Robert Fiscalini owned his principal personal residence (his home) in California, but the mortgages from various re-financing and business problems were more than he could pay.
He transferred the ownership of the home to his parents in a transaction that was part sale and part gift. The parents got a new mortgage with most of the funds used to pay the existing mortgages.
IRS felt since the title company issued a form 1099-S showing the total “Proceeds From Real Estate Transactions” was $975,000, that was enough to call it a sale for that amount.
Fiscalini pointed out the $664,048 owed on the mortgages was correctly classified as sales proceeds. However, the parents did not pay him any additional amount. The closing statement by the title company indicated he made a gift of the difference. The closing statement showed “Gift of Equity to Buyer (parents)”.
The U.S. Tax Court looked at the transaction and found it was partly a sale and partly a gift. Robert Fiscalini did not have to pay the capital gains tax IRS assessed.
Robert was able to reduce the taxable gain on the sale part by selling costs and the $250,000 home sale gain exclusion because he had lived in the home enough before the transaction. It was his home more than two of the five years before the sale.
On the other hand, IRS was found to be correct to assess penalties and interest because Robert did the transaction in 2007, but did not report the sale portion on his 2007 income tax return he finally filed in June 2013. The court found Robert did not have reasonable cause for not filing a correct return and not filing it on time just because he was unable to pay the tax.
IRS finally did agree the selling costs were a valid deduction to determine the taxable gain. The report on the case seems to indicate IRS only agreed to allow selling costs just before or during the trial.
The court also agreed with IRS the special, additional 20% penalty “accuracy-related” was proper in this matter because of the “negligence and disregard of rules or regulations, or a substantial understatement of tax”.
The case was settled in August of 2017. That seems a long time to me. Why IRS did not understand this was a part sale and part gift is not explained. Robert could have saved a lot of penalties if he had just filed that 2007 return correctly and timely, even if he could not pay the tax then.
Did you hear “Chance favors the prepared mind.” Louis Pasteur, Chemist