United States Federal Tax Law Assignment Example | Topics and Well Written Essays - 2000 words

United States Federal Tax Law - Assignment Example United States Federal Tax Law On January 3, 2009, Kathy and Frank Willow got married and entered into a contract with Hive Construction Corporation to build a house for $3,000,000 to be used as their main home. On November 10, 2010, when the outstanding principal balance on the mortgage loan was $2,500,000, the FMV of the property fell to $1,750,000 and Kathy and Frank abandoned the property by permanently moving out. They had made interest payments of $130,000 in 2009 and 2010 and paid $50,000 of principal in each year of those years (2009 and 2010) to bring the mortgage balance from $2,600,000 to $2,500,000 just before the date of abandonment. The lender foreclosed on the property and, on December 5, 2010, sold the property to another buyer for $1,750,000. More than one year after the foreclosure, and after heated negotiations, the couple convinced Outside Lender to cancel the remaining debt. So, on December 26, 2011, the lender canceled the remaining debt owing. Kathy and Frank are filing a joint return for 2011. On December 26 2011, Kathy and Frank had $15,000 in a savings account, household furnishings with an FMV of $17,000, a car with an FMV of $10,000, and $18,000 in credit card debt. The household furnishings originally cost $30,000. The car had been fully paid off (so there was no related outstanding debt) and was originally purchased for $16,000. Kathy and Frank had no adjustments to the cost basis of the car. Kathy and Frank had no other assets. ... Kathy and Frank had no other assets or liabilities at that time, except for the Disputed Amount that remains in dispute. (a) What are the tax consequences to Kathy and Frank, if any, for each year? It should be noted that foreclosure occurred before Kathy and Frank cancelled their debt; therefore, they are liable to gain or loss from the foreclosure. Since they maintained personal liability for the $ 750,000 of the remaining debt, then they were liable to cancellation. Additionally, the insolvency exclusion cannot apply in the Kathy and Frank case since their indebtedness did not qualify for the principal residence (Lyon 64). However, the same could have only applied if their insolvency could have been excluded instead of the indebtedness. Additionally, it should be considered that the remaining part of the debt just before the cancellation did not qualify as principal residence indebtedness since only part of the loan could qualify as the principal indebtedness. Therefore, Kathy and Frank must have ordered for the cancellation. (b) Same as (a) except Hive Construction Corporation financed the purchase of the house for Kathy and Frank and Hive Corporation agreed to reduce the debt to 1,750,000 on December 26 2011 and Kathy and Frank continue to live in the houseand there was no foreclosure in 2010? To this extent, Kathy and Frank do not have the right to elect insolvency exclusion as could be in the case of principle residence exclusion. However, they are liable to apply for the insolvency exclusion to $500,000 for the nonqualified debts since such debt is never qualified as principal residence indebtedness. Kathy and Frank have no tax attribute up to the year 2010 other than the use of basic