In Jason B. Sage v. Commissioner, the Tax Court held that a developer’s transfer of property to a liquidating trust for the benefit of his creditors, which was a grantor trust, did not trigger a loss on the transfer of property to the trust. The opinion synopsis is as follows:
P, a real estate developer, owned through subchapter S corporation IDG three parcels of Oregon real estate encumbered by liabilities in excess of their fair market values. In response to the 2008 economic recession, IDG engaged in a series of transactions in December 2009 designed to transfer the parcels to three separate liquidating trusts for the benefit of the mortgage holders. Between 2010 and 2012 the liquidating trusts disposed of the parcels, and the mortgage holders applied the proceeds from these dispositions against the outstanding liabilities of IDG and its wholly owned limited liability company (LLC).
IDG reported significant losses as a result of the 2009 transactions, which losses P claimed on his 2009 individual tax return. These losses gave rise to a net operating loss (NOL), which P, inter alia, carried back to his 2006 taxable year as an NOL carryback deduction and forward to his 2012 taxable year as an NOL carryover deduction. R disallowed the losses reported by IDG and claimed by P for the 2009 taxable year, made correlative adjustments to the 2006 and 2012 NOL deductions, and determined deficiencies for 2006 and 2012.
Held: As the proceeds of the Oregon parcels held by the liquidating trusts were applied to discharge certain liabilities of IDG and its wholly owned LLC between 2010 and 2012, IDG and the LLC were the owners of the corresponding liquidating trusts during those respective years pursuant to the “grantor trust” provisions. I.R.C. secs. 671-679.
Held, further, because IDG and the LLC owned the liquidating trusts beyond the close of the 2009 taxable year, the losses reported by IDG and claimed by P for 2009 were not bona fide dispositions and not “evidenced by closed and completed transactions, fixed by identifiable events, and * * * actually sustained during” that year. Sec. 1.165-1(b), Income Tax Regs. The deductions were properly disallowed.
Posted by Lewis J. Saret, Co-General Editor, Wealth Strategies Journal.