Recent Developments

■ Bankruptcy:

When you make a mortgage payment, part of each payment is interest, and the balance is principal, reducing the amount you owe the lender, and increasing your equity in the house. The Bankruptcy Code provides that: "…a debtor may not exempt any amount of interest that was acquired by the debtor during the 1215-day period preceding the date of the filing of the petition…" A recent case held that your making regular mortgage payments, including principal payments that build equity in your home, won't be treated as your acquiring an interest in real property under Section 522(p) of the Bankruptcy Code. In re Burns, 21 Fla. L.L. Weekly Fed. B487 (U.S. Bankruptcy Court, M.D. Fla. August 8, 2008. Exercise caution extrapolating this to making payments larger than your regular monthly payments. The courts might not view that as favorably.

■ S Corporation Tax Basis:

Tax basis is important to your being able to deduct losses, and reducing gain on a sale of stock.  Your basis in your S corporation stock is increased by your share of income and reduced by your share of loss, etc. Once your tax basis in your S corporation stock is reduced to zero, additional losses will reduce your tax basis in loans to the corporation. IRC Sec. 1367(b)(2)(A). The taxpayers argued that capital contributions should be treated as income restoring tax basis in their loans. The Tax Court held that capital contributions are not income, and the contributions did not increase the taxpayers basis in his loans. The court noted that capital contributions increase a taxpayer's basis in his stock. Nathel, 131 TC No. 17 (2008).

■ Private Annuity Respected: The Tax Court held that a private annuity transaction should be respected and capital gains tax could be deferred. Katz, TC Memo 2008-269. While this case is somewhat helpful to the use of private annuity transactions, the effective date precedes the proposed Treasury Regulations effective for sales after 10/18/06  requiring the seller of property for a private annuity to recognize all gain in the year of sale, rather then when payments are received (which is why these are often structured as sales to grantor trusts).