About Those 1099 and Other Tax Filings from Servicers and Banks …

The problem for everyone involved is that in reality the investors made nothing and merely received a portion of their own money as though it had come from the trust. But it didn’t come from the trust because the trust didn’t even have a bank account. If the banks had disclosed the truth of the matter the investors would have known this is a Ponzi scheme. Imagine what would happen if someone claimed sub S treatment when the corporation they had formed did no business, had no bank account and never had any business activity, never had any assets or liabilities and never had any income or expenses.

THE FOLLOWING ARTICLE IS NOT A LEGAL OPINION UPON WHICH YOU CAN RELY IN ANY INDIVIDUAL CASE. HIRE A LAWYER. HIRE AN ACCOUNTANT OR OTHER QUALIFIED TAX ANALYST

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Few people can say they understand the Internal Revenue Code (IRC), and far fewer understand the statute that gave birth to the idea of a REMIC pass through entity (REAL ESTATE MORTGAGE INVESTMENT CONDUIT). The banks lobbied heavily for this section because it left open doors that could be exploited for the benefit of banks selling the “investment products” to the huge detriment of (1) the investors who advanced money into what turned out to be a nonexistent trust, (2) borrowers who were coaxed into signing “closing” documents as though the party named on the documents was lending them money, and (3) the US Government and the taxpayers who ultimately picked up the tab for a “bailout” of banks who had lost nothing from the actual “loans” nor the “mortgage bonds” because the banks were selling them not buying them. The bailouts from the US Treasury and the Federal Reserve in reality only added to the pornographic profits made by the banks by rewarding them with payments on losses incurred by others.

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Follow the money. Because of tacit agreements with Bush and Obama administrations the IRS has been granting repeated safe harbor extensions to the banks and servicers who have filed documents that  say that a REMIC was formed. Such filings were mostly false.  The problem is that the money and the acquisitions of “loans” MUST be through the trusts in order to get pass-through treatment. Without pass-through treatment, (like a sub S corporation) the cash received by investors is taxable income — even the portion, if any, that is attributable to principal. But the banks have been telling investors that they are getting the interest payment that they signed up for — according to the Prospectus and Pooling and Servicing Agreement. What they are actually getting is their own money back from the investment they  thought they made.

[NOTE: The part attributable to principal would be taxable because the notes themselves, even if they were valid, are not the source of income to investors as far as the investors know. The source is supposedly the REMIC Trust — an entity that was created on paper but never used. In reality the source was a pool of dark money consisting entirely of investor money. But the banks and servicers are reporting to the investors that the money they are receiving is “income”from interest due from the REMIC Trust that never operated. The banks and services are obviously not reporting the cash as part of a Ponzi scheme. So the investors are paying taxes on the return of their own money. Hence the part of the payment from the “borrower” that has been designated as “principal” is reported as “interest” in reports to the investors. In reality the money from “borrowers” merely dumped into a dark pool along with all the other money received from investors.  The entire “loan closing” and subsequent foreclosures are a charade adding the judgment from a court of law that is treated as giving a stamp of approval for everything that preceded the judgment.]

The problem for everyone involved is that in reality the investors made nothing and merely received a portion of their own money as though it had come from the trust. But it didn’t come from the trust because the trust didn’t even have a bank account. If the banks had disclosed the truth of the matter the investors would have known this is a Ponzi scheme. Imagine what would happen if someone claimed sub S treatment when the corporation they had formed did no business, had no bank account and never had any business activity, never had any assets or liabilities and never had any income or expenses.

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The forms filed with the IRS are fraudulent. The 1099 issued to borrowers who avoided deficiency judgments are fraudulent because they come from entities that had no loss and never had the authority to collect or enforce. In reality if the true facts were followed there would be no taxable event for getting their own money back from their “investment.” But the way it is reported, the investors are getting “income” on which they owe taxes. The real taxes on real income should come from the banks that stole a large part of the money advanced by investors. It’s like Al Capone — in the end it was income tax that brought him down.

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Instead the investors are being taxed for interest received and are exposed to more taxes when they get money reported as “principal.” Neither the investors nor the borrowers should be paying taxes on any money or “benefit” they reportedly received (because there was no benefit). So the end result is that the banks made all the money, paid no taxes, and are taking a deduction for payments made to investors and for waivers of deficiency on loans they never owned.

