Tax Implications of Hurricane Sandy

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Deductions for Damaged and Destroyed Property

The tax law allows you to claim an itemized deduction for personal casualty losses that are not reimbursed by insurance. You must first reduce your loss by $100 and then by 10% of your adjusted gross income. If you have any loss remaining after these reductions, you can claim an itemized write-off on Schedule A of Form 1040.

If you have a deductible loss due to a disaster in a federally declared disaster area, a special rule allows you to claim your allowable write-off in the year before the year the loss actually occurred and thereby get a tax refund. For example, Hurricane Sandy victims can choose to deduct their allowable losses in 2011; even though, the damage obviously happened in 2012. This special deduction timing rule allows you to quickly receive some tax-savings relief immediately instead of having to wait to file your 2012 return. If you wish to take advantage of this, you must file an amended 2011 return to claim your loss in that year.

You must make the choice to take the write-off in the earlier year by no later than the filing deadline (without extensions) of this year’s return. For example, victims of Hurricanes Sandy have until April 15, 2013 to decide.

Beware: You Might Have a Taxable Gain

If you have casualty insurance coverage, you actually might have a taxable involuntary conversion gain instead of a deductible loss. Why? Because when insurance proceeds exceed the tax basis of a damaged or destroyed asset, you have a taxable profit as far as the IRS is concerned. This is the case everr when the insurance doesn’t compensate you for the full precasualty fair market value of the damaged or destroyed property. These gains are termed involuntary conversion gains.

If you turm out to have an involuntary conversion gain, it must be reported on your tax return unless you: (1) make sufficient expenditures to repair or replace the property and (2) make an election to defer the gain. If you make the election, you’ll have a current taxable gain only to the extent insurance proceeds exceed what you spend to repair or replace the affected property.

Conclusion Hurricane Sandy victims may receive other types of insurance reimbursements and assistance that can have important tax implications. Please contact us if you want more information about anything covered in this letter, or if you have any other questions. We are here to help.

Best regards,

Daniel Silvershein

Casualty Loss Rules—Hurricane Sandy Victims

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Victims of Hurricane Sandy may be able to claim a deduction for Damaged and Destroyed Property.
The rules below describe the requirements to be able to claim this loss.

  1. The claim is allowed as an itemized deduction for personal casualty losses provided that they are not reimbursed by insurance. The loss must first be reduced by $100 and then by 10% of your adjusted gross income. Any loss remaining after these reductions, you can claim an itemized write‐off on Schedule A of Form 1040.
  2.  If you do not itemize, you cannot take this loss. Special Rules for Federally Declared Disaster Area
  3. If the above applies and the loss occurred in a federally declared disaster area, a special rule allows you to claim your allowable write‐off in the year before the year the loss actually occurred and get a tax refund.
  4. For example, Hurricane Sandy victims can choose to deduct their allowable losses in 2011; even though, the damage happened in 2012. This rule allows you to quickly receive some tax‐savings relief immediately instead of having to wait to file your 2012 return. Or if you itemized in 2011 and do not plan to itemize in 2012. If you wish to take advantage of this, you must file an amended 2011 return to claim your loss in that year.
  5. You must make the choice to take the write‐off in the earlier year by no later than the filing deadline (without extensions) of this year’s return. For example, victims of Hurricanes Sandy have until April 15, 2013 to decide. Possible Unexpected Taxable Gain – Involuntary Conversion Gains
  6.  If you have insurance coverage that covers the loss, you actually might have a taxable gain instead of a deductible loss. When the insurance proceeds exceed the basis (cost with adjustments) of a damaged or destroyed property, you have a taxable profit under the tax code. This is the case even when the insurance doesn’t compensate you for the full fair market value of the damaged or destroyed property prior to Sandy. For example, if you had coverage of $400,000 on your house which you purchased 15 years ago for $350,000, but the house today is valued at $475,000, then there would be a taxable gain of $50,000.00.
  7. The above transaction must then be reported on your tax return unless : (1) sufficient monies are spent to repair or replace the property or (2) by making an election to defer the gain and purchasing qualifying replacement property within the allowed time period. Once the election is made, the taxable gain is only to the extent the insurance proceeds exceeds what is spent to replace the affected property. If in the above example, the house is rebuilt for a cost of $375,000, the gain would only be 25, 000.

