Posts Tagged ‘Homebuyer credit’

Tax Court: no homebuyer credits for S corprorations, LLCs.

Tuesday, May 22nd, 2012 by Joe Kristan

Flickr Image by Joe Shlabotnik under Creative Commons License

The futile and wasteful homebuyer credits are history, except for cleaning up the messes in court.  The Tax Court yesterday ruled that two sets of homebuyers foot-faulted their way out of their credits — one by by having their corporation buy their house, and one by using an LLC.

The S corporation case involved a Nevada home through their Wyoming S corporation, “Santsu,” which also owned rental properties that the couple operated.  The tax court takes up the story:

Sanstu was the legal owner of the property. The property was petitioners’ principal residence. Petitioners had not owned another principal residence during the prior three years.

Petitioners claimed the $8,000 tax credit on their Form 1040, U.S. Individual Income Tax Return, for 2009. Sanstu did not claim the tax credit on its Form 1120S, U.S. Income Tax Return for an S Corporation, for 2009. Respondent issued a deficiency notice to petitioners, disallowing the tax credit.

The court said that didn’t work because the tax law allowed the credit only to “individuals” (Citations omitted, emphasis added):

We hold that S corporations are not individuals for purposes of section 36.  A corporation, at its core, is a business entity organized under State or Federal law, whether an association, a company or another recognized form. A corporation that satisfies certain criteria may elect small business status for Federal income tax purposes.  An S election does not alter the corporation’s corporate status; it merely alters the corporation’s Federal tax implications.  Items of income, deduction, loss and credit generally pass through to the shareholders.  S corporations remain freestanding entities “independently recognizable” from their shareholders.  Individual taxpayers, on the other hand, are subject to tax under section 1, which sets rates for married and unmarried individuals, heads of households, and estates and trusts.  A corporation’s income is not subject to tax under section 1. Rather, tax is imposed on corporate income under section 11. Accordingly, corporations are not individuals within the meaning of section 1.

As an extra kick in the teeth for the taxpayers, apparently an IRS representative had told them it was OK to use the S corporation.  Tough, says the court:

It is unfortunate when a taxpayer receives inaccurate information. We have recognized, however, that incorrect legal advice from an IRS employee does not have the force of law and cannot bind the Commissioner or this Court.

If there’s real money at stake, don’t take the word of some IRS person on the phone.  Get it in writing or get professional help.

The LLC Case involved the purchase of a New Jersey residence by “Jacco,”  a family LLC owned by the taxpayers and their four children.  Using similar reasoning as in the S corporation case, the court said that the taxpayers were out of luck because the LLC is not an individual.  The taxpayer tried another way around, saying that the LLC should be disregarded as the “alter ego” of the taxpayers.  No go, said the court:

Petitioners contend that Jacco was actually their alter ego and, therefore, should be disregarded for purposes of deciding whether petitioners are entitled to claim the first-time homebuyer credit personally. By contending that Jacco was their alter ego, petitioners seek to have the Court pierce the corporate veil. Respondent contends that, pursuant to New Jersey law, an individual member has no interest in specific LLC property.  Respondent further contends that New Jersey caselaw does not support petitioners’ veil-piercing theory.

In the absence of fraud or injustice, New Jersey courts generally will not pierce the corporate veil.  As the New Jersey Supreme Court has explained, the “purpose of the doctrine of piercing the corporate veil is to prevent an independent corporation from being used to defeat the ends of justice, to perpetrate fraud, to accomplish a crime, or otherwise to evade the law”.  Even where the corporation7 has no separate existence and the corporate form has not been respected, New Jersey courts will pierce the veil only where the corporation has been used to perpetuate a fraud or other injustice… Neither party contends that Jacco’s corporate form has been used to perpetuate some fraud or injustice, and the record does not disclose any fraud or injustice that would cause us to disregard the existence of Jacco. Accordingly, petitioners are not entitled to claim the first-time homebuyer credit on the basis of their alter ego theory.

The result should be different if the reseidence were purchased by a single-member LLC, which is normally “disregarded” from its owner under the tax law.  The multiple owners of the entity presumably prevented that here, but the court didn’t say so specifically.


S corporation case: Trugman, 138 T.C. No. 22

LLC Case: Rospond, T.C. SUmm. Op. 2012-47


No first time homebuyer credit for purchase by executor from an estate

Monday, June 20th, 2011 by Joe Kristan

Roger McEowen reports.


