Fringe benefits aircraft valuation formula. The Standard Industry Fare Level (SIFL) cents-per-mile rates and terminal charges in effect for the first half of 2005 are set forth for purposes of determining the value of noncommercial flights on employer-provided aircraft under section 1.61-21(g) of the regulations.
Final regulations under section 7701 of the Code clarify that a disregarded entity (an entity that is not treated as separate from its owner) is treated as a separate entity for purposes of any federal tax liability for which it is liable.
Final regulations under section 860F of the Code relate to the application of the unified partnership audit procedures to disputes regarding the ownership of residual interests in a Real Estate Mortgage Investment Conduit (REMIC).
Final regulations under section 817 of the Code remove provisions of the regulations that apply a look-through rule to assets of a nonregistered partnership for purposes of satisfying the diversification requirements of section 817(h).
This notice clarifies and modifies Notice 2004-80 to provide additional guidance for material advisors who are required to comply with sections 6111 and 6112 of the Code, as amended, and to grant an extension of time for material advisors to comply with the new filing requirements under section 6111 as previously provided in Notice 2004-80 and Notice 2005-17. Notices 2004-80 and 2005-17 clarified and modified.
Weighted average interest rate update; corporate bond indices; 30-year Treasury securities. The weighted average interest rate for March 2005 and the resulting permissible range of interest rates used to calculate current liability and to determine the required contribution are set forth.
Little League Baseball, Inc. 2321213 Schenectady LL of Schenectady, NY, and Jane Withers Wonderful World of Dolls and Teddy Bears of Studio City, CA, no longer qualify as organizations to which contributions are deductible under section 170 of the Code.
This notice modifies Notice 2005-4, 2005-2 I.R.B. 289, by extending the transitional rule related to sales of gasoline on oil company credit cards and by making several corrections to Notice 2005-4. Notice 2005-4 provides guidance on certain excise tax provisions in the Code that were added or affected by the American Jobs Creation Act of 2004, Pub. L. 108-357. Notice 2005-4 modified.
Automobile owners and lessees. This procedure provides owners and lessees of passenger automobiles (including trucks, vans, and electric automobiles) with tables detailing the limitations on depreciation deductions for passenger automobiles first placed in service during calendar year 2005 and the amounts to be included in income for passenger automobiles first leased during calendar year 2005.
The principal author of this revenue ruling is Kathleen Edmondson of the Office of Division Counsel/Associate Chief Counsel (Tax Exempt and Government Entities). For further information regarding this revenue ruling, contact Ms. Edmondson at (202) 622-0047 (not a toll-free call).
This document contains final regulations removing provisions of the Income Tax Regulations that apply a look-through rule to assets of a nonregistered partnership for purposes of satisfying the diversification requirements of section 817(h) of the Internal Revenue Code.
Effective Date: These regulations are effective as of March 1, 2005. However, arrangements in existence on March 1, 2005, will be considered to be adequately diversified if: (i) those arrangements were adequately diversified within the meaning of section 817(h) prior to March 1, 2005, and (ii) by December 31, 2005, the arrangements are brought into compliance with the final regulations.
Applicability Date: For dates of applicability, see §1.817-5(i).
James Polfer, (202) 622-3970 (not a toll-free number).
Under section 817(h), a variable contract based on a segregated asset account is not treated as an annuity, endowment, or life insurance contract unless the segregated asset account is adequately diversified. For purposes of testing diversification, section 817(h)(4) and §1.817-5(f) of the regulations provide a look-through rule for assets held through certain investment companies, partnerships, or trusts. Section 1.817-5(f)(2)(i) provides that look-through treatment is available with respect to any investment company, partnership, or trust only if all the beneficial interests in the investment company, partnership, or trust are held by one or more segregated asset accounts of one or more insurance companies, and public access to such investment company, partnership, or trust is available exclusively (except as otherwise permitted by section 1.817-5(f)(3)) through the purchase of a variable contract. Under §1.817-5(f)(2)(ii), the look-through rule applies to a partnership interest that is not registered under a Federal or state law regulating the offering or sale of securities. Unlike §1.817-5(f)(2)(i), satisfaction of the nonregistered partnership look-through rule of §1.817-5(f)(2)(ii) is not explicitly conditioned on limiting the ownership of interests in the partnership to certain specified holders.
On July 30, 2003, the Treasury Department and the IRS published a notice of proposed rulemaking (REG-163974-02, 2003-2 C.B. 595) under section 817 in the Federal Register (68 FR 44689). The proposed regulations would remove the rule that applies specifically to nonregistered partnerships for purposes of testing diversification. The proposed regulations also would remove an example that illustrates that rule.
The application of §1.817-5(f)(2)(i) to interests in nonregistered partnerships will be unchanged by the removal of §1.817-5(f)(2)(ii). Thus, look-through treatment will be available for interests in a nonregistered partnership if all the beneficial interests in the partnership are held by one or more segregated asset accounts of one or more insurance companies and public access to the partnership is available exclusively (except as otherwise permitted by §1.817-5(f)(3)) through the purchase of a variable contract.
Written comments were received in response to the notice of proposed rulemaking. A public hearing on the notice of proposed rulemaking was held on April 1, 2004. After consideration of all the comments and the hearing testimony, the proposed regulations are adopted as amended by this Treasury decision.
In addition to requesting comments on the clarity of the proposed rule and how the rule could be made easier to understand, the Treasury Department and the IRS specifically requested comments on: (1) whether revocation of §1.817-5(f)(2)(ii) necessitates other changes to the look-through rules of §1.817-5(f), in particular whether the list of holders permitted by §1.817-5(f)(3) should be amended or expanded, and whether a non-pro-rata distribution of the investment returns of a segregated asset account should be permitted to take account of certain bonus payments to investment managers commonly referred to as incentive payments, (2) whether §1.817-5 should be updated to take account of changes to variable contracts since the final regulations were published in 1986, and (3) whether regulations are needed to address when a holder of a variable contract will be treated as the owner of assets held in a segregated asset account and, therefore, required to include earnings on those assets in income.
Two comments on the proposed regulation concerned the definition of “security” in §1.817-5(h)(6). Under §1.817-5(b)(1)(ii)(A), all securities of the same issuer are treated as one investment for the purposes of satisfying the diversification requirements. Section 1.817-5(h)(6) provides that the term security includes “a cash item and any partnership interest registered under a Federal or State law regulating the offering or sale of securities,” but does not include “any other partnership interest.” The commentators stated that the definition of “security” that applies to §1.817-5 should be amended to include an interest in a non-registered partnership. The Treasury Department and the IRS agree that, in light of the revocation of former §1.817-5(f)(2)(ii), the definition of security should be modified to remove the distinction between registered and nonregistered partnership interests. The final regulations reflect this change.
A number of commentators also suggested that the regulation should be clarified by adding to or otherwise revising the examples contained in §1.817-5(g). In response to these comments, the final regulations revise §1.817-5(g) Example 1 to remove the reference to partnership P as a publicly registered partnership. The Treasury Department and the IRS believe that, with this change, the examples contained in §1.817-5(g) adequately explain the application of §1.817-5 to partnership interests. Any questions concerning the application of §1.817-5 to more specific factual scenarios may be addressed by the letter ruling process or by subsequent published guidance.
Two commentators urged that existing arrangements either should be grandfathered in some fashion or should be given additional time to be brought into compliance with the final regulations. The notice of proposed rulemaking provided that arrangements in existence on the effective date of the revocation of §1.817-5(f)(2)(ii) will be considered to be adequately diversified if: (i) those arrangements were adequately diversified within the meaning of section 817(h) prior to the revocation of §1.817-5(f)(2)(ii), and (ii) by the end of the last day of the second calendar quarter ending after the effective date of the regulation, the arrangements are brought into compliance with the final regulations. The Treasury Department and the IRS do not believe it is appropriate to grandfather existing arrangements indefinitely. In response to these comments, however, the transition period for existing arrangements to be brought into compliance with the regulations is two calendar quarters longer than the period provided in the proposed regulations.
