Sad Situation...Any Ideas?

[gfizer]

I have this little old couple who have been clients for several years. He is in his 90's and she in her 80's. He is a veteran and legally blind. They have struggled financially for many years and finally couldn't deal with it. They were going to lose everything and wanted to avoid bankruptcy so they sold the farm that the wife had inherited from her mother, who had inherited it from her parents, who had inherited it from their parents and so on. Of course they never bothered to consult with me before making the sale. They sold the farm which had practically no tax basis for $260,000.00 of which all but $2,200 went to pay off the mortgages against it and the closing costs. They were thinking that since they only got $2,200 of the money that that would be all they had to pay tax on, which we all know is not the case. They owe nearly $40,000 in federal and state tax. I feel sorry for them. I mean they are living on social security and a va pension and all they have is their home a few acres they retained from the sale.

Anyone know anything that I might be able to do to help these folks out?

[RoyDaleOne]

Have them file separately, and only one report the sale. If this is legal.

Ask for an installment plan to pay the tax.

[JohnH]

Sounds like they may be a candidate for an OIC.

I'd get an extension and deal with this one after the 15th when I could think through all the permutations.

[Don in Upstate NY]

OK - let me ask some questions ...

Did they live on the farm as their principle residence?

How much was it worth when they inherited it from her mother?

[SHARON B]

Is the gain after the $500,000 exclusion? Did you adjust the basis to basis upon the wife inhriting property?

[gfizer]

Actually the farm was gifted to the wife from her mother by deed so the wife's basis would be her mother's basis, correct? But her mother inherited from her parents back in the 40's and they had inherited it from their parents way back when. So, I believe that the wife's basis is the very small amount that the land was valued at when her mother inherited it in the 40's. It is unimproved farmland with no buildings. Their principal residence was located on the farm but they had the house and 30 acres surveyed off and they retained this portion for themselves so principal residence exclusion doesn't apply.

[JohnH]

When the mother gifted the property to the wife, did mom retain a life estate?

In some states that might make a huge difference concerning the basis.

You said they kept the house and 30 acres. What is its value? Are there children (or other relatives) who stand to inherit what's left when this couple dies? If so, they might be inclined to help pay the taxes as a way to get the couple out of debt to the government and protect the value of the inheritance. If this was a loan spread among several people and secured by a mortgage it might be attractive to them.

[gfizer]

When the mother gifted the property to the wife, did mom retain a life estate?

In some states that might make a huge difference concerning the basis.

You said they kept the house and 30 acres. What is its value? Are there children (or other relatives) who stand to inherit what's left when this couple dies? If so, they might be inclined to help pay the taxes as a way to get the couple out of debt to the government and protect the value of the inheritance. If this was a loan spread among several people and secured by a mortgage it might be attractive to them.

The mother did not retain a life estate in the property. The house and remaining acreage is valued at around $70,000-$80,000. They have a son who has had his own share of financial difficulty and has recently filed bankruptcy so I doubt he would be able to come up with the funds.

If I decide to do an OIC should I wait until I start receiving hate mail from the IRS seeking payment or should I file it immediately?

Thanks for your input.

[Ray in Ohio]

First of all... I also sympathize with the now elderly, blind couple who has nothing but a home and a 40,000.00 tax debt. BUT..... (I don't want to sound too critical here) What were they doing all their lives? THEY INHERITED A FARM!!!!. No mortgage interest!!! How did they get into a position to lose everything. It's not like they had the farm to pay off and couldn't make the payments. I can understand a period of bad luck, but did they have bad luck all their life??? Even renting out the fields would make a considerable income all these years. What about timber??

Without knowing more...... have they lived a lazy "good" life till it finally caught up with them. It's hard to have pity on them if that is the case. And it sounds like the son is following in their footsteps.

Otherwise, I have no other ideas for you to help their current situation. And remember, it's not your fault if they owe taxes.

(OK, I feel better now) :rolleyes:

[gfizer]

First of all... I also sympathize with the now elderly, blind couple who has nothing but a home and a 40,000.00 tax debt. BUT..... (I don't want to sound too critical here) What were they doing all their lives? THEY INHERITED A FARM!!!!. No mortgage interest!!! How did they get into a position to lose everything. It's not like they had the farm to pay off and couldn't make the payments. I can understand a period of bad luck, but did they have bad luck all their life??? Even renting out the fields would make a considerable income all these years. What about timber??