$15 billion down the rathole

Monday, March 28th, 2011 by Joe Kristan

Kay Bell reports that in the last government fiscal year 2.1 million tax returns claimed $15.6 billion in first-time homebuyer tax credits. That $15.6 billion was supposed to fix the market for houses. How’s that working out? Smartmoney Tax Blog has the results:

Two and a half years later, sales in most residential markets are still anemic and prices are still falling.
The real estate gurus at Case-Shiller expect more bad news: prices could fall another 15%-25%.

Just last week we got headlines like: New home sales plumb record lows, prices stumble
Targeted tax credits normally fail. The failure is usually less spectacular.


Feds: Lure of sweet $8,000 check leads IRS agent, 13 others astray

Friday, March 25th, 2011 by Joe Kristan

The Feds have indicted a New Hampshire IRS agent for trying to help himself to the Homebuyer Credit cookie jar:

An eighth individual, Michael Doyle, 44, of Hudson, NH, was also indicted for filing
false, fictitious and fraudulent claims with the IRS and faces the same penalties. The indictment
of Doyle alleges that he was a long time employee of the IRS who falsely claimed to have
purchased his home in 2008 in order to obtain a tax refund by claiming the First-Time Home
Buyer Tax Credit, even though he had purchased his home in 2007 and therefore wasn


2008 Homebuyer credits: time to pay them back

Wednesday, February 16th, 2011 by Joe Kristan

The first version of the “First Time Homebuyer Credit” had an unusual feature: it has to be paid back. If you took the $7,500 homebuyer credit on your 2008 return, you are to start paying them back on your 2010 return due in April. The 2009 and 2010 credits, in contrast, only have to be repaid if the house is sold in the first three years after the purchase.
The Tax Policy Blog and the TaxProf have more. Look for sad, sad stories of homebuyers who find that paying back the $7,500 interest free loan you and I have helped finance is just an intolerable burden.


Tax Court: homebuyer credit doesn’t work when you buy from relatives

Tuesday, February 8th, 2011 by Joe Kristan

The insane, futile and mercifully defunct refundable first-time homebuyer tax credit had one feature that frustrated subsidy seekers: the IRS said it wasn’t available to those buying homes from relatives, even at full fair-market value.
It’s not entirely clear that the law should work that way. The related party rule of 36(c)(1)(3) reads:

The term


Storage shed not ‘residence’ for homebuyer credit, thanks to girlfriend

Monday, January 31st, 2011 by Joe Kristan

While the first-time homebuyer credit was a futile and insane waste of money, it does provide some tax geek amusement. For example, an IRS e-mailed advice to the field from last October headlined Individual Who Sometimes Lived in Storage Shed During Home Construction Qualifies as First-Time Home Buyer (Tax Analysts, $link)
The Key facts:

During the period of * * * through * * *, the taxpayer lived with his girlfriend, and sometimes at the homes of relatives and other friends. When the taxpayer began construction of the new residence in late 2008, he also lived in a storage shed/dwelling unit on the property where he was constructing his new home. The storage shed had a stove, refrigerator, bathroom, sleeping apparatus, and heat.
The taxpayer spent about 40% of his time in the storage shed/dwelling unit, and most of the rest of the 60% of his time living with his girlfriend.

While the storage shed qualified as a “residence,” it wasn’t a “principal” residence because he spent most of his time at his girlfriend’s. That meant the taxpayer qualified as a “first-time” homebuyer.
Still, this ruling raises many questions for enquiring minds, like:
– Did the girlfriend spend any time in the shed?
– Did he only live in the shed when he was in the doghouse?
– If not, why the shed? She didn’t let him smoke at her place?
Alas, the IRS leaves these important questions unanswered.


Do you really need more than five months to close on a house?

Friday, September 24th, 2010 by Joe Kristan

Kay Bell reminds us that the last deadline for eligibility for the first-time homebuyer credit looms. If you had a house purchase under contract by April 30, you have to close by September 30 to be eligible for the credit.
Related: The Homebuyer Credit: an $8000 subsidy for buying in the spring instead of the summer


Dead people need a place to live too.

Friday, September 10th, 2010 by Joe Kristan

For some folks who got through life without ever achieving the joys of home ownership, the first-time homebuyer credit gave them a shot at it in the afterlife. From a report of the Treasury Inspector General for Tax Administration:

TIGTA also identified 1,326 single taxpayers the Social Security Administration recorded as deceased who claimed $10.1 million in erroneous Credits. The IRS did not allow 528 of the 1,326 individuals to receive over $4 million they claimed for the Credit.