Finally, one commentator questioned the authority of the Treasury Department and the IRS to enact this final regulation because “the only substantive impetus for the regulation is a general statement in the legislative history.” Congress enacted the diversification requirements of section 817(h) to “discourage the use of tax-preferred variable annuity and variable life insurance primarily as investment vehicles,” H.R. Conf. Rep. No. 98-861, at 1055 (1984), and granted the Secretary broad regulatory authority to develop rules to carry out this intent. The Treasury Department and the IRS have determined that this final regulation and the rest of the regulations contained in §1.817-5 were prescribed within the delegation of authority provided by Congress.
Many comments concerned the list of permitted investors under §1.817-5(f)(3). Notwithstanding the limitations on public access to an investment company, partnership, or trust that is subject to look-through treatment under §1.817-5(f), §1.817-5(f)(3) permits look-through treatment if the beneficial interests of the investment company, partnership, or trust are held by certain other “permitted investors,” including the general account of a life insurance company (if certain requirements are met), the manager or a corporation related to the manager (if certain requirements are met), or the trustee of a qualified plan. Commentators suggested that the list of permitted investors be expanded to include, for example, qualified tuition programs described in section 529; segregated asset accounts of foreign insurance companies; foreign pension plans; persons or entities related to the manager of an investment company, partnership, or trust in a manner specified in section 707(b); certain investment professionals operating as service providers; or persons who receive interests in a partnership as a result of inadvertent transfers, such as by bankruptcy or death of the permitted investor. The sole speaker at the public hearing on the notice of proposed rulemaking testified that the list of investors permitted by §1.817-5(f)(3) should be expanded to include “floor specialists” as that term is defined in section 1236(d)(2).
Other comments suggested guidance on non-pro-rata manager compensation. In order for the manager (or a corporation related in a manner specified in section 267(b) to the manager) of an investment company, partnership, or trust, to be a permitted investor under §1.817-5(f)(3)(ii), (1) its interest must be held in connection with the creation or management of the investment company, partnership, or trust; (2) the return on such interest must be computed in the same manner as the return on an interest held by a segregated asset account is computed (determined without regard to expenses attributable to variable contracts); and (3) there must be no intent to sell such interest to the public. A number of commentators stated that the requirement that the return on a manager’s interest be computed in the same manner as the return on a segregated asset account’s interest — essentially a pro-rata distribution requirement — is inconsistent with prevailing market practices concerning manager bonuses, discourages the creation of insurance dedicated funds, and is not necessary to prevent abuse of the look-through rules contained in §1.817-5(f).
Some comments stated there is a need to clarify the consequences to a variable contract and variable contract holder when the contract’s segregated asset account contains an asset in which beneficial interests are held by investors (such as qualified plans) that qualified as permitted investors in §1.817-5(f)(2) or (3) at the time of initial investment, but subsequently lose their status. Similarly, one commentator urged that if an insurance company has a reasonable basis to believe that an investment company, partnership, or trust satisfies the requirements of §1.817-5(f)(2), a variable contract of that insurance company should be permitted to look-through that entity for purposes of testing a segregated asset account on which that contract is based, even if the investment company, partnership, or trust has investors not described in §1.817-5(f)(2) or (3). The commentator suggested that this standard would be consistent with the standard of determination often used in the Federal securities laws.
Although the comments on §1.817-5 generally are not adopted in this Treasury decision, the Treasury Department and IRS will consider these comments in the event of future published guidance. For example, Rev. Rul. 2005-7, 2005-6 I.R.B. 464 (see §601.601(d)(2)(ii)(b) of this chapter) provides guidance on the application of the diversification look-through rule to tiered investment companies.
Finally, some comments concerned the need for additional guidance addressing circumstances under which the holder of a variable contract will be treated as the owner of assets held by a segregated asset account by virtue of the control the contract holder has over those assets. Under Rev. Rul. 81-225, 1981-2 C.B. 12 (see §601.601(d)(2)(ii)(b) of this chapter), the owner of a variable annuity contract funded by publicly available mutual fund shares is treated as the owner of those shares. Rev. Rul. 2003-92, 2003-2 C.B. 350 (see §601.601(d)(2)(ii)(b) of this chapter), clarified and amplified Rev. Rul. 81-225 by applying the same rule to variable life insurance contracts, and by treating as publicly available a nonregistered partnership, interests in which are sold only to qualified purchasers that are accredited investors or to no more than one hundred accredited investors. See also Rev. Rul. 2003-91, 2003-2 C.B. 347; Rev. Rul. 82-54, 1982-1 C.B. 11; Rev. Rul. 80-274, 1980-2 C.B. 27; Rev. Rul. 77-85, 1977-1 C.B. 12.; Christoffersen v. U.S., 749 F.2d 513 (8th Cir. 1984), rev’g 578 F. Supp. 398 (N.D. Iowa 1984). See §601.601(d)(2)(ii)(b) of this chapter.
One commentator urged that Rev. Rul. 2003-92 should not be applied retroactively to treat certain investors as the “general public” as that term is used in Rev. Rul. 81-225. Specifically, the commentator requested relief for investments in real estate partnerships, interests in which are held directly by (1) organizations described in section 501(c)(3), and (2) such partnerships’ investment managers, if those managers are not described in §1.817-5(f)(3)(ii) because of bonus payment arrangements. The commentator believed such relief is warranted because of uncertainty concerning the meaning of “general public” as that term is used in Rev. Rul. 81-225. Several other commentators suggested that regulations under section 817 should clarify that the permitted investors under §1.817-5(f)(3) do not constitute the “general” public as that term is used in Rev. Rul. 2003-92 and Rev. Rul. 81-225. According to these commentators, it would be anomalous for ownership by a permitted investor under §1.817-5(f)(3) to result in a variable contract holder being treated as the owner of an investment company, partnership, or trust, when the look-through rule itself appears to endorse ownership by that same investor for purposes of testing diversification. Still another commentator noted that when determining whether a contract holder is treated as the owner of segregated account assets, communications between investment advisors or officers and variable contract holders should be permitted if the communications are consistent with Federal securities and commodities laws.
One commentator suggested that the preamble to this Treasury decision should confirm the intended scope of Rev. Proc. 99-44, 1999-2 C.B. 598. Under Rev. Proc. 99-44, a contract is treated as an annuity contract described in sections 403(a), 403(b), or 408(b), notwithstanding that contract premiums are invested at the direction of the contract holder in publicly available securities, so long as certain requirements are met. Those requirements include a limitation that no additional Federal tax liability would have been incurred if the employer of the contract holder had instead paid amounts into a custodial account in an arrangement that satisfied the requirements of section 403(b)(7)(A) or no additional Federal tax liability would have been incurred if the consideration for the contract had instead been held as part of a trust that would satisfy the requirements of section 408(a), as applicable. The commentator urged that the preamble to this Treasury decision clarify that the “no additional Federal tax liability” limitation was intended to apply only to tax on unrelated business income. Finally, one commentator noted that, given the inherent factual nature of the determination whether a contract holder is treated as the owner of segregated account assets, the issue is better addressed by letter ruling or revenue ruling, rather than by regulations.
Although the comments on investor control are not adopted in this Treasury decision, they are responsive to the request for comments in the July 30, 2003, notice of proposed rulemaking and will receive careful attention in the event of further guidance on investor control.
It has been determined that this Treasury decision is not a significant regulatory action as defined in Executive Order 12866. Therefore, a regulatory assessment is not required. It also has been determined that section 553(b) of the Administrative Procedure Act (5 U.S.C. chapter 5) does not apply to these regulations, and because the regulations do not impose a collection of information on small entities, the Regulatory Flexibility Act (5 U.S.C. chapter 6) does not apply. Pursuant to section 7805(f) of the Internal Revenue Code, the notice of proposed rulemaking preceding these regulations was submitted to the Small Business Administration for comment on its impact on small business.
1. Paragraphs (f)(2)(ii) and (g) Example 3 are removed.
2. Paragraph (f)(2)(iii) is redesignated as paragraph (f)(2)(ii).
3. The first sentence of paragraph (g) Example 1 is revised.
4. Paragraph (g) Example 4 is redesignated as paragraph (g) Example 3.
5. Paragraph (h)(6) is revised.
6. New paragraph (i)(2)(v) is added.
§ 1.817-5 Diversification requirements for variable annuity, endowment, and life insurance contracts.