Without knowing more...... have they lived a lazy "good" life till it finally caught up with them. It's hard to have pity on them if that is the case. And it sounds like the son is following in their footsteps.

Otherwise, I have no other ideas for you to help their current situation. And remember, it's not your fault if they owe taxes.

(OK, I feel better now)

I know where you're coming from and it's true that the fact of the matter is that they owed the debt against the farm. In answer to your question, no they haven't been living high. From what I can gather much of the debt against the farm was generated by a combination of poor management of the farm by the couple's son and attempts to bail him out of his financial mess. They just kept getting in deeper and deeper with farm operating loans and the like and by the time they realized they couldn't get out of the hole by digging out the bottom it was too late to salvage anything.

I know it's not my fault but it is just so sad. I just can't imagine working all your life and having nothing to show for it. Especially when your deadbeat kid helped get you there. I hope I'm not $300,000 in debt when I'm their age. And if I am I know it won't be because of my kids. I love them to death but I believe there comes a time when you gotta' cut em loose and let them clean up their own messes.

[Ray in Ohio]

I know where you're coming from and it's true that the fact of the matter is that they owed the debt against the farm. In answer to your question, no they haven't been living high. From what I can gather much of the debt against the farm was generated by a combination of poor management of the farm by the couple's son and attempts to bail him out of his financial mess. They just kept getting in deeper and deeper with farm operating loans and the like and by the time they realized they couldn't get out of the hole by digging out the bottom it was too late to salvage anything.

I know it's not my fault but it is just so sad. I just can't imagine working all your life and having nothing to show for it. Especially when your deadbeat kid helped get you there. I hope I'm not $300,000 in debt when I'm their age. And if I am I know it won't be because of my kids. I love them to death but I believe there comes a time when you gotta' cut em loose and let them clean up their own messes.

Ok... thanks for letting me vent. Working 15+ hour days trying to pay the bills tends to make me cranky. I hope inheriting a farm would make me happier, but maybe it wouldn't. Again, I do sympathize with them, and wish them the best. As far as you being 300k in debt when you get their age.... I doubt that's gonna happen. Your too smart.... or you wouldn't be preparing taxes.

[JohnH]

Reminds me of the farmer who was asked what he would do if he won a million dollars in the lottery.

He replied, "I'd probably just keep on farming 'til I lost it all."

[BulldogTom]

There is an old joke that goes like this -

Q. How do you end up with a million bucks being a farmer?

A. You start with 2 million.

It is not easy being a farmer. There are many years when there are no profits and the bank owns everything. Farmers are the most optimistic people in the world. Next year is always going to produce the bumper crop and high prices.

I can see how this happened. It is not that unusual.

Tom

Lodi, CA

[GeneInAlabama]

I saw a case once where a taxpayer owed quite a bit but had absolutely nothing to pay the tax that was owed. The collections officer marked it uncollectable and put it on the back burner. Two or three years later, they checked with him again and determined that it was still uncollectable. Nothing else was heard from it. After ten years the statue of limitations runs out (of course in this case, 10 years is a lifetime). I don't believe they would take his home but they might take most of the 30 acres. You know the saying that you can't get blood out of a turnip. This may be a turnip.

[zeke]

THEY INHERITED A FARM!!!!. No mortgage interest!!!

Ray in Ohio - I just re-read the original post. I see no indication that the inherited farm did or did not have an incumberance.

[Jack from Ohio]

THEY INHERITED A FARM!!!!. No mortgage interest!!!

Ray in Ohio - I just re-read the original post. I see no indication that the inherited farm did or did not have an incumberance.

<<<$260,000.00 of which all but $2,200 went to pay off the mortgages against it and the closing costs>>>

[zeke]

I was referring to the farm as and when inherited. It could well have had a mortgage WHEN inherited - and never become profitable. But - you are probably right. They probably just never learned how to take care of business, & taught their son everything they knew...

z

[Julie]

Are you sure yo have the right basis? Counting all improvements?

IRS will probably declare the debt uncollectible. Have them pay what they can this year, then after a year or two, ask IRS for relief from the debt. They're never going to pay it anyway.