Late Budget Deal Affects IRS Acceptance of 2012 Returns

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The IRS recently announced that the end of year budget deal will cause the IRS start date for
accepting returns to be moved to January 30, 2013. No returns, electronic nor paper will be processed before that date. The government also announced that major tax software companies were currently accepting the returns, and warehousing or holding them until the arrival of January 30, 2013. Refunds, should be issued in nearly most of the cases within 21 days of receipt. The status of the refund can be checked on www.irs.gov and use “Where’s My Refund” tool.

Obviously, the IRS had no control over the timing of the budget deal and its effect on the tax
code. The Service’s continued movement towards electronic filing and customer inquiry has made the filing and processing of returns easier and quicker. However, the code continues to be even more and more complex. Attempts to simplify it were raised by the politicians in the latest budget negotiations. They were unsuccessful. The tax code still remains contained in two very large volumes comprising nearly 3000 pages.

Lessons Learned from MF Global

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Another large bankruptcy involving the brokerage industry hit Wall Street recently and resulted is more pain for its’ clients. As has been widely reported in the MF Global bankruptcy (See NY Post, Friday, November 18, 2011” Burned by Greed”) many of its clients now face the prospect of either losing part or all of their investment. This is true with customers who held investments with MF’s securities brokage accounts. Cash only customers may be paid in full.

People will learn that the bankruptcy process can be slow, but fair. Many had their cash accounts frozen and only recently had the monies released by the bankruptcy judge.

There are other stories of people with their life savings in jeopardy. One of the major lesson to be learned is that of risk in the marketplace. Companies can and do go bankrupt and when that happens the average investor can be hurt in the process. Bankruptcy aims to even the playing field but is not a perfect solution. The problem is that there is only a limited amount of assets that can be recovered and all the clients claims are treated equally in this process. The claims generally are greater than the assets recoverable. So as in the MF case some people will only get 60% of their money back.

One way to protect oneself is to be aware of the risk and not to place all of one’s assets with any one broker or asset class. Diversification would have helped some of these people. The old saying of “not to put all your eggs in one basket” applies here as well. Those who placed their life savings with MF surely, given a second chance, would have placed only a part of their capital with MF and the rest in bank Cd’s , money market, or even another broker.

The bankruptcy process is fair and can serve to protect clients to recover funds which may not be available without the existence of such laws. However, it is not a guaranty that clients will recover all or any of their funds. Buyer beware.

Student Loans Non-Dischargeable to Parent -Debtor

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Student loans used to be dischargeable and many people forget that they are now non-dischargeable due to changes in the law. Everyone attending higher education should be reminded several times before signing these notes that they are non-dischargeable and the same rules apply to the co-applicant or guarantor.  In a recent case  In Re: Curvtis V. and Connie S. Vitzhum,, 22 CBN 1, 2011 Wl 3957273 (Bankr W.D. Mo 9/7/11); Consumer Bankruptcy News October 13, 2011, vol 22 iss 1 ).  the parent, signed for a student loan along with their daughter  through Educap Inc. in October 2005 for their daughter’s college education.

Pursuant to Section 523(a) (8) student loans or loans to be used “for educational purposes only” are non-dischargeable. In the reported case, the parents applied along with their daughter for loans issued for her college education. . The daughter attended college and the parents fell on hard times and were forced to file bankruptcy. Since they were not the student under the loan they tried to have it discharged claiming that they did not receive any educational benefit. The court disagreed and said it did not matter,  that it still was an educational loan and therefore non-dischargeable.

The point of this case  is that student loans are almost never dischargeable to anyone who signs them regardless of whether they were the student are not. Until Congress changes this rule, it is the law of the land.  In today’s world with a year of private college costing more than $40,000 it is easy for students to get themselves in a great amount of debt.  Parents and students should know that they will be tied to with this debt until paid and bankruptcy will not remove it.

If you have any questions regarding this or other bankruptcy matters, please call me at 1-888-382-7880.