(6) Security. The term security shall include a cash item and any partnership interest, whether or not registered under a Federal or State law regulating the offering or sale of securities. The term shall not include any interest in real property, or any interest in a commodity.
(B) By December 31, 2005, the account is adequately diversified within the meaning of section 817(h) and this regulation.
The principal author of these regulations is James Polfer, Office of the Associate Chief Counsel (Financial Institutions and Products), Office of Chief Counsel, Internal Revenue Service. However, personnel from other offices of the Treasury Department and the IRS participated in their development.
This document contains final regulations relating to the application of the unified partnership audit procedures to disputes regarding the ownership of residual interests in a Real Estate Mortgage Investment Conduit (REMIC). These regulations will affect taxpayers that invest in REMIC residual interests.
These regulations apply after December 31, 1986.
Arturo Estrada, (202) 622-3900 (not a toll-free number).
This regulation amends 26 CFR Part 1 under section 860F of the Internal Revenue Code (Code) relating to the application of the unified partnership audit procedures of subchapter C of chapter 63 of the Code to REMICs and the holders of residual interests. Section 860F(e) provides that a REMIC is treated as a partnership (and holders of residual interests in that REMIC shall be treated as partners) for purposes of subtitle F of the Code, which includes the unified partnership audit procedures. The taxable income of a holder of a REMIC residual interest is determined under the REMIC provisions of part IV of subchapter M, which require the holder to take into account its daily portion of the REMIC’s taxable income or net loss for each day during the taxable year on which the holder holds its interest. Section 860C(a)(1). The provisions of subchapter K relating to the determination of the taxable income of a partnership and its partners do not apply to REMICs or the holders of REMIC residual interests. Section 860A(a).
Questions have arisen regarding whether the identity of the holder of a REMIC residual interest is treated as a partnership item for purposes of the unified partnership audit procedures. Questions also have arisen regarding the applicability of the unified partnership audit procedures when a determination is made under the REMIC regulations to disregard certain transfers of REMIC residual interests and continue to treat the transferor as the holder of the transferred REMIC residual interests. See §§1.860E-1(c) and 1.860G-3.
The IRS and Treasury Department have determined that the identity of a holder of a REMIC residual interest is more appropriately determined at the residual interest holder level than at the REMIC entity level.
The regulations provide that the determination of the identity of a holder of a REMIC residual interest is not a partnership item for purposes of the unified partnership audit procedures as applied to REMICs, whether or not such determination involves the application of a disregarded transfer rule. Unlike the identity of a partner in a partnership subject to subchapter K, the identity of the holder of a REMIC residual interest does not affect the calculation of the REMIC’s taxable income or net loss.
These regulations apply after December 31, 1986. See §1.860A-1(b)(1)(ii).
It has been determined that this Treasury decision is not a significant regulatory action as defined in Executive Order 12866. Therefore, a regulatory assessment is not required. It also has been determined that section 553(b) of the Administrative Procedure Act (5 U.S.C. chapter 5) does not apply to these regulations, and because these regulations do not impose a collection requirement on small entities, the Regulatory Flexibility Act (5 U.S.C. chapter 6) does not apply. Therefore, a Regulatory Flexibility Analysis is not required. Pursuant to section 7805(f) of the Code, this Treasury decision has been submitted to the Chief Counsel for Advocacy of the Small Business Administration for comment on its impact on small businesses.
§1.860F-4 REMIC reporting requirements and other administrative rules.
(a) * * * The identity of a holder of a residual interest in a REMIC is not treated as a partnership item with respect to the REMIC for purposes of subchapter C of chapter 63.
The principal author of these regulations is Arturo Estrada, Office of the Associate Chief Counsel (Financial Institutions and Products). However, other personnel from the IRS and Treasury Department participated in their development.
This document contains final regulations that clarify that qualified REIT subsidiaries, qualified subchapter S subsidiaries, and single owner eligible entities that are disregarded as entities separate from their owners are treated as separate entities for purposes of any Federal tax liability for which the entity is liable. These regulations affect disregarded entities that are liable for Federal taxes with respect to tax periods during which they were not disregarded or because they are successors or transferees of taxable entities.
Effective Date: These regulations are effective April 1, 2004.
Applicability Dates: For dates of applicability, see §§1.856-9(c), 1.1361-4(a)(6)(iii), and 301.7701-2(e).
Martin Schäffer, (202) 622-3070 (not a toll-free number).
This document contains amendments to 26 CFR parts 1 and 301. The amendments to 26 CFR part 1 are under sections 856 and 1361 of the Internal Revenue Code (Code). Section 856(i) was added by the Tax Reform Act of 1986 (Public Law 99-514, 100 Stat. 2085). Section 1361(b)(3) was added by the Small Business Job Protection Act of 1996 (Public Law 104-188, 110 Stat. 1755). The amendments to 26 CFR part 301 are to §301.7701-2, first promulgated by T.D. 8697, 1997-1 C.B. 215 [61 FR 66584] (December 18, 1996). On April 1, 2004, a notice of proposed rulemaking (REG-106681-02, 2004-18 I.R.B. 852) relating to the taxation of disregarded entities was published in the Federal Register (69 FR 17117). A notice of correction was published in the Federal Register (69 FR 22463) on April 26, 2004. No comments were received from the public in response to the notice of proposed rulemaking. No public hearing was requested, and accordingly, no hearing was held. This Treasury decision adopts the language of the proposed regulations with only minor clarifying changes.
It has been determined that this Treasury decision is not a significant regulatory action as defined in Executive Order 12866. Therefore, a regulatory assessment is not required. It also has been determined that section 553(b) of the Administrative Procedure Act (5 U.S.C. chapter 5) does not apply to these regulations and, because the regulations do not impose a collection of information on small entities, the Regulatory Flexibility Act (5 U.S.C. chapter 6) does not apply. Pursuant to section 7805(f) of the Code, the proposed regulations preceding these regulations were submitted to the Chief Counsel for Advocacy of the Small Business Administration for comment on its impact on small business.
§1.856-9 Treatment of certain qualified REIT subsidiaries.
(1) Federal tax liabilities of the qualified REIT subsidiary with respect to any taxable period for which the qualified REIT subsidiary was treated as a separate corporation.
(2) Federal tax liabilities of any other entity for which the qualified REIT subsidiary is liable.
Example 1. X, a calendar year taxpayer, is a domestic corporation 100 percent of the stock of which is acquired by Y, a real estate investment trust, in 2002. X was not a member of a consolidated group at any time during its taxable year ending in December 2001. Consequently, X is treated as a qualified REIT subsidiary under the provisions of section 856(i) for 2002 and later periods. In 2004, the Internal Revenue Service (“IRS”) seeks to extend the period of limitations on assessment for X’s 2001 taxable year. Because X was treated as a separate corporation for its 2001 taxable year, X is the proper party to sign the consent to extend the period of limitations.
Example 2. The facts are the same as in Example 1, except that upon Y’s acquisition of X, Y and X jointly elect under section 856(l) to treat X as a taxable REIT subsidiary of Y. In 2003, Y and X jointly revoke that election. Consequently, X is treated as a qualified REIT subsidiary under the provisions of section 856(i) for 2003 and later periods. In 2004, the IRS determines that X miscalculated and underreported its income tax liability for 2001. Because X was treated as a separate corporation for its 2001 taxable year, the deficiency may be assessed against X and, in the event that X fails to pay the liability after notice and demand, a general tax lien will arise against all of X’s property and rights to property.
Example 3. X is a qualified REIT subsidiary of Y under the provisions of section 856(i). In 2001, Z, a domestic corporation that reports its taxes on a calendar year basis, merges into X in a state law merger. Z was not a member of a consolidated group at any time during its taxable year ending in December 2000. Under the applicable state law, X is the successor to Z and is liable for all of Z’s debts. In 2004, the IRS seeks to extend the period of limitations on assessment for Z’s 2000 taxable year. Because X is the successor to Z and is liable for Z’s 2000 taxes that remain unpaid, X is the proper party to sign the consent to extend the period of limitations.
(c) Effective date. This section applies on or after April 1, 2004.
