Case Analysis of Accounting – Crane vs Commission

Facts

Bob had taken a mortgage to buy a house which attracted a monthly payment of the loan and the interest. The mortgage was entirely secured against the house and hence, the borrower was interested in the house. After some time, Bob died and left the house to Wilma who inherited the property with an outstanding mortgage repayment of $210000. The house Fair market value is estimated to be $90000 which is lower than the outstanding mortgage. The borrower cannot make claim on any asset of the diseased, apart from the house which was used as security. The borrower can only give a window period of one year upon the death of Bob, and if the debt is not cleared then they have the right to take up the house.

Wilma has inherited the house and now is considering different options of dealing with the matter to achieve the friendliest solution with regards to taxation. The three options under consideration include:

Walking away and surrendering the whole house to the bank can then close up the transaction and recover part of the mortgage from the sale of the house. Wilma feels that this option will lead to the loss of certain taxable gains.

The second option is to negotiate with the bank to settle the loan at the market fair value of the house. This option will also have some tax implications.

The third option under consideration is the sale of the house to a neighbor at $90000 and negotiating for settlement of the mortgage at $80000.This will also attract additional costs such as Realtors fees and closing costs. This option will bring a net income of $3700.

Issues

1. Among the three options that are under consideration which one will provide the best tax incentive for Wilma?
2. What are the legal provisions with regard to taxation of mortgaged property?
3. To what extent should Wilma assume the liabilities attributed to the diseased, especially on the repayment of the mortgage?

Analysis

The above case clearly relates to the Crane Vs Commission case which deals with the determination of the value of the inherited property for the purposes of taxation. Mrs.Crane inherited property from her husband, which was subject to a mortgage payment of $255000 plus interest of $7000. The property had a taxable value of $262000 after the death of her husband. She managed the property and later sold the property and declared a taxable gain of only $2500 and not the total value of sales (Newman 420). In her submission, she claimed that she inherited a zero value from the property, since the market value of the property was equal to the outstanding loan plus interest, and hence she could not assume the husband’s liabilities. According to real estate tax provision 103.7 for inherited property, anything inherited from a spouse or other related people is treated as a gift, and hence it’s considered a tax-free event. This, therefore, means that any gains or losses transferred are not subjects to taxation (Windish 10). Under provision 105.1 of contingent obligation, there must be a certainty that the loan and the interest accrued will have to be paid, and if that is determined, then the gains made by a person inheriting the property will be subject to taxation. In the above case, no such determinations have been made, hence Wilma cannot assume the tax obligations of the diseased. The laws of England further emphasize that the decision to label a discretionary trust is under the jurisdiction of the courts as was in the case of Challinor Vs Challinor 2009. This provision is however limited to family and dependants as in the 1975 inheritance act (Bar, Drobnig and Alpa, 88). In the Commissioner Vs Tufts case, Justice Blackmun held that all the respondents in the case had an obligation to account for proceeds received free of tax, and hence, must be included in the tax basis. This judgment, therefore, implies that Wilma who inherits the house has an obligation to account for any proceeds from the sales of the property which she has received tax-free (Lavine 28). The repealed federal provisions for the taxation of the inherited property have provided that all inherited property will be based on their value immediately before the transfer, and hence any gains realized thereafter will be considered in the filing of tax returns (Clifford,238). This also applies to any value realized by selling the estate upon the transfer (Lasser 119). In addition to the above provisions, the federal government has comprehensive inheritance tax policies that cover all forms of inherited property and, as such, no individual can claim to have no obligation on gains realized from inherited property (Nissley 111).

Based on the above provisions, the best option will be to sell the two-party and make the necessary disclosures for taxation purposes and use the proceeds to settle part of the mortgage repayment. This will lead to the settlement of the loan at less than the current level of $255000. Wilma has no liability to the bank and cannot be compelled to assume the liabilities of the diseased, since it has not been stated with certainty that the loan would be cleared. The only obligation under the federal laws is to include any gains made from the inherited property for taxation purposes (Miller 112).

Leaving the property would deprive him of the opportunity to gain anything because the bank is interested in the estate provided it was used as a security against the mortgage. Negotiating with the bank on the modalities of repayment will amount to assuming the liability of the diseased, although this is not provided by law unless prior agreements are made (Geschwender 232).

References

Bar, V. Christine, Ulrich Drobnig and Alpa Guido. The interaction of contract law and tort and property law in Europe: A comparative study. München: Sellier, 2004.Print.

Clifford, Dennis. Plan your estate.7^th ed. Berkeley, Calif.: Nolo, 2010. Print.

Geschwender, Arlyne. Real estate principles & practices.8^th ed. Mason, OH: Cengage Learning, 2010.Print.

Lasser, J. K. J.K. Lasser’s your income tax 2011.7^th ed. Hoboken, N.J.: Wiley, 2010. Print.

Levine, L.Mark. Real estate transactions : tax planning and consequences. St. Paul, Minn: West Group, 2003.Print.

Miller, K. Robert. Inheritance and wealth in America. New York [u.a.] Plenum Press, 1998. Print.

Newman, S. Joel. Federal income taxation: Cases, problems, and materials.4^th ed. St. Paul, MN: Thomson/West, 2008. Print.

Nissley, P. Julia. How to probate an estate in California.21^st ed. Berkeley, Calif: Nolo, 2011. Print.

Windish, F. David. Practical Guide to Real Estate Taxation.5^th ed. Chicago: CCH Inc., 2008.Print.