So what about the other 798? The report says the IRS should:

ensure the 798 individuals who TIGTA identified as being deceased prior to the purchase of the home are entitled to claim the Credit.

So the IRS has auditors beyond the veil? If you run into an IRS agent in the afterlife, you made a serious mistake somewhere along the line.
The TaxProf has more.


Filling the giant hole, $8,000 at a time

Thursday, July 1st, 2010 by Joe Kristan

Late last night the Senate passed HR 5623, a 3-month extension of yesterday’s deadline to close purchases of houses placed under contract by April 30 to qualify for the “popular” first-time homebuyer credit. The bill passed despite warnings that it invites massive backdating of paperwork to “qualify” home purchases for the $8,000 refundable credit. Every Iowa congresscritter voted to take money from all of us — or our grandchildren — to give $8,000 each to perhaps 2,030 Iowans and 178,000 other housing welfare recipients. The bill goes to the White House, where approval is assured.
While making sure to subsidize people who, in theory, can afford a house, the Senate did not pass an extension of unemployment benefits. Interesting priorities.
UPDATE: More from TaxGrrrl.
Related: The lingering death of the Homebuyer Credit


The lingering death of the Homebuyer Credit

Wednesday, June 30th, 2010 by Joe Kristan

Update, July 1: the Senate passed the 3-month extension last night.
The $8,000 First Time Homebuyer Credit has turned out to be an incredibly expensive and ineffective boondoggle whose stimulative effect was largely focused on the inmate and future inmate communities. Naturally, Congress hates to see it die.
Current law requires that house sales have to close today to qualify for the credit, as TaxGrrrl explains. Anybody facing the deadline had to have a binding contract by April 30. That means they’ve had two months to get financing and close. Care to guess what sort of credit risks can’t arrange financing within two months?
The National Association of Realtors Claims that 180,000 home sales could fall through if the June 30 deadline isn’t extended. Still, look at the bright side: $1.4 billion in taxpayer money might not be flushed down a big hole $8,000 at a time if the deadline stays in place. Billions of dollars of bad mortgage loans may never be made if the deadline isn’t extended.
Graphic courtesy the Onion News Network
Congress seems to be leaning towards the “flush the money down the big hole” approach, as Kay Bell explains. The House voted yesterday to give homebuyer another three months, 409-5. The Senate is trying to do the same thing.
UPDATE: More here:

The tax credit is the last injectable vein in the shriveled body of the American real estate market. Without it, there’s nothing standing between dumb buyers and the horror of price discovery.

Well, other than Fannie Mae, Freddie Mac, and a passel of tax benefits for home owners and defaulters.


I’ll bet the May house sale market will look like this too

Wednesday, June 2nd, 2010 by Joe Kristan

A picture (by Coyote Blog, via Hit and Run) of the effect of Cash for Clunkers:
A temporary surge, followed by a fall-off, and then a reversion to trend (as indicated by the dotted line). It’s obvious that Cash for Clunkers clunked, merely borrowing sales from the period following the program.
Expect the same pattern for houses in May now that the First-time homebuyer credit is over.


Another cost of insane tax credits

Tuesday, May 25th, 2010 by Joe Kristan

Though it is finally dead, the recently expired first-time homebuyer credit continues to do its little part to undermine our already rotten tax administration system. Kay Bell reports:

Note [Taxpayer Advocate Nina] Olson’s conclusion: “


It’s a point of view they know well

Monday, April 26th, 2010 by Joe Kristan

Trish McIntire:

If Congress insists on using the tax system to social engineer, they need to approach new credits and deductions from a cheater’s point of view. Then ask what needs to be built into the law to deflect some of the fraud.

Her topic: the homebuyer credit, scheduled to expire Friday if not again extended by Congress.


We don’t worry if car prices are too low…

Thursday, April 22nd, 2010 by Joe Kristan

…so why are we fretting over lower housing costs? Yet that’s what’s happening at TaxVox:

These results come with lots of caveats, but the lessons are clear. One, limiting itemized deductions might not be the best idea while the housing market is still struggling. And two, higher tax rates might just be a much-needed shot in the arm for our anemic housing market.

This would be typically perverse social engineering via the tax code: the IRS takes your money unless you spend it on more house. It’s the same lunatic tax code that supports housing demand with the fraud-ridden $8,000 first-time homebuyer subsidy while at the same time spurring housing supply with the low-income housing credit. And they wonder why the housing market is such a mess.