1. In paragraph (a)(1) introductory text, the first sentence is amended by removing the language “paragraph (a)(3)” and adding “paragraphs (a)(3) and (a)(6)” in its place.
2. Paragraph (a)(6) is added.
§1.1361-4 Effect of Qsub election.
(A) Federal tax liabilities of the QSub with respect to any taxable period for which the QSub was treated as a separate corporation.
(B) Federal tax liabilities of any other entity for which the QSub is liable.
(C) Refunds or credits of Federal tax.
Example 1. X has owned all of the outstanding stock of Y, a domestic corporation that reports its taxes on a calendar year basis, since 2001. X and Y do not report their taxes on a consolidated basis. For 2003, X makes a timely S election and simultaneously makes a QSub election for Y. In 2004, the Internal Revenue Service (“IRS”) seeks to extend the period of limitations on assessment for Y’s 2001 taxable year. Because Y was treated as a separate corporation for its 2001 taxable year, Y is the proper party to sign the consent to extend the period of limitations.
Example 2. The facts are the same as in Example 1, except that in 2004, the IRS determines that Y miscalculated and underreported its income tax liability for 2001. Because Y was treated as a separate corporation for its 2001 taxable year, the deficiency for Y’s 2001 taxable year may be assessed against Y and, in the event that Y fails to pay the liability after notice and demand, a general tax lien will arise against all of Y’s property and rights to property.
Example 3. X is a QSub of Y. In 2001, Z, a domestic corporation that reports its taxes on a calendar year basis, merges into X in a state law merger. Z was not a member of a consolidated group at any time during its taxable year ending in December 2000. Under the applicable state law, X is the successor to Z and is liable for all of Z’s debts. In 2003, the IRS seeks to extend the period of limitations on assessment for Z’s 2000 taxable year. Because X is the successor to Z and is liable for Z’s 2000 taxes that remain unpaid, X is the proper party to execute the consent to extend the period of limitations on assessment.
(iii) Effective date. This paragraph (a)(6) applies on or after April 1, 2004.
1. Paragraph (c)(2)(iii) is added.
2. Paragraph (e) is revised.
(1) Federal tax liabilities of the entity with respect to any taxable period for which the entity was not disregarded.
(2) Federal tax liabilities of any other entity for which the entity is liable.
Example 1. In 2001, X, a domestic corporation that reports its taxes on a calendar year basis, merges into Z, a domestic LLC wholly owned by Y that is disregarded as an entity separate from Y, in a state law merger. X was not a member of a consolidated group at any time during its taxable year ending in December 2000. Under the applicable state law, Z is the successor to X and is liable for all of X’s debts. In 2004, the Internal Revenue Service (“IRS”) seeks to extend the period of limitations on assessment for X’s 2000 taxable year. Because Z is the successor to X and is liable for X’s 2000 taxes that remain unpaid, Z is the proper party to sign the consent to extend the period of limitations.
Example 2. The facts are the same as in Example 1, except that in 2002, the IRS determines that X miscalculated and underreported its income tax liability for 2000. Because Z is the successor to X and is liable for X’s 2000 taxes that remain unpaid, the deficiency may be assessed against Z and, in the event that Z fails to pay the liability after notice and demand, a general tax lien will arise against all of Z’s property and rights to property.
(e) Effective date. (1) Except as otherwise provided in this paragraph (e), the rules of this section apply as of January 1, 1997, except that paragraph (b)(6) of this section applies on or after January 14, 2002, to a business entity wholly owned by a foreign government regardless of any prior entity classification, and paragraph (c)(2)(ii) of this section applies to taxable years beginning after January 12, 2001. The reference to the Finnish, Maltese, and Norwegian entities in paragraph (b)(8)(i) of this section is applicable on November 29, 1999. The reference to the Trinidadian entity in paragraph (b)(8)(i) of this section applies to entities formed on or after November 29, 1999. Any Maltese or Norwegian entity that becomes an eligible entity as a result of paragraph (b)(8)(i) of this section in effect on November 29, 1999, may elect by February 14, 2000, to be classified for Federal tax purposes as an entity other than a corporation retroactive to any period from and including January 1, 1997. Any Finnish entity that becomes an eligible entity as a result of paragraph (b)(8)(i) of this section in effect on November 29, 1999, may elect by February 14, 2000, to be classified for Federal tax purposes as an entity other than a corporation retroactive to any period from and including September 1, 1997.
(2) Paragraph (c)(2)(iii) of this section applies on or after April 1, 2004.
The principal author of these regulations is James M. Gergurich of the Office of the Associate Chief Counsel (Passthroughs & Special Industries). However, other personnel from the IRS and Treasury Department participated in their development.
The purpose of this notice is to clarify and modify Notice 2004-80, 2004-50 I.R.B. 963, to provide additional guidance for material advisors who are required to comply with §§ 6111 and 6112 of the Internal Revenue Code, as amended, and to grant an extension of time for material advisors to comply with the new filing requirements under § 6111.
Section 6111, as amended by the American Jobs Creation Act of 2004, P.L. 108-357, 118 Stat. 1418 (the Act), requires that each material advisor with respect to any reportable transaction make a return setting forth information identifying and describing the transaction and any potential tax benefits expected to result from the transaction no later than the date specified by the Secretary. Notice 2004-80 announced that the Internal Revenue Service and the Treasury Department intend to issue regulations providing rules under § 6111.
Notice 2004-80 also provides interim rules implementing the requirements of § 6111 until the Secretary prescribes regulations. Under Notice 2004-80, each material advisor with respect to a reportable transaction must file a return on Form 8264, Application for Registration of a Tax Shelter, within 30 days after the date on which the person becomes a material advisor. Notice 2004-80 also provides transitional relief in the case of a person who becomes a material advisor after October 22, 2004, and on or before December 31, 2004, that allows the material advisor to file the return before February 1, 2005. Notice 2005-17, 2005-8 I.R.B. 606, released on January 28, 2005, grants additional transitional relief allowing a person who becomes a material advisor after October 22, 2004, and on or before January 29, 2005, to file the return before March 1, 2005.
Since the issuance of Notice 2004-80, questions have arisen regarding the application of the interim rules to material advisors. In addition, Notice 2005-17 states that the Service and Treasury intend to provide further guidance on the issue of the date on which a person becomes a material advisor with respect to a reportable transaction (including whether the obligation of a material advisor arises only when a reportable transaction is entered into by a taxpayer). This notice provides additional interim rules that will apply until further guidance is issued and grants additional transitional relief.
Notice 2004-80 provides that each material advisor required under § 6111, as amended, to file a return with respect to a reportable transaction must complete Parts I (except item 1(b)), IV, and V of Form 8264. In completing Form 8264, the form and instructions are to be read to apply, by substituting: (1) “reportable transaction” each place “tax shelter” or “confidential corporate tax shelter” appears; (2) “material advisor” each place “organizer” or “principal organizer” appears; and (3) “Date the material advisor became a material advisor with respect to the reportable transaction” in place of “Date an interest in the tax shelter was first offered for sale” in Part I, line 7, of the form.
Questions have arisen whether a material advisor is required to modify the Form 8264 by striking or replacing lines or fields. A material advisor may not make modifications to the Form 8264. A material advisor must simply complete the form as if it had been modified to read as described in Notice 2004-80.
Notice 2004-80 provides that a material advisor who is required to file a return under § 6111 must file the return within 30 days after the date on which the person becomes a material advisor. Notice 2004-80 provides that a material advisor is defined in § 301.6112-1(c)(2). Notice 2004-80 also provides that a material advisor may file a single Form 8264 for substantially similar transactions. A material advisor is required to supplement information disclosed on Form 8264 if the information provided is no longer accurate, or if additional information that was not disclosed on Form 8264 becomes available.
Questions have arisen regarding when a person becomes a material advisor. Section 301.6112-1(c)(2) defines a material advisor as a person who makes a tax statement and receives or expects to receive a minimum fee with respect to a reportable transaction. Section 301.6112-1(c)(2)(B) provides that a material advisor includes a person who makes a tax statement to or for the benefit of a taxpayer who the potential material advisor (at the time the transaction is entered into) knows is or reasonably expects to be required to disclose the transaction under § 1.6011-4.
