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INDIVIDUALS

Situations in which taxpayers should Sec. 1017(b)(3)(F)(iii), the basis reduc- genuine issues of material fact regarding
file an amended return because they are tion for discharge of QRPBI occurs in whether the couple’s sale of their home
now eligible after the unemployment the same year as the sale for “property was due to unforeseen circumstances,
compensation exclusion include: taken into account under Sec. 108(c)(2) which would entitle them to a partial
■ They did not submit a Schedule (B).” The Tax Court found that this rule exclusion from income from the sale,
8812, Additional Child Tax Credit, applied to the properties the taxpayer and denied the second motion because it
with the original return to claim short sold in 2012, and thus the basis in found that they had failed to cite any au-
the additional child tax credit and those 15 properties sold must be reduced thority that they were entitled to reduce
are now eligible for the credit after in 2012. The court, however, also found the gain on the sale of another home for
the unemployment compensation that the taxpayer had no additional debt furniture sold with the home.
exclusion; and discharge in 2013. It further held that
■ They did not submit a Schedule he was not liable for accuracy-related Sec. 130: Certain personal
EIC, Earned Income Credit, with the penalties because he relied in good faith injury liability assignments
original return to claim the EITC on professional tax advice in preparing In IRS Letter Ruling 202127039, the
(with qualifying dependents) and his returns for those years. IRS was asked to rule on (1) whether a
are now eligible for the credit after In Kelly,18 one of the issues in the specific assignment agreement relating
the unemployment compensation case was whether the taxpayer had to periodic payments of damages to an
exclusion. taxable cancellation-of-debt (COD) injured individual due to medical mal-
income or if he was insolvent such that practice at birth is a qualified assignment
Sec. 108: Income from the discharge of indebtedness was not under Sec. 130(c); and (2) whether an
discharge of indebtedness includible in his gross income under annuity used to fund it was a qualified
In Hussey,17 the Tax Court considered a Sec. 108(a)(1)(B). The court held that funding asset under Sec. 130(d). The
situation where the discharge of quali- the taxpayer’s insolvency computation IRS ruled that the structured settlement
fied real property business indebtedness required the elimination of loans to is a qualified assignment under Sec.
(QRPBI) applied to reduce the basis of him from his closely held companies. 130(c) because the payments are fixed
depreciable real property in the same As a result, the court found that his and determinable and that an annuity
year that certain properties were sold. In COD income was overstated and the purchased to fund the payments is a
2012, the taxpayer sold 16 investment parties were to recompute the insol- qualified funding asset.
properties (selling 15 of them short) vency amount.
and received from the mortgage lender Sec. 165: Losses
a discharge of indebtedness totaling Sec. 121: Exclusion of Theft losses: The courts in several
$754,054 for 15 of those properties. In gain from sale of principal cases again were required to determine
2013, the taxpayer short sold another residence if taxpayers claiming a theft loss met
seven investment properties but did not In Forte,19 the U.S. district court in Utah the requirements of Sec. 165, including
receive from the lender a discharge of denied the taxpayers’ motions for sum- whether a theft occurred under state law.
indebtedness relating to those sales. The mary judgment relating to their sales of In Smith,20 the taxpayers claimed a
taxpayer and the IRS disputed how pro- residences in 2005 and 2007. The issues theft loss for an investment in a mort-
visions relating to the timing of the basis before the court in these motions were: gage company. The taxpayers relied on
adjustment for discharge of QRPBI (1) whether the Fortes were entitled to Rev. Proc. 2009-20, which generally
in Secs. 108 and 1017 apply; whether exclude from their gross income part applies to Ponzi schemes, but the court
the lending bank discharged any of the of the gain from the 2007 sale of their found that the revenue procedure did
taxpayer’s debt in 2013; and whether home; and (2) whether the Fortes were not apply because the mortgage com-
the taxpayer was liable for accuracy- entitled to reduce the amount of taxable pany was not a Ponzi scheme, the CEO
related penalties. gain realized on the 2005 sale of a dif- of the company was not charged with
The court held that, although the ferent home by the amount paid for fur- fraud, and the taxpayers had not invested
basis reduction generally occurs in the nishings that were sold with the home. directly in the company. The taxpayers
year following the discharge of indebt- The court denied the motion on the first continued to invest even though finan-
edness, under an exception to the rule in issue because it found that there were cial records showed that the company

17. Hussey, 156 T.C. 170 (2021). 19. Forte, No. 2:18-cv-00200 (D. Utah 6/21/21).
18. Kelly, T.C. Memo. 2021-76. 20. Smith, No. 19-14222 (S.D. Fla. 10/14/21).

32 March 2022 The Tax Adviser