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I have been telling borrowers for years to send the IRS a latter or notice in which they flatly state that the  form filed with the IRS was wrong, fraudulent and inoperative. The borrower received no benefit from the bank or servicer that filed it. Hence no tax is due. Thus far I have seen no evidence that the IRS is attempting to enforce the payment of income taxes from people who have challenged the the authenticity of the report. The IRS apparently does NOT want to be in the shoes of the banks trying to prove that the bank who filed the form owned the loan when they already know that the transaction was not actually a loan and that the “loan closing” transaction was the the result of the unauthorized and fraudulent use of investor money.

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Eventually the truth comes out. The problem for the banks is that they stole money and didn’t pay tax on their ill-gotten gains. Every time a “servicer” “recovers” “servicer advances” they are taking more money from investors because every “advance” was taken from a pool of money that consisted solely of investor cash. When they “recover” it they book it as return of capital rather than pure income which is what it really is, even if it is illegally obtained.

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If they admitted what it was then the banks would be required to pay huge sums in taxes. But they would also be facing angry investors who, upon realizing that every cent they received was their own money and not return on capital “invested” into a trust, would press claims and in many cases DID press claims and settled with the bank that defrauded them. So the banks and servicers are attempting to avoid both jail and huge sums in back taxes that would put a significant dent in the “deficit” of the U.S. government caused by the illegal and fraudulent activity of the banks.

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States Ignore Obvious Remedy to Fiscal Meltdown

without raising taxes one cent, many states could recover much or all of their deficit and perhaps some states could be looking at a surplus.
The money is sitting on Wall Street waiting to be claimed through existing tax laws, regulatory fees, and even damage claims much like the Tobacco litigation.
Editor’s Note: Bob Herbert of the New York Times correctly depicts the tragedy of the cuts to education, health care for children, and other essential services that we expect from government. And any economist would agree with him that budget cuts are the last thing a state or any government ought to do in a recession. But his story, and that of dozens of other reporters and opinion writers misses the simple fact that this crash, which is depression (not a recession) for many states need not be so painful.

The money is sitting on Wall Street waiting to be claimed through existing tax laws, regulatory fees, and even damage claims much like the Tobacco litigation. As I have repeatedly stated to Arizona’s Republican State Treasurer Dean Martin and Andre Cherney, the Democrat who wants to replace him, along with legislative committees and other government departments of many states, including Florida, they are owed taxes, fees, penalties and damages from the investment bankers who brought us the great financial meltdown.

It’s really simple, but the bank lobby is so strong and the misconceptions are so great, that they just don’t want to get it. In the securitization of mortgages, there were numerous transfers on and off record (mostly off-record).

Each of those transfers resulted in fees or profits made by the parties involved. All of that was ordinary income, taxable transfers, subject to recording and registration fees,and regulation by state agencies with whom the parties never bothered to register.

Each transaction that should have been recorded would produce revenue for counties in their recording offices if they simply enforced it. Each profit or fee earned was related to a transfer of real property interests in the state that were NOT subject to any exemption. The income tax applies. Arizona calculated what the income would be if they enforced tax collection against these fees and came up with $3 billion. I think it is three times that, but even accepting their estimate, that would completely eliminate their deficit and allow them to continue covering the 47,000  children they just cut from health care.

So without raising taxes one cent, many states could recover much or all of their deficit and perhaps some states could be looking at a surplus.
There are many ways to actually collect this money as I have explained to legislators, agency heads and aides. The ONLY reason communities are closing down police and fire departments, closing schools and cutting medical care for children is because the people in power are too beholden to the banking lobby and too fearful of angering the real powers on both the national and state levels — Wall Street.
March 20, 2010
Op-Ed Columnist, NY Times

A Ruinous Meltdown

A story that is not getting nearly enough attention is the ruinous fiscal meltdown occurring in state after state, all across the country.

Taxes are being raised. Draconian cuts in services are being made. Public employees are being fired. The tissue-thin national economic recovery is being undermined. And in many cases, the most vulnerable populations — the sick, the elderly, the young and the poor — are getting badly hurt.