I have this little old couple who have been clients for several years. He is in his 90's and she in her 80's. He is a veteran and legally blind. They have struggled financially for many years and finally couldn't deal with it. They were going to lose everything and wanted to avoid bankruptcy so they sold the farm that the wife had inherited from her mother, who had inherited it from her parents, who had inherited it from their parents and so on. Of course they never bothered to consult with me before making the sale. They sold the farm which had practically no tax basis for $260,000.00 of which all but $2,200 went to pay off the mortgages against it and the closing costs. They were thinking that since they only got $2,200 of the money that that would be all they had to pay tax on, which we all know is not the case. They owe nearly $40,000 in federal and state tax. I feel sorry for them. I mean they are living on social security and a va pension and all they have is their home a few acres they retained from the sale.

Anyone know anything that I might be able to do to help these folks out?

[Ray in Ohio]

I was referring to the farm as and when inherited. It could well have had a mortgage WHEN inherited - and never become profitable. But - you are probably right. They probably just never learned how to take care of business, & taught their son everything they knew...

z

If the farm came with a mortgage, wouldn't that be it's basis for this taxpayer?

(it hurts if I think too hard, so this is off the top of the head)

[Randall]

As mentioned, there may be improvements. Try to jog their memory. I doubt they have good documentation but maybe going through old checkbooks. Was all the borrowed money used for the deadbeat son? Could some of the money be spent on land improvements, fencing, excavation, surveying, whatever? Even to finance tenant farmers, or the son who was trying to be a farmer (in order to save the farm)? Just tossing out ideas to come up with some basis for them?

[gfizer]

Thanks everyone for your input and ideas. In answer to some of your questions....no, there was no mortgage against the property whenever it was gifted to the wife. The debt against the property was acquired later. A lot of the money was used for improvements/maintenance to the farm buildings used in the dairy operation. Unfortunately all of these buildings/improvements lie on the land that was retained by the taxpayers and not on the land that was sold. There were some expenditures for fencing (which is all now fully depreciated) and surveying (which I've included in their very minute cost basis).

I felt so sorry for them when I told them what they were facing yesterday afternoon. They believed they were doing the right thing by selling it and getting rid of the debt before they were foreclosed on. I sent them home and asked them to review their information to see if there is anything they've missed.

I will advise them that we need to file the return in order to avoid late filing penalties, ask for an installment agreement ($50 a month from now to the end of time) and then deal with the collection process as it comes. Anyone else have any better suggestions?

[gfizer]

Well, I guess this situation is no longer my problem. My secretary just took a phone call from the wife stating that she would be here Monday morning to pick up their stuff so they could take it to someone else and IF they owed me anything I could let them know on Monday. How would you guys handle this situation? Just hand their info back to them and walk away or give them the prepared returns along with the billing invoice or something else? Also would you have them sign something summarizing my involvement to date and acknowledging their decision to take them somewhere else?

Thanks for your input. This whole situation has just really been bearing on my mind and my heart. It's nice to have a group of professionals to talk to and bounce things off of.

[JohnH]

Others may disagree with me, but I'd probably give them their info back (not the returns) and not charge them. It's partly compassion and partly self-interest. ( Ths runs counter to my general contention that this business is all about billable time, but in this case it's mroe important to look ahead than to dwell on the time already expended)

This sounds like a situation that whoever prepares the return is letting themselves in for a gaggle of follow-up calls, pleas for help at the eleventh hour, agonizing over dealing with the IRS, and general aggravation, all the while knowing they can't or won't be able to pay. It's probably going to get a lot worse as time goes on, so whoever accepts the first fee is going to be in it for the long haul. And let's not forget that somebody may find themselves dealing with sonny boy once he figures out that his inheritance may be at risk.

Sometimes it's best to just ease out of the situation gracefully and let them move on to someone else.

[zeke]

I agree with JohnH. No assets + no future = no billable time. Give thanks that they are giving you an early out. Someone else can now do the work and not get paid....

[gfizer]

Thanks to all. I was pretty much leaning that way myself. I'll make sure they have copies of their last two or three years returns, depreciation reports, and the info they brought in and I'll wish them well and send them on their way. I must admit I'm a little relieved to be out of the middle of this mix.

Thanks again.