Until further guidance is issued, a material advisor will be treated as becoming a material advisor under § 6111 when all of the following events have occurred: (1) the material advisor makes a tax statement, (2) the material advisor receives (or expects to receive) the minimum fees, and (3) the transaction is entered into by the taxpayer. Material advisors, including those who cease providing services prior to the time the transaction is entered into, must make reasonable and good faith efforts to determine whether the taxpayer entered into the transaction.
Moreover, the time for providing disclosure as provided in Notice 2004-80 is amended by this notice. Until further guidance is issued, a material advisor will meet its return filing obligation under § 6111 if the Form 8264 is filed by the last day of the month that follows the end of the calendar quarter in which the advisor became a material advisor. Also, the transitional relief provided in Notice 2004-80 and Notice 2005-17 for disclosure of a transaction under § 6111 is extended. Accordingly, if a person becomes a material advisor after October 22, 2004, and on or before March 31, 2005, that material advisor must file the return on or before April 30, 2005.
Once a material advisor has filed a Form 8264 with respect to a transaction, the material advisor is not required to file an additional Form 8264 for each additional taxpayer that subsequently enters into the same transaction or to file a Form 8264 for a separate transaction that is the same as or substantially similar to the transaction for which the material advisor has filed a Form 8264.
Questions also have arisen regarding whether the tolling provisions of § 1.6011-4(f) would apply to requests from a potential material advisor for a letter ruling. Until further guidance is issued, if the advisor submits a request for a letter ruling on or before the date the return under § 6111 is due and fully discloses all relevant facts relating to the transaction, the obligation of the potential material advisor to disclose the transaction will be suspended as provided in § 1.6011-4(f). However, a request for a letter ruling by a potential material advisor will not toll the disclosure provisions of § 1.6011-4 for taxpayers who participate in the transaction. See § 1.6011-4(f) for tolling provisions applicable to material advisors and taxpayers.
Finally, questions have arisen regarding the nature of the statement relating to the financial accounting treatment of the item(s) giving rise to a significant book-tax difference described in § 1.6011-4(b)(6). In addition, some practitioners have erroneously concluded that Notice 2004-80 was intended to exclude persons who do not provide accounting advice. The financial accounting statement described in Notice 2004-80 includes statements made by any material advisor, including accountants, lawyers, or investment advisors.
This notice is effective February 24, 2005, the date this notice was released to the public.
This document clarifies and modifies Notice 2004-80 and Notice 2005-17.
This notice modifies Notice 2005-4, 2005-2 I.R.B. 289, by extending the transitional rule related to sales of gasoline on oil company credit cards and by making several corrections to Notice 2005-4. Notice 2005-4 provides guidance on certain excise tax provisions in the Internal Revenue Code that were added or affected by the American Jobs Creation Act of 2004 (Pub. L. 108-357) (Act).
Section 7 of Notice 2005-4 provides guidance on § 6416(a)(4), as amended by the Act. Section 7(a)(1)(ii) provides that the pre-2005 rules relating to sales of gasoline to state and local governments and nonprofit educational organizations on oil company credit cards issued to those entities will generally apply to sales before March 1, 2005. The notice also states that Congress may wish to address this issue before March 1, 2005, and that Treasury and the Service would assist Congress in designing an administrable alternative.
Treasury and the Service believe that it would be appropriate to continue to apply the oil company credit card rule until Congress has had an opportunity to address the issue. Accordingly, the oil company credit card rule will remain in effect until modified by a statutory change or by future guidance on this issue.
(a) Aviation-grade kerosene; certificate for commercial aviation and exempt use. In § 4(g)(2), which contains a model certificate for persons buying aviation-grade kerosene for commercial aviation or nontaxable use, “ for export;” is removed from the list in the certificate of possible uses of the aviation-grade kerosene to which the certificate relates.
(b) Aviation-grade kerosene; claims by registered ultimate vendors (nontaxable uses)—(i) In § 4(h)(6)(ii), which contains a model waiver for ultimate purchasers of aviation-grade kerosene used in nontaxable uses, “ for use on a farm for farming purposes;” and “ for the exclusive use of a state;” are removed from the list in the waiver of possible uses of the aviation-grade kerosene to which the waiver relates. For rules relating to claims by registered ultimate vendors of kerosene (including aviation-grade kerosene) for farming and state use, see § 48.6427-9 of the Manufacturers and Retailers Excise Tax Regulations.
(ii) In § 4(h)(6)(ii), “ other nontaxable use (Describe nontaxable use) ;” is added to the waiver immediately before the last item in the list of possible uses of the aviation-grade kerosene to which the waiver relates.
(c) Gasoline; claims by registered ultimate vendors. In § 7(a)(1)(ii), first sentence, the language “based on a price that excludes the tax” is removed and “based on a price that includes the tax” is added in its place.
Notice 2005-4 is modified as described in §§ 2 and 3 of this notice.
This notice is effective January 1, 2005, the effective date of Notice 2005-4.
The principal authors of this notice are Susan Athy and Deborah Karet of the Office of the Associate Chief Counsel (Passthroughs and Special Industries). For further information regarding this notice, please contact Ms. Karet (concerning aviation-grade kerosene) or Ms. Athy (concerning all other issues) at (202) 622-3130 (not a toll-free call).
The composite corporate bond rate for February 2005 is 5.36 percent. Pursuant to Notice 2004-34, the Service has determined this rate as the average of the monthly yields for the included corporate bond indices for that month.
The rate of interest on 30-year Treasury securities for February 2005 is 4.55 percent. Pursuant to Notice 2002-26, 2002-1 C.B. 743, the Service has determined this rate as the monthly average of the daily determination of yield on the 30-year Treasury bond maturing in February 2031.
01. This revenue procedure provides: (1) limitations on depreciation deductions for owners of passenger automobiles first placed in service by the taxpayer during calendar year 2005, including special tables of limitations on depreciation deductions for trucks and vans, and for passenger automobiles designed to be propelled primarily by electricity and built by an original equipment manufacturer (electric automobiles); and (2) the amounts to be included in income by lessees of passenger automobiles first leased by the taxpayer during calendar year 2005, including a separate table of inclusion amounts for lessees of trucks and vans, and a separate table for lessees of electric automobiles.
02. The tables detailing these depreciation limitations and lessee inclusion amounts reflect the automobile price inflation adjustments required by § 280F(d)(7).
01. For owners of passenger automobiles, § 280F(a) imposes dollar limitations on the depreciation deduction for the year that the passenger automobile is placed in service by the taxpayer and each succeeding year. In the case of electric automobiles placed in service after August 5, 1997, and before January 1, 2007, § 280F(a)(1)(C) requires tripling of these limitation amounts. Section 280F(d)(7) requires the amounts allowable as depreciation deductions to be increased by a price inflation adjustment amount for passenger automobiles placed in service after 1988. The method of calculating this price inflation amount for trucks and vans placed in service in or after calendar year 2003 uses a different CPI “automobile component” (the “new trucks” component) than that used in the price inflation amount calculation for other passenger automobiles (the “new cars” component), resulting in somewhat higher depreciation deductions for trucks and vans. This change reflects the higher rate of price inflation that trucks and vans have been subject to since 1988. For purposes of this revenue procedure, the term “trucks and vans” refers to passenger automobiles that are built on a truck chassis, including minivans and sport utility vehicles (SUVs) that are built on a truck chassis.
02. For leased passenger automobiles, § 280F(c) requires a reduction in the deduction allowed to the lessee of the passenger automobile. The reduction must be substantially equivalent to the limitations on the depreciation deductions imposed on owners of passenger automobiles. Under § 1.280F-7(a), this reduction requires the lessees to include in gross income an inclusion amount determined by applying a formula to the amount obtained from a table. There is a table for lessees of electric automobiles, a table for lessees of trucks and vans, and a table for all other passenger automobiles. Each table shows inclusion amounts for a range of fair market values for each tax year after the passenger automobile is first leased.
01. The limitations on depreciation deductions in section 4.02(2) of this revenue procedure apply to passenger automobiles (other than leased passenger automobiles) that are placed in service by the taxpayer in calendar year 2005, and continue to apply for each tax year that the passenger automobile remains in service.
