INTRODUCTION TO REAL ESTATE TAX SHELTER (Supplement Pages 49-52)PowerPoint PresentationBASIC TAX RULES OF GAIN OR LOSS ON SALEOn Purchase of Land and BuildingOn Purchase of Land and Building (cont’d)Slide 6Nonrecourse Financing and Crane (Text p. 640)Crane v. Commissioner 331 U.S. 1 (1947) (discussed in Text at p. 640 and in Mayerson at Supp. p. 52)Crane (Cont’d)AMOUNT REALIZEDSlide 11Crane v. Commissioner (cont’d)Crane’s Footnote 37Slide 14Mayerson v. Commissioner (Supplement p. 52 and Text p. 654) Nonrecourse Seller FinancingMAYERSON: ARGUMENTS OF IRSMayerson (IRS Arguments Cont’d)Mayerson: Present ValueMAYERSONMore on MayersonSlide 21Yet More on MayersonSlide 23Slide 24And Even More on MayersonAt RiskSlide 27Seller-Provided Financing: Purchase Price ReductionNotes following MayersonTax Relief on Mortgage Discharge in the Wake of The Financial CrisisSeller-Provided Financing: Not “At Risk” (Supp. P. 92)BASIC TAX RULES OF GAIN OR LOSS ON SALE (review prior to Tufts)Commissioner v. Tufts (1983) (Text p. 940)Tufts (cont’d)Slide 35Tufts: Taxpayer versus IRSTUFTS THEORIES OF TAX TREATMENT ON “RELIEF” FROM THE MORTGAGEEconomic BenefitCancellation of IndebtednessCoinvestment TheoryTax BenefitTax Benefit (cont’d)Double DeductionDouble Deduction (cont’d)Professor Barnett’s Bifurcated TransactionBifurcated Transaction (cont’d)Slide 47Slide 48Professor Bittker’s Balancing Entry versus Professor Barnett’s Bifurcated TransactionSlide 50Balancing Entry: Bittker’s No Depreciation Example (cont’d)Slide 52Slide 53Court Rejects Bittker’s BifurcationCourt Emphasized Prior Untaxed ReceiptTufts: Much Left UnchangedTufts: Requires SymmetryTufts Does Not Validate Inflated Purchase PricesFootnote to Tufts (Supplement pp. 91, 89)Footnote to Tufts (cont’d)Slide 61Penultimate Footnote to TuftsFinal Footnote to Tufts2013 Tax UpdateCasebook Note on Foreclosure (Text p. 913)Casebook Note on Foreclosures (cont’d)Slide 67Slide 68Some Terms of the Net LeaseSubordination of Lease to Mortgage (a first look at subordination)Terms of the Lease (cont’d)Slide 72The Mortgage Anticipated The Financing Corporation Would Transfer TitleTHE FINANCING CORPORATION (a.k.a. “Special Purpose Entity” or “Special Purpose Vehicle”)Purposes of the Special Purpose EntityCOURT’S DEFINITION OF THE ISSUESIs the Write-Off in the Corporation?Deductions Locked Up in the Corporation? (cont’d)The “Reversionary Interest” Argument of the IRSBolger’s Present InterestThe Measure of Bolger’s BasisBolger’s “Bitter Pill” (Crane plus accelerated methods of computing depreciation)Other Possibilities in BolgerBollinger v. Commissioner (Supp. p. 78)Slide 85Ex Ante: The Nominee AgreementEx PostEx Post (cont’d)Slide 89Bollinger (cont’d)Slide 91Moline and Taxpayer Gaming the SystemMoline and Taxpayer Gaming the System (cont’d)National Carbide Requirement #1Justice Scalia on the Usury IssueNational Carbide Requirement # 2Bollinger’s Safe HarborDonald J. Weidner1INTRODUCTION TO REAL ESTATE TAX SHELTER(Supplement Pages 49-52)Two Different Meanings of Real Estate Tax Shelter a. An Investment That Generates Cash that is Sheltered from Taxb. An Investment That Generates Tax Losses. Taxable income or loss can be derived from Net Cash Flow (NCF).RR = Rent ReceiptsRT = Real Estate TaxesME = Maintenance Expense (including insurance)P = Principal repaid on debt (amortization)I = Interest paid on debtD = Depreciation deduction allowableDonald J. Weidner2 Example of tax shelter in second senseNCF = RR – RT – ME – (P + I) = $10,000 – 500 – 400 – (900 + 8,000) = $200 Caveat: Capital ExpendituresT.I. = NCF + P – D = 200 + 900 – 1,200 = ($100) Collapse of tax shelterT.I. = NCF + P – D = 200 + 8,000 – 700 = $7,500 Example of Tax Shelter in Second SenseDonald J. Weidner3 AMOUNT REALIZED- ADJUSTED BASIS GAIN MONEY RECEIVED+ FMV OF PROPERTY RECEIVED AMOUNT REALIZED INITIAL BASIS (GENERALLY COST)- DEPRECIATION ALLOWABLE+ CAPITAL IMPROVEMENTS (ADDITIONAL COST) ADJUSTED BASIS (UNRECOVERED COST)BASIC TAX RULES OF GAIN OR LOSS ON SALEDonald J. Weidner4On Purchase of Land and Building1. Allocate cost between land and building.•The investment in the land is an investment in a non-depreciable asset—an asset that does not waste away and therefore has an unlimited useful life.2. The building is presumably a wasting asset (through obsolescence or physical deterioration). The investment in the building is depreciable if the building is: (a) used in a trade or business; or (b) held for the production of income. Ex. A $100 total cost of land and building must be allocated, say, $20 to the land and $80 to the building. Only the $80 is depreciable.Donald J. Weidner5On Purchase of Land and Building (cont’d)3. Determine the “applicable [cost] recovery period” (formerly known as “useful life”) for the asset being depreciated). 1. Code sec. 168(c) says 1. 39 years for nonresidential, 2. 27.5 years for residential rental.On Purchase of Land and Building (cont’d)4. Allocate the building cost over the applicable recovery period (39 years for nonresidential). •Code sec. 168(b)(3) says the “straight line” method is the only method that may be used to compute depreciation deductions on either nonresidential property or residential rental property.•The depreciation deduction will be the same every year of the cost recovery period•That is, the deductions may not be “accelerated”—bunched up in the beginning of the cost recovery period. Donald J. Weidner6Donald J. Weidner7Nonrecourse Financing and Crane(Text p. 640)•Text discusses “mortgage financing as part of an investor’s depreciable basis in the property—i.e., ‘leveraged depreciation.’”•“The investor’s tax basis in acquired property normally is his cost, which includes not only his investment but any debt incurred to purchase or improve the property.”–“This includes not only funds borrowed by the investor, but any debt to which the property is subject at the time of the acquisition.”•“The Supreme Court has held that basis includes debt on which the investor has no personal liability.”–Citing Crane v. Commissioner, 331 U.S. 1 (1947).Donald J. Weidner8Crane v. Commissioner331 U.S. 1 (1947) (discussed in Text at p. 640 and in Mayerson at Supp. p. 52)Ms. Crane sold apartment bldg for