Harvey L. Tucker v. Commissioner of Internal Revenue
2016 U.S. App. LEXIS 20782
| 11th Cir. | 2016Background
- Tucker was sole shareholder/president of Paragon Homes (an S-corp) that developed and owned multiple residential properties secured by recourse mortgages; Paragon reported a large 2008 inventory write-down and flowed a large NOL to Tucker.
- After the 2007–2008 housing crash Paragon ceased regular operations late 2008; Tucker claimed the properties were worthless as of December 31, 2008 and that Paragon was effectively insolvent.
- In 2009–2010 Tucker injected personal funds into Paragon, caused construction and sales to continue, and entered settlement agreements with lenders that resolved mortgage liabilities in exchange for cash payments and sales proceeds.
- The IRS audited and concluded Paragon’s allowable 2008 loss was far smaller; the Commissioner disallowed Tucker’s NOL carrybacks to 2004–2006 and issued a notice of deficiency assessing tax and accuracy-related penalties.
- The Tax Court held Paragon did not abandon the properties nor were they worthless to Paragon as of 12/31/2008 (and in any event, losses on property subject to recourse debt are generally recognized in the year of foreclosure/sale); it sustained the Commissioner’s adjustments and penalties.
- Tucker appealed; the Eleventh Circuit affirmed, applying de novo review of legal issues and clear-error review of facts and concluding Tucker failed to meet his burden to show abandonment or worthlessness in 2008.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether Paragon abandoned the properties in 2008 so as to sustain a §165(a) loss then | Tucker: Paragon ceased operations, dismissed employees, stopped payments—objective abandonment occurred in 2008 | Commissioner/Tax Ct: Paragon’s later overt acts (sales, construction notices, settlements, funds flowing) show no abandonment | Court: No abandonment in 2008; Tax Court factual finding not clearly erroneous |
| Whether Paragon’s properties were worthless to Paragon in 2008 for §165(a) purposes | Tucker: market crash and insolvency made Paragon’s equity essentially valueless by 12/31/2008, so loss was sustained then | Commissioner/Tax Ct: properties still had value to Paragon (could be sold, used in settlements), and losses on recourse debt are not fixed until foreclosure/sale | Court: Properties were not worthless to Paragon in 2008; deduction not available then |
| Whether Treas. Reg. §1.165-1(d) permits treating market collapse as a fixed loss for recourse-property earlier than foreclosure | Tucker: the regulation allows an ‘‘other event’’ to fix a loss when claim for recovery is unreasonable, so the market collapse fixed the loss | Commissioner/Tax Ct: regulation does not support Tucker’s novel inverse reading where recourse mortgages mean loss amount not ascertainable until foreclosure | Court: Rejected Tucker’s novel reading; loss amounts not ascertainable in 2008 due to recourse exposure |
| Burden of proof / timing of deduction for recourse debts | Tucker: argued exceptional facts meant loss should be recognized earlier | Commissioner: established rule that recourse-mortgage losses recognized in year of foreclosure/sale; taxpayer bears burden | Court: Applied established rule; taxpayer failed to meet burden and Court affirmed Tax Court decision |
Key Cases Cited
- Gustashaw v. Comm’r, 696 F.3d 1124 (11th Cir.) (standard of review and burden on taxpayer)
- Welch v. Helvering, 290 U.S. 111 (Supreme Court) (presumption of correctness of Commissioner decision; burden on taxpayer)
- C. A. White Trucking Co., Inc. v. Comm’r, 601 F.2d 867 (5th Cir.) (deductions are a matter of legislative grace; taxpayer bears burden)
- Echols v. Comm’r, 935 F.2d 703 (5th Cir.) (worthlessness and abandonment standards for §165 losses)
- Helvering v. Hammel, 311 U.S. 504 (Supreme Court) (foreclosure sale is the definitive event for loss on recourse property)
- Comm’r v. Green, 126 F.2d 70 (3d Cir.) (recourse debt: property retains value until foreclosure sale for deficiency determination)
- Helvering v. Gordon, 134 F.2d 685 (4th Cir.) (market events and timing of loss recognition)
- Boehm v. Comm’r, 326 U.S. 287 (Supreme Court) (worthlessness is question of fact for Tax Court)
- Laney v. Comm’r, 674 F.2d 342 (5th Cir.) (definition and significance of recourse obligation)