Filing Season Tip: File that homebuyer-credit claim the old-fashioned way

Tuesday, March 30th, 2010 by Joe Kristan

20100330-2.jpgWhile it’s of doubtful use economically, the first-time homebuyer credit is definitely worth claiming when you qualify. The IRS struggles to process claims for the $8,000 refundable credit (you get it even if your tax is zero) because it is a fraud magnet. If you don’t want to wait many months for your credit, make sure you give the IRS everything it wants with the return.
You can’t e-file a claim for the credit. Your return with Form 5405 needs to be filed on paper.
– You have to file a 1040. You can’t use either short-form 1040, and you can’t file the Form 5405 by itself.
You have to attach a signed settlement statement. The IRS says:

For most homebuyers, this will be a properly executed Form HUD-1, Settlement Statement (U.S. Department of Housing and Urban Development) that includes:
* Names and signatures (if available) of all parties involved,
* Property address,
* Purchase price, and
* Date of purchase.
If you purchased a mobile home and do not have a settlement statement, you should attach a copy of your executed retail sales contract showing all parties’ names and signatures, the property address, the purchase price and the date of purchase.
If you are claiming the credit for a newly constructed home and you do not have an executed settlement statement, you should attach a copy of your certificate of occupancy showing the name of the taxpayer, the property address, and the date of the certificate.

Of course, you need to make sure you qualify.
Check back every day through April 15 for more 2010 tax filing season tips!
Image credit: Image by Boris T. Johnson under Creative Commons license.
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Where there’s a refundable credit, there’s fraud…

Wednesday, February 24th, 2010 by Joe Kristan

…and the First-time homebuyers credit is no exception. reports:

Continuing its long battle against tax preparers it considers incompetent or dishonest, the Internal Revenue Service on Tuesday sued a pair of Miami, Fla., practitioners, saying they wrongly claimed the first-time homebuyer’s credit for dozens of clients.
In separate civil lawsuits, lawyers for the agency said both preparers claimed the credit for clients who had not even bought homes. One preparer, Paula O. Patrice, who operates To the Max Professionals Inc., allegedly listed nonexistent addresses for purchased property while Henry E. Medina Jr., who runs Medina Group Inc., also known as Medina & Associates, purportedly listed the same bought-property address on tax returns of different clients.

Don’t believe anybody who says you can get a credit for the home you’ve lived in for years, or that you don’t really need to buy a house to qualify. To find out what the rules really are, the IRS first-time homebuyer page is a good place to start.


A thousand words of value on the homebuyer credit

Tuesday, February 23rd, 2010 by Joe Kristan

A great illustration of how the homebuyer credit works at TaxGrrrl’s place.

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IRS answers on homebuyer credit

Thursday, January 14th, 2010 by Joe Kristan

IRS practitioner liason Kristy Maitre has sent an e-mail answering questions on the First Time Homebuyer Credit. Here’s one anwer:

Q. If a person purchases a home from a related person and pays Full Market Value, do they qualify for the FTHBC? If they receive the property as a result of a gift or inheritance, they would not qualify?
A. Who cannot take the credit?
If any of the following describe you, you cannot take the credit, even if you buy a new home.
o Your income exceeds the phase-out range.
o You buy your home from a close relative. This includes your spouse, parent, grandparent, child or grandchild.
o You do not use the home as your principal residence.
o You are a nonresident alien.


A polite way of saying ‘it was just a big waste of money’

Tuesday, January 5th, 2010 by Joe Kristan

The Congressional Research Service says lower prices, not the homebuyer tax credit, have gotten houses selling again:

Results presented in this report suggest that lower home prices and low mortgage rates were quantitatively more important in stabilizing the housing market than the tax credit. For example, the effect of home prices and mortgage rates on the typical buyer’s mortgage payment is estimated to have been about eight times that of the first two versions of the tax credit. In addition, lower home prices and mortgage rates tended to benefit first-time and repeat buyers, as opposed to the tax credit which until recently just benefited the former. Estimates of the number of additional home purchases that can be attributed to the ARRA and WHBAA versions of tax credit are presented and compared to those reported by private industry analysts. The estimates raise questions about those reported by industry analysts, as well as questions about how effective the tax credit may have been at reducing the home inventory.

In other words, if you lower the price of houses to the market-clearing level, they sell. How about that.
Via the TaxProf.