Arizona, struggling with a projected $2.6 billion budget shortfall, took the drastic step of scrapping its Children’s Health Insurance Program. That left nearly 47,000 low-income children with no coverage at all. Gov. Jan Brewer is also calling for an increase in the sales tax. She said, “Arizona is navigating its way through the largest state budget deficit in its long history.”

In New Jersey, the newly elected governor, Chris Christie, has proposed a series of budget cuts that, among other things, would result in public schools receiving $820 million less in state aid than they had received in the prior school year. Some well-off districts would have their direct school aid cut off altogether. Poorer districts that rely almost entirely on state aid would absorb the biggest losses in terms of dollars. They’re bracing for a terrible hit.

For all the happy talk about “no child left behind,” the truth is that in Arizona and New Jersey and dozens of other states trying to cope with the fiscal disaster brought on by the Great Recession, millions of children are being left far behind, and many millions of adults as well.

“We’ve talked in the past about revenue declines in a recession,” said Jon Shure of the Center on Budget and Policy Priorities, “but I think you have to call this one a revenue collapse. In proportional terms, there has never been a drop in state revenues like we’re seeing now since people started to keep track of state revenues. We’re in unchartered territory when it comes to the magnitude of the impact.”

Massachusetts, which has made a series of painful cuts over the past two years, is gearing up for more. Michael Widmer, president of the Massachusetts Taxpayers Foundation, told The Boston Globe: “There’s no end to the bad news here. The state fiscal situation is already so dire that any additional bad news is magnified.”

California has cut billions of dollars from its education system, including its renowned network of public colleges and universities. Many thousands of teachers have been let go. Budget officials travel the state with a glazed look in their eyes, having tried everything they can think of to balance the state budget. And still the deficits persist.

In the first two months of this year, state and local governments across the U.S. cut 45,000 jobs. Additional layoffs are expected as states move ahead with their budgets for fiscal 2011. Increasingly these budgets, instead of helping people, are hurting them, undermining the quality of their lives, depriving them of educational opportunities, preventing them from accessing desperately needed medical care, and so on.

The federal government has tried to help, but much more assistance is needed.

These are especially tough times for young people. “What we’re seeing now in Arizona and potentially in New Jersey and other states spells long-term trouble for the nation’s children,” said Dr. Irwin Redlener, a pediatrician who is president of the Children’s Health Fund in New York and a professor at Columbia University’s Mailman School of Public Health.

“We’re looking at all these cuts in human services — in health care, in education, in after-school programs, in juvenile justice. This all points to a very grim future for these children who seem to be taking the brunt of this financial crisis.”

Dr. Redlener issued a warning nearly a year ago about the “frightening” toll the recession was taking on children. He told me last April, “We are seeing the emergence of what amounts to a ‘recession generation.’ ”

The impact of the recession on everyone, of whatever age, is only made worse when states trying to balance their budgets focus too intently on cutting services as opposed to a mix of service cuts and revenue-raising measures.

As Mr. Shure of the Center on Budget noted, “The cruel irony is that in a recession like this, the people’s needs go up at the same time that the states’ ability to meet those needs goes down.”

Budget cuts also tend to weaken rather than strengthen a state’s economy, especially when they entail furloughs or layoffs. Government spending stimulates an economy in recession. And wise spending is an investment in everyone’s quality of life.

All states have been rocked by the Great Recession. And most have tried to cope with a reasonable mix of budget cuts and tax increases, or other revenue-raising measures. Those that rely too heavily on cuts are making guaranteed investments in human misery.

Tax Impact of Principal Reduction

With the Obama administration and private lenders actively considering mortgage-principal-reduction programs to help financially distressed homeowners, the Internal Revenue Service has issued an advisory to taxpayers who receive — or seek to receive — such assistance if it’s offered.

Editor’s Note: The only thing I would add to this, for the moment, is that any principal reduction is basically an admission that your property is not worth the amount of the mortgage. If you have made demand for damages or relief based upon appraisal fraud or other causes of action in or out of court, the taxpayer can take the position that the debt reduction is also in lieu of payment of damages which often is not taxable. Under this theory — which may or may not apply — you would NOT be limited to your principal residence to claim an exemption. Consulting with a licensed attorney or accountant familiar both with federal and state tax law would be strongly advisable.