02. The tables in section 4.03 of this revenue procedure apply to leased passenger automobiles for which the lease term begins during calendar year 2005. Lessees of such passenger automobiles must use these tables to determine the inclusion amount for each tax year during which the passenger automobile is leased. See Rev. Proc. 2002-14, 2002-1 C.B. 450, for passenger automobiles first leased before January 1, 2003, Rev. Proc. 2003-75, 2003-2 C.B. 1018, for passenger automobiles first leased during calendar year 2003, and Rev. Proc. 2004-20, 2004-1 C.B. 642, for passenger automobiles first leased during calendar year 2004.
(1) Limitations on Depreciation Deductions for Certain Automobiles. The limitations on depreciation deductions for passenger automobiles placed in service by the taxpayer for the first time during calendar year 2005 are found in Tables 1 through 3 in section 4.02(2) of this revenue procedure. Table 1 of this revenue procedure provides limitations on depreciation deductions for a passenger automobile. Table 2 of this revenue procedure provides limitations on depreciation deductions for a truck or van. Table 3 of this revenue procedure provides limitations on depreciation deductions for an electric automobile.
(2) Inclusions in Income of Lessees of Passenger Automobiles. A taxpayer first leasing a passenger automobile during calendar year 2005 must determine the inclusion amount that is added to gross income using the tables in section 4.03 of this revenue procedure. The inclusion amount is determined using Table 4 in the case of a passenger automobile (other than a truck, van, or electric automobile), Table 5 in the case of a truck or van, and Table 6 in the case of an electric automobile. In addition, the procedures of § 1.280F-7(a) must be followed.
02. Limitations on Depreciation Deductions for Certain Automobiles.
(1) Amount of the Inflation Adjustment. Under § 280F(d)(7)(B)(i), the automobile price inflation adjustment for any calendar year is the percentage (if any) by which the CPI automobile component for October of the preceding calendar year exceeds the CPI automobile component for October 1987. The term “CPI automobile component” is defined in § 280F(d)(7)(B)(ii) as the “automobile component” of the Consumer Price Index for all Urban Consumers published by the Department of Labor (the CPI). The new car component of the CPI was 115.2 for October 1987 and 133.0 for October 2004. The October 2004 index exceeded the October 1987 index by 17.8. The Service has, therefore, determined that the automobile price inflation adjustment for 2005 for passenger automobiles (other than trucks and vans) is 15.45 percent (17.8/115.2 x 100%). This adjustment is applicable to all passenger automobiles (other than trucks and vans) that are first placed in service in calendar year 2005. The dollar limitations in § 280F(a) must therefore be multiplied by a factor of 0.1545, and the resulting increases, after rounding to the nearest $100, are added to the 1988 limitations to give the depreciation limitations applicable to passenger automobiles (other than trucks, vans, and electric automobiles) for calendar year 2005. To determine the dollar limitations applicable to an electric automobile first placed in service during calendar year 2005, the dollar limitations in § 280F(a) are tripled in accordance with § 280F(a)(1)(C) and are then multiplied by a factor of 0.1545; the resulting increases, after rounding to the nearest $100, are added to the tripled 1988 limitations to give the depreciation limitations for calendar year 2005. To determine the dollar limitations applicable to trucks and vans first placed in service during calendar year 2005, the new truck component of the CPI is used instead of the new car component. The new truck component of the CPI was 112.4 for October 1987 and 143.1 for October 2004. The October 2004 index exceeded the October 1987 index by 30.7. The Service has, therefore, determined that the automobile price inflation adjustment for 2005 for trucks and vans is 27.31 percent (30.7/112.4 x 100%). This adjustment is applicable to all trucks and vans that are first placed in service in calendar year 2005. The dollar limitations in § 280F(a) must therefore be multiplied by a factor of 0.2731, and the resulting increases, after rounding to the nearest $100, are added to the 1988 limitations to give the depreciation limitations applicable to trucks and vans.
(2) Amount of the Limitation. For passenger automobiles placed in service by the taxpayer in calendar year 2005, Tables 1 through 3 contain the dollar amount of the depreciation limitation for each tax year. Use Table 1 for passenger automobiles placed in service by the taxpayer in calendar year 2005. Use Table 2 for trucks and vans placed in service by the taxpayer in calendar year 2005. Use Table 3 for electric automobiles placed in service by the taxpayer in calendar year 2005.
03. Inclusions in Income of Lessees of Passenger Automobiles.
The inclusion amounts for passenger automobiles first leased in calendar year 2005 are calculated under the procedures described in § 1.280F-7(a). Lessees of passenger automobiles other than trucks, vans, and electric automobiles should use Table 4 of this revenue procedure in applying these procedures, while lessees of trucks and vans should use Table 5 of this revenue procedure and lessees of electric automobiles should use Table 6 of this revenue procedure.
This revenue procedure applies to passenger automobiles (other than leased passenger automobiles) that are first placed in service by the taxpayer during calendar year 2005, and to leased passenger automobiles that are first leased by the taxpayer during calendar year 2005.
The principal author of this revenue procedure is Bernard P. Harvey of the Office of Associate Chief Counsel (Passthroughs & Special Industries). For further information regarding the depreciation limitations and lessee inclusion amounts in this revenue procedure, contact Bernard P. Harvey at (202) 622-3110 (not a toll-free call).


By: Kate Cavallaro and Nicholas Moccia, Esq.
In HSBC Mtge. Corp. (USA) v. Enobakhare, 2010 NY Slip Op 31925(U)(Sup. Ct. Richmond County 2010), Plaintiff HSBC seeks summary judgment dismissing the Defendant homeowner’s answer and granting Plaintiffs application for an Order of Reference. HSBC commenced the instant foreclosure action in January of 2009 and the homeowner entered an answer pro se in February of the same year. Later in 2009 defendant homeowner retained counsel, and new counsel filed a motion for leave to amend the original answer on behalf of the homeowner.
HSBC argues that it is entitled to summary judgment dismissing the Defendant homeowner’s answer in its entirety because HSBC has provided the mortgage, note, proof of assignment of the note and mortgage and evidence of the Defendant’s default. The Court notes that a ruling on a summary judgment in this matter was not yet “ripe for decision and must be denied with leave to renew,” since a mandatory settlement conference has not been held as required by CPLT 3408. CPLR § 3408 provides that “in any residential foreclosure action involving a high-cost home loan…, or a subprime or nontraditional home loan, … in which the defendant is a resident of the property subject to foreclosure, the court shall hold a mandatory conference within sixty days after the date when proof of service is filed with the country clerk, … for the purpose of holding settlement discussions pertaining to the relative rights and obligations of the parties under the mortgage loan documents, including, but not limited to determining whether the parties can reach a mutually agreeable resolution to help the defendant avoid losing his or her home, and evaluating the potential for a resolution in which payment schedules or amount may be modifies or other workout option may be agreed to, and for whatever other purpose the court deems appropriate.” Once a settlement conference has been held pursuant to CPLR 3408, the plaintiff may renew its summary judgment motion if applicable.
The Defendant seeks leave to serve an amended answer to the Plaintiff’s complaint which includes several affirmative defense and counterclaims that were previously unasserted. “Leave to amend pleasing is a discretionary matter that is generally favorably exercised in the absence of prejudice or surprise or unless it appears that the proposed amendment plainly lacks merit.” In this matter, the Court opined that the homeowner’s proposed affirmative defenses may have merit and the Plaintiff has failed to show surprise or prejudice due to the Defendant’s delay in asserting the affirmative defenses. Since Plaintiff HSBC has not established that it will be prejudiced by allowing the Defendant to serve an amended answer and the proposed affirmative defenses may have merit, the Court held that it is within the Court’s discretion to permit the Defendant to submit an amended answer.
The Plaintiff also argues against the Defendant’s attempt to include certain affirmative defenses that the Plaintiff claims have been waived (pursuant to CPLR 3211) since the Defendant failed to allege them in its original answer. The Court notes that while the affirmative defenses should have been raised in the original answer, defenses that are ordinarily waived under CPLR 3211 “can nevertheless be interposed in an answer amended by leave of court… so long as the amendment does not cause the other party prejudice or surprise resulting directly from the delay.” For this reason the Court permitted the Defendant to include the affirmative defenses that were allegedly waived for failure to raise them in the original answer.