 

 

Art Dealer Convicted of Bankruptcy Fraud On Run for 5 Years for Bankruptcy Finally Apprehended

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A bankruptcy Art dealer who plead guilty to 1 count of bankruptcy fraud was apprehended after 5 years on the run. His crime involved transferring ownership of an oil painting to another person to sell and conceal the sale proceeds. First he failed to report to jail in 2004. Then he fled abroad while the U.S. Marshals were tracking him through 14 countries including China. Ultimately he was arrested in Rome in 2009. Released on house arrest he fled Italy to Mexico and was deported back to the United States (Consumer Bankruptcy News August 18, 2011, v 21, iss18).

It’s important to note how diligent the U.S. Marshals were in apprehending him. Bankruptcy fraud is a federal offense and taken very seriously by law enforcement. People filing bankruptcy often think they can get away with transferring assets on the eve of Bankruptcy. People often ask can they transfer their house to their son or daughter or give away assets and then file bankruptcy. The obvious answer is no and taking such action can make a difficult situation much worse and turn a civil action into a criminal one. So for those contemplating bankruptcy, the advice is not to transfer any assets. Leave things the way they are and get competent legal advice. Do no turn a civil matter into a criminal one.

Could Medical Marijuana Become an Ordinary and Necessary Expense Deductible under Tax Code For California and Other States Allowing Medical Marijuana Dispensaries ?

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Several Congressmen have been receiving inquiries from their constituents about the legality of deducting expenses incurred when selling marijuana for medical purposes. (See Practitioners TaxAction Bulletin No. 2011-18 p4.) The IRS has responded with a series of informational letters. Under the Internal Revenue Code Sec 280E disallows deductions incurred in the trade or business of controlled substances of which marijuana of course falls into. There is no exception for medical marijuana neither under either the code nor under Controlled Substances Act. In order for the IRS to publish formal guidance would necessitate Congress to change the Controlled Substance Act or Internal Revenue Code.

It doesn’t seem likely given the current political atmosphere and public attitude that Congress will make the necessary changes. I believe that is too bad, because if it were allowed into the code it would be one further step to full legalization and taxation of marijuana and surely would help take the criminal element out of the trade and of course generate additional revenue to bridge the current large and getting larger budget deficit.

Your Neighborhood Chevy’s, Friendly’s, Boston Market May be Closing due to Bankruptcy of Parent Company

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Sun Capital Partners the parent company of big name chains such as Chevy’s, Friendly’s and Boston Market and El Torito filed for bankruptcy on October 4th., as reported by the New York Post (October 5, 2011, p 32.) Also, Sun also owns the Friendly ‘s chain which is expected to file later this month. This is just one of many recent filings for the restaurant industry as 5 chains with at least 100 locations have filed for bankruptcy.

Despite these woes, the principal of the company Marc Leder was reported to be throwing wild parties in the Hamptons with a pool full of nude guests performing sex acts.

Is the start of more chains and major national brands to go into bankruptcy? I would not be surprised with this economy. There is talk that American Airlines maybe on the verge of bankruptcy. However, it is not necessarily the end of these companies and may serve to strengthen them. For instance General Motors and Chrysler were able to reduce debt, renegotiate labor contracts, and close unprofitable plants. They had been unprofitable for several years prior to the bankruptcy. General Motors continue to make cars and has reported profits and new increased labor contracts for its workers. So Chapter 11 for large companies is not necessarily a bad thing if they are able to restructure and come out of the process more streamlined

Discharge Allowed to Stand for Debtor Later Found Guilty of Criminal Drug Sales

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In an interesting case recently reported in (Consumer Bankruptcy News, vol.21, iss19, p, 3) involving both the bankruptcy and criminal laws , a person who had been first granted a Chapter 7 discharge claiming to be unemployed and having no income was  arrested 5 months later. and charged with possession of and trafficking in crack cocaine.

The Office of the US. Trustee which oversees the bankruptcy process tried to reopen her case and have her discharge revoked based on fraud.  The debtor was subsequently found guilty on several criminal counts including delivery of a controlled substance, criminal conspiracy, and child endangerment.

Despite the US Trustee  introducing  the criminal evidence into the bankruptcy proceeding, the Court found that the US Trustee hand not proved that the debtor actually derived income from these transactions during the pre-bankruptcy period and allowed the discharge to stand. U.S. Trustee v. Shiloh (In re: Lisa L. Shilo), 21 CBN 1025, 2011 W. 3204915 (Bankr. M.D. PA 7/26/11)