The reason I mention state law is that the reduction of principal might be the basis for contesting the assessed valuation of your home for real estate taxes, property insurance etc.

IRS tells homeowners how to get tax relief if a lender forgives part of their debt

Reduction of mortgage principal, usually considered taxable income, is expected to become more prevalent as the Obama administration and banks seek ways to prevent foreclosures.

By Kenneth R. Harney

March 14, 2010

Reporting from Washington

With the Obama administration and private lenders actively considering mortgage-principal-reduction programs to help financially distressed homeowners, the Internal Revenue Service has issued an advisory to taxpayers who receive — or seek to receive — such assistance if it’s offered.

The IRS gets involved in mortgage principal write-downs because the federal tax code generally treats any forgiveness of debt by a creditor in excess of $600 as ordinary taxable income to the recipient.

However, under legislation that took effect in 2007, certain home mortgage debt cancellations — such as through loan modifications, short sales or foreclosures — may be exempted from tax treatment as income.

Sheila C. Bair, chairwoman of the Federal Deposit Insurance Corp., recently confirmed that her agency was working on a new program to expand the use of principal mortgage reductions to keep underwater borrowers out of foreclosure.

Most major banks and mortgage companies have preferred monthly payment reductions and other loan modification techniques over cuts of principal balances, but a handful have made limited use of the concept.

One of the largest servicers of subprime home loans, Ocwen Financial Services of West Palm Beach, Fla., has strongly advocated principal reductions to keep people out of foreclosure, and claimed broad success with them. Ocwen President Ron Faris testified to a congressional subcommittee this month that borrowers with negative equity were as much as twice as likely to re-default after a standard payment-reduction loan modification than those who receive partial forgiveness on their principal debt.

But what are the tax implications when your lender essentially says: OK, we recognize that you’re underwater, maybe you’re thinking about walking away, and we’re going to write off some of what you owe to keep you in the house?

IRS guidance issued March 4 spelled out step by step how financially troubled and underwater borrowers can qualify for tax relief when a lender agrees to lower their debt. Here are the basics, should you be considering a short sale or loan modification involving principal reduction.

First, be aware that the federal tax exclusion only applies to mortgage balances on your principal residence — your main home — and not on second homes, rental real estate or business property. The maximum amount of forgiven debt eligible under the law is $2 million for married taxpayers filing jointly and $1 million for single filers.

But there are some potential snares: Your debt reduction can only be for loan amounts that you’ve used to “buy, build or substantially improve your principal residence.” This includes refinancings that increased your total mortgage debt attributable to renovations and capital improvements of your house. But if you used the proceeds for other personal purposes, such as to pay off credit card bills, buy cars or invest in stocks, the mortgage debt attributable to those expenditures is not eligible for tax exclusion.

When your lender forgives all or part of your mortgage balance, the lender is required by law to issue you an IRS Form 1099-C, a “Cancellation of Debt” notice, which is also sent to the IRS. The form shows not only the amount of debt discharged but the estimated fair market value of the house securing the debt as well.

A few other noteworthy features of the IRS rules: If you’ve been foreclosed upon or you do a short sale and lose money in the process, don’t claim a tax loss on your federal filing. The IRS will turn you down. However, if you go to foreclosure and your lender agrees to cancel all or part of the unpaid mortgage balance as part of the deal, then you can file for an exemption from the IRS.

What if your lender reduces the debt on your house but you continue to own the property and live in it? There’s a tax wrinkle in the fine print: The IRS will require you to reduce your “basis” in the house — your “cost” for tax purposes — by the amount of the forgiven debt. But that’s not likely to be a big concern for most homeowners digging their way out.

Finally, if you want to claim the debt-forgiveness exemption, download IRS Form 982 at www.irs.gov and attach it to your return for the year in which the debt was forgiven. And don’t assume that this tax code benefit to homeowners will be around forever. It expires at the end of 2012.

kenharney@earthlink.net.

Distributed by the Washington Post Writers Group

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