Accordingly, Judge Maltese denied Plaintiff HSBC’s motions for summary judgment and for the dismissal of Defendant’s Answer is denied with leave to amend upon completion of a mandatory settlement conference; and Judge Maltese further ordered that Defendant’s motion for leave to serve an amended answer was granted. Lastly, Judge Maltese ordered that all parties appear for a mandatory settlement conference pursuant to CPLR § 3408.
Recently, Judge Joseph J. Maltese of the Richmond County Supreme Court, denied a defendant homeowner’s motion to vacate a judgment of foreclosure and sale because of the Defendant’s failure to comply and facilitate the mediation process held by the Courts. See Central Mtg. Co. v. Elfassy, 2010 NY Slip Op 31926 (U)(Sup. Ct. Richmond County 2010). The homeowner began defaulting on her loan in late 2008 when the homeowner failed to make any payments. Plaintiff subsequently accelerated the mortgage and brought an action to foreclose its mortgage by filing a summons and complaint in May of 2009. The homeowner’s first mistake in dealing with this foreclosure action was her failure to file an answer to the banks’ summons and complaint. It appears that the homeowner was also properly served with the summons and complaint and, therefore, the Court noted that the homeowner did not otherwise have a reasonable excuse for her failure to answer. Despite the fact that the defendant homeowner failed to appear in the foreclosure action, discussions between the parties occurred thought the proceedings with regard to the potential for a loan modification. The homeowner also made an application for hardship assistance, yet, failed to provide the plaintiff Bank with requisite documentation and proof of hardship. Additionally, two separate conferences were held, in which the court acted as mediator. Judge Maltese notes that “despite the court’s suggestion as to what documents to bring … [Defendant] failed to bring the documents to court for either of the conferences.” He further notes that the conferences and separate discussions between the parties never resulted in a loan modification.
The Defendant homeowner argued, among other things, that Defendant was entitled to vacate the default judgment and that the Court should have granted the Defendant an extension of time to appear or enter a pleading in this case. In its decision, the Court notes that “in order to vacate a default judgment …the defendant must establish both a reasonable excuse for default and a meritorious defense.” Here, the Court observed that the homeowner failed to provide any excuse for her failure to appear in the action prior to the entry of default. Since the homeowner “has failed to offer a reasonable excuse for her default, the Default Judgment of Foreclosure and Sale cannot be vacated.” Furthermore, the Court does note that “there is a string public policy to resolve cases on the merits, rather than on default, [Defendant] fails to set forth a reasonable excuse for default and a meritorious defense.” Judge Maltese clarifies that while the Court is not unsympathetic to the home homeowner’s situation, that sympathy does not justify setting aside a duly entered judgment absent some showing of a reasonable excuse for default and a meritorious defense.
This action is a prime example of how a homeowner cuts off potential avenues of relief and hopes of loan modifications by simply failing to take the appropriate measures to address an impending foreclosure. Had the homeowner initially entered an answer in this action or at the very least complied with the document requests from the Court, the homeowner may have a much greater opportunity of mitigating her losses and/or securing a loan modification from the bank. Unfortunately, this homeowner’s inattention and non-compliance has caused the Court, despite its sympathies to the homeowner, to deny Defendant homeowner’s motion in its entirety and affirm the Plaintiff bank’s default judgment of foreclosure and sale.
By Kate Cavallaro and Nicholas M. Moccia, Esq.
Petitioner Federal Home Loan Mortgage Corporation ("FHLMC") commenced a holder-over proceeding to evict Respondent Paul Raia from his home. The underlying eviction stems from the foreclosure brought by Well Fargo Home Mortgage, Inc. (“Wells Fargo”), resulting in the sale of the Paul Raia’s home (“Subject Premises”). At the sale, Petitioner Federal Home Loan purported to be the successful bidder and the rightful occupant of the Subject Premises. However, the court found that this was not in fact the case.
A later examination of the documents submitted in support of FHLMC’s petition indicated that Wells Fargo was the actual lender that had a security interest in the Subject Premises. Additionally, it was revealed that a number of the sworn allegations that were asserted in the petition were false. Specifically, the court took issue with certain representations made by the law office of Steven J. Baum, P.C. regarding FHLMC’s right to evict Paul Raia post-auction. The court held that it “will hold a hearing to determine what sanctions if any, that may be imposed upon Steven J. Baum, P.C. for the false representations made in the petition,” as counsel for FHLMC’s.
The court found that Wells Fargo—and not FHLMC—was the successful bidder at the foreclosure auction of the Subject Premises. However, FHLMC claims that Wells Fargo assigned its auction bid to FHLMC. Upon examination of “Assignment of Bid” document, the court noted that it contained the signature of an attorney from Steven J. Baum, P.C., although there was no indication on whose behalf the firm was signing. “Mr. Baum’s office claims to have the authority to execute the document for Wells Fargo but provides no evidence in support of that allegation.” Respondent asserts that the "Assignment of Bid" is invalid and ineffective because it is not executed by Wells Fargo, thus FHLMC never acquired title to the bid, the collateral, or the right to the possession of the cooperative apartment, and Petitioner lacks standing to institute this proceeding. The firm of Steven J. Baum, P.C. alleges to have the authority to assign the bid on behalf of Wells Fargo because the firm represented Wells Fargo in the cooperative foreclosure sale on January 5, 2010. However, neither a power of attorney to Steven J. Baum, P.C. nor a supporting affidavit from Wells Fargo was presented with the "Assignment of Bid." For this reason the Court found the assignment invalid.
This court granted Respondent Raia’s motion dismissing the holdover proceeding with prejudice due to the finding that FHLMC lacked a possessory interest in the subject premises. As noted earlier, the Court has also set a date for a hearing to determine what, if any, sanctions should be imposed against the law firm of Steven J. Baum, P.C., for the false statements made in the original petition.
See Federal Home Loan Mtge. Corp. v Raia, 2010 NY Slip Op 51287(U), (District Court Nassau County, 2010).
The plaintiff commenced this action on March 26, 2009 to recover loan proceeds allegedly given pursuant to an agreement to obtain a Home Equity Conversion Mortgage loan [i.e. a reverse mortgage] on the Defendant’s home. The plaintiff alleges that it advanced monthly funds to William Slinkosky totaling $297,344.08 and that upon his death, his estate failed to pay the note that came due as required under the terms of the note and mortgage. The defendants answered asserting a defense of unconscionability and unclean hands; alleging that the Plaintiff engaged in predatory lending practices and schemes, both by unreasonably inducing the homeowner to enter into the mortgage and because the loan origination fee exceeded the maximum allowable fee.
The plaintiff now moved for summary judgment. “A plaintiff seeking foreclosure must establish that it was the owner or holder of the note and mortgage at the time that it commenced the foreclosure action. See, Mortgage Elec. Registration Sys. v. Coakley, 41 AD3d 674 (2nd Dept., 2007); Federal Natl. Mtge. Assn. v. Youkelsone, 303 AD2d 546 (2nd Dept., 2003); see also, Wells Fargo Bank, N.A. v. Marchione, 69 AD3d 204 (2nd Dept., 2009)).
Here, the plaintiff sought to foreclose the first mortgage but failed to submit a copy of the first note. The estate that now represents the homeowners also moved for summary judgment.
Based on the foregoing, explanation the Court ordered that the default judgment against the homeowners; estate be vacated, and a referee is to be appointed. Additionally, the Defendant’s motion for summary judgment dismissing the complaint is similarly denied but without prejudice for leave to renew.
The California State Bar Association is cracking down on lawyers whose misconduct is associated with loan modification services. The State Bar of California launched a task force on loan modification and since its launch about a year ago; the Bar “has obtained the resignation of 13 attorneys.” Most recently, two attorneys were disbarred for lending their names as attorneys to several non-attorney organizations. One individual attorney was cited because he “lacked control and failed to supervise and of the organizations” and “this lack of control and failure to supervise consequently led to, among other things, the unauthorized practice of law, misrepresentations and client harm.” Another attorney who was recently disbarred owned and operated a loan modification business by the name of Advocate for Fair Lending. The article notes that there were 18 examples in which the attorney’s clients were not helped and also asked for refunds. It further noted that the attorney is accused of using “Advocate [the loan modification business] and his status as an attorney to convince cash strapped homeowners to pay him thousands of dollars in hopes of saving their homes from foreclosure.” It is even alleged that some clients were in an even worse position after retaining the services!
