many of the trusts were ever funded) is being made to look foolish in this, a mass tort settlement, if it allows the “settlement” funds to be taxed without allowing the corresponding deduction for the losses which the “settlement” agreement encompasses. Therefore, the appropriate client should be advised of the risks of an audit, but expenses for the recovery of taxable income are deductible. If a person spent $300.00 in copy costs and postage to recover $300.00 in taxable income (the “settlement” payment) the net taxable income should be zero. Carrying forward this principle, attorney’s fees, filing fees, deposition expenses, travel to court at the GAO mileage rate (with some limitations) could arguably be deducted.
CAUTION: See this from a recent (2002) IRS Audit Manual
“With the exception of amounts paid to treat emotional distress, damages received after August 20, 1996, are excludable under IRC § 104(a)(2) only if received on account of physical injury or physical sickness. Therefore, a taxpayer receiving lawsuit proceeds from a non physical injury claim cannot exclude any amount for payment to compensate for an intangible emotional distress value.”
NOTE: There is a difference between an exclusion and a deduction.
I look forward to raising the issue of the cost of recovering taxable income in an appropriate case. Does the recovery get reported on a Schedule C–self-employment income–for so many who took on the time-consuming job of resisting their unlawful foreclosures with the hope of defeating the foreclosure and recovering some damages and at least their costs for their trouble? Would there then be a net operating loss to report on the Form 1040 by which the taxpayer’s income from other sources could be reduced dollar for dollar?
Rather than see the insult, I recommend that we review the possibilities. . .
P.S. Of course, if the checks were “relief checks,” which they emphatically are not, then “relief” checks would be tax-free. As to the claim that the checks might count against other public assistance benefits such as Medicaid and Food Stamps, I would argue that such an increase in “income” should only be counted as to any amount considered “net” income after deduction of the costs of recovery of the taxable income. The current real economy is so moribund and the displaced population so underemployed, that recourse to “relief” programs has become a necessity for many.