Has anyone worked on a case like this?

[Lucho]

A taxpayer with low rating credit (commercial truck driver) has being working as a contractor driving a truck and making the monthly installment payments of that truck that legally belongs to his friend. (There is no problem for the taxpayer of loosing anything as all the paperwork for him to claim ownership of the asset is in process and actually he started driving the truck the same day this heavy vehicle came out of the dealer)

Now the question is this:

How can he claim his truck expenses, especially depreciation if the truck is not in his name yet? He has the 1099-MISC for 2008 and 2009 and the documents that prove that he is the one who did all the truck payments (the truck is already paid in full)

Any comment will be appreciated.

Now he knows there will be consequences for filing late.

[rfassett]

He can't. The proper reporting would be what actually happened. He leased a truck from his friend. Your client can take lease payment deductions and maintenance, fuel, etc. Your client should issue a 1099 for the lease payments to his friend. The friend will have to pick up the lease payments as income and he can take depreciation against that income. The sales documents that you mention should probably be redone to reflect current value because when the sale actually takes place, the friend could have a recapture issue. Curious, does the friend understand the legal exposure he has accepted? He must be a really GOOD friend.

[OldJack]

Your client can take lease payment deductions

I doubt that your client can take lease payment deductions as such. However, depending upon the paperwork, he may have a capital lease that is considered as a financial arrangement and therefore the vehicle is considered and booked the same as a purchase with all normal deductions allowed. Factors indicating a capital lease are spelled out in Rev. Proc. 2001-28. This subject is summarized in the Quickfinder Depreciation Handbook. Good luck.

[Lucho]

I doubt that your client can take lease payment deductions as such. However, depending upon the paperwork, he may have a capital lease that is considered as a financial arrangement and therefore the vehicle is considered and booked the same as a purchase with all normal deductions allowed. Factors indicating a capital lease are spelled out in Rev. Proc. 2001-28. This subject is summarized in the Quickfinder Depreciation Handbook. Good luck.

Thank you for your help, OldJack. Yes, they are very goog friends.

Lucho

[jainen]

>>the truck is not in his name<

Legally, title is said to memorialize ownership, not create it. In other words, the records are just not accurate in this case, a concept we tax preparers are exceedingly familiar with. The ACTUAL transactions he is claiming will lead directly to full title in his name. He is buying the truck.

The legal precedent is not exactly the same so I can't promise he would win an audit or court case, but there is a reasonable possibility. The verbal agreement, supported by written records such as payments, is clear. He has possession, responsibility for maintenance, risk of loss, and most other rights and obligations of ownership.

[mcb39]

I had a client a few years back who was "the friend". Very similar situation. We worked up an amortization schedule and a legal agreement to purchase. My client claimed the interest he received on the payments and held lienholder title to the vehicle until it was paid for. In essence, the purchaser was purchasing the truck just as if he had borrowed the money from the bank and was entitled to all of the deductions for depreciation, etc. I think your case depends upon what kind of paperwork they have drawn up and what kind of agreement they have.

[Lucho]

To rfassett, Oldjack, Jainen, Mcb39.

Thank you very much for your posts.

I will meet with the taxpayer and his Good Samaritan friend this coming weekend.

Lucho