An article from dailyfinance.com provides information on the thousands of homeowners who are likely to lose their homes to foreclosure this year. “Nearly 528,000 homes were taken over by lenders in the first six months of the year,” according to Realty Trac Inc. The article states the “surge in foreclosures reflect a crisis that has shown signs of leveling off in recent months but remains a crippling drag on the housing market and the economy.” Statistics from the article provide that “on average, it takes about 15 months for a home loan to go from being 30 days late to the property being foreclosed and sold.” Furthermore the “number of homeowners that received a legal warning that they could lose their homes in the first half of the year climbed 8 percent from the same period last year.” Additionally, about 1.7 million homeowners received a foreclosure-related warning,” which is equivalent to about one in 78U.S. homes. Foreclosed home obviously have a terrible effect on the individual homeowners but also on the community as a whole. When a home is sold as a result of foreclosure it is generally done do at a severely depressed value, ultimately effecting the market value of surrounding homes in the area.
NEW YORK July 15 (Reuters) - Banks repossessed a record number of U.S. homes in the second quarter, but slowed new foreclosure notices to manage distressed properties on the market, real estate data company RealtyTrac said on Thursday.
The root problems of job losses and wage cuts persist, making a sustained U.S. housing recovery elusive.
Banks took control of 269,962 properties in the second quarter, up 5 percent from the prior quarter and a 38 percent spike from the second quarter of last year, RealtyTrac said in its midyear 2010 foreclosure report.
Repossessions will likely top 1 million this year.
"The underlying conditions haven't improved," RealtyTrac senior vice president Rick Sharga said in an interview.
The housing market still grapples with "unemployment, economic displacement in general, and still sits on over 5 million seriously delinquent loans that in all likelihood will at some point go into foreclosure," he said.
In 2005, the last "normal" year in housing, Sharga said, about 530,000 households got a foreclosure notice and banks took over a comparatively minuscule 100,000 houses.
This year more than 3 million households are likely to get at least one foreclosure filing, which includes notice of default, scheduled auction and repossession, Irvine, California-based RealtyTrac forecasts.
In the first half of the year, foreclosure filings were made on 1.65 million properties. That was down 5 percent from the last half of 2009 but up 8 percent from the first half of last year.
One in every 78 households got at least one foreclosure filing in the first six months of this year.
Justice Minardo of the Supreme Court, Richmond County, granted a defendant homeowner’s order to show cause to vacate a default judgment of foreclosure and dismissing the entire action without prejudice due to plaintiff bank’s lack of standing. The defendant was represented by the Law Offices of Robert E. Brown, P.C. This action to foreclose a mortgage was commenced by the filing of a summons and complaint in December of 2006. Defendant homeowner was never personally served and defendants did not receive any acceleration notice as required. Unbeknownst to the defendant, the Court granted Plaintiff’s unopposed default judgment in June of 2009. Remarkably, at the same time the default judgment was entered, the parties were involved in settlement discussion. This unilateral action of moving forward without defendants knowledge indicates plaintiffs breach of its duty of good faith. Additionally, an audit of the loan documents revealed numerous other violations on both the State and Federal level, including Truth in Lending Act violations. Furthermore, the audit indicated that the plaintiff bank lacked the necessary standing and capacity to prosecute the foreclosure action. Defendants through their counsel, the Law Offices of Robert E. Brown, P.C., also argued that plaintiff failed to elect its remedies by pursuing simultaneous actions for both a judgment on a note and a judgment of foreclosure under the mortgage should be dismissed. Defendant’s counsel argues that “New York law has long been clear that a plaintiff with rights on a note and a mortgage must elect between the remedy of an action on the note or the remedy in foreclosure…. A plaintiff may not have causes of action for both remedies in a single action.” Citing President and Directors, Etc. Co. v. Callister Bros., 526 A.D. 1097, 11 N.Y.S.2d 593 (2d Dep’t 1939), aff’ed 282 N.Y. 629 (1940); see also White v. Wielandt, 259 A.D. 676, 678, 20 N.Y.S.2d 560, 561-563 92d Dep’t 1940. The rule that a plaintiff cannot simultaneously seek a judgment on the note and a judgment of foreclosure is echoed in New York RPAPL § 1301(a,) which states that without prior leave of the Court, simultaneous actions of this kind are barred.
With regard to vacating the default judgment, Defendants further argue that pursuant to CPLR 317, the Court has discretion to grant relief from judgment where defendant was served with a summons other than by personal delivery and has a meritorious defense to the underlying foreclosure action, Larman v. Russel, 240 A.D.2d 473 (2d Dep’t 1997). Defendant was not personally served and submitted to the Court, an affidavit of merit. Pursuant to CPLR 317 “the movant may apply to the court for relief only if he or she was served other than by personal service under CPLR 308(1).” Wells Fargo Bank v. Mondesir, 13 Misc. 3d 1210A; 824 N.Y.A. 2d 759 (Sup. Ct. 2006). If service is effected other than by personal delivery a court may still vacate a default judgment under CPLR 317, if it it is shown that the defendant did not have an opportunity to make its meritorious defense to the court due to the lack of knowledge of the action because of failure to be personally served.
For the foregoing reasons, Justice Minardo found that Plaintiff LaSalle Bank failed to properly serve defendant homeowner and that defendant homeowner had therefore been unable to bring forth its meritorious defenses. Plaintiff’s default judgment was vacated pursuant to CPLR 317 and the foreclosure action was dismissed in its entirety without prejudice.
Justice Minardo currently holds the position of Administrative Judge in the Thirteen Judicial District (Appointed by Chief Administrative Judge Ann Pfau). Previously Justice Mianrdo was the Administrative Judge to the Supreme Court of Richmond Country from 2005 to 2009 and was elected as a Supreme Court Justice for Richmond County from 1996 to 2009 and has been recently re-elected for 2010 through 2023. Justice Minardo also served as Special Counsel to State Senator John Marchi, 1988 to 1995 and Richmond County Assistant District Attorney from 1969 to 1976. Justice Minardo was also in private practice from 1976 to 1995. Minardo received his Bachelor of Arts from Manhattan College and his juris doctor from St. John’s University School of Law. He is admitted to the New York State Bar, the Appellate Division and Second Department.
An article from the Washington Post’s Associated Press cites that more than a third of the 1.24 million borrowers who have enrolled in the $75 billion mortgage modification program have dropped out. The article claims that the effort by the Obama administration to help people from losing their homes is falling short. According to the article 150,000 homeowners have left the program. Spokespersons for the program claim that despite the drop in participants in the program, those homeowners who are no longer part of the program will still find assistance from other places. Perhaps these homeowners will find loan modifications or loan assistance from non governmental agencies. “A major reason so many have fallen out of the program is the Obama administration initially pressured banks to sign up borrowers without insisting first on proof of their income. When banks later moved to collect the information, many troubled homeowners were disqualified or dropped out.” Apparently the initial pressure to have participants in the program caused some to fail to thoroughly determine if the homeowner is actually eligible for assistance via the government’s program.
Brooklyn Judge, Arthur M. Schack, dismisses yet another foreclosure case brought by the offices of Steven Baum. Schack dismissed this particular foreclosure action “because the lawyer on the case, ... represented the mortgage broker, the bank that brought the loan and the industry registration service serving as the nominee of the loan.” Apparently the conflict of interest issues were not the only problems with this action. Additionally, Judge Schack “found that the bank, US Bank, never should have filed the foreclosure action because of an ‘ineffective assignment of the subject mortgage and note to it.” Also at issue in this case was the role of Baum lawyer, Elpiniki Bechhakas, who, according to the Post article “singed paper claiming to be an executive of Mortgage Electronic registration System (MERS),… while simultaneously representing Fremont and US Bank, which filed the foreclosure in July 2009.” The NY Post also reported the Baum’s “Buffalo based foreclosure mill” had filed 12,551 foreclosure actions in the New York area just last year.