repossession

[S T]

Question?

Seller had to repossess a business sold, default on note. Originally Goodwill was reported on the installment sale.

T/p incurred legal fees and also had to pay additional lease expense as they were a guarantor on the lease.

Are the legal fees and lease payments added to the repossesion as costs, or do you expense under other business expense?

Sandy

[veritas]

Good grief

Where do you get these?

What did your client reposess? Inventory, personal property?

[S T]

Luck of the draw

Just "dumb" clients!

They repossessed possession of the leased premises. They were on lock out! The furniture fixtures, equipment and leasehold were all reported in the original sale at a loss in 2005. Installment note went to default in 2006, and the original buyers filed bankruptcy. It took the t/p over 1 year to even gain control of the premises due to the lease. . Goodwill was a gain and reported on the Installment Sale.

So I have to report a repossession, and I don't know how to treat the attorney fees and the payoff of the lease and close this forever, and never look back.

Sandy

[JG EA]

Repossession costs are part of the gain/loss on repossesing a property. I would think attorney fees would be part of this.

Do you have a good worksheet for this? NATP has one for members but I know there should be others out there.

[S T]

Worksheet

Yes I have CFS which seems to do well,

Just was uncertain as how to handle the high legal expenses and $88,000 of lease expense to close the deal and be done with it.

So when all is said and done the t/p walked with $6,000 or so out of the proceeds of $100K.

So I add all legal fees and lease expense to the expenses on the repossession and do not show on the form 1065 as business expenses? Then I have a schedule D for losses?

I am so confused!

Sandy

[JG EA]

I'm no authority but it seems that if these were the costs to repossess then these are the cost to reposess!

Usually there is a gain (maybe taxable, maybe not) when repossessing because they got money for the property and they got the property.

All I know is those worksheets walk you through it and I'd say they are not a separate business expense but just an expense of repo.

[veritas]

If the fmv

of the repossesed property exceeds the basis of the installment obligation at the time of repossession there would be a gain. Expenses paid to reposess the assets increase the basis of the installment obligation. If the fmv of the repossesed property is less than the basis you would have a loss.

What were the legal fees paid for? To gain possession of the failed business assets?

I don't think the lease payments would add to the basis. Those expenses were paid bcause your client was on the hook for the lease. Those expenses would be deductible otherwise in my opinion.

I haven't had a repossession in years and that was on real property.

I'm interested in some other input.

[S T]

More on my nightmare

The legal fees were paid to regain control of the leasehold , that the original buyer defaulted on the note and filed bankruptcy. Calif law was very particular, so the t/p was dealing with eviction rulings, the landlord of the property who was not cooperating and the buyer in 2005. The leased premises that was all locked up contained all of the furniture and fixtures, equipment, had sat vacant for almost 15 months while the legal mess was going on. There was no business at that point, as the doors had been locked. T/p had been told the contents inside such as the furniture and fixtures and equipment were worth $ .10 cents on the $ 1.

No way to separate out the legal fees as I see, the t/p had 3 different attorneys all working at various levels. Some was to collect on the default, another was working on the bankruptcy of the buyer, and at least 2 of them were working on the eviction proceedings to gain access to the leased property/ business was already closed by that time, all signs down and no reference to a business at all.

T/p had to have the Property Owner's blessing in order to sell to this new buyer, had to approve the new buyer so basicially t/p sold to the new buyer for $100K, owed $88K on back lease payments as a guarantor of the lease for the 2005 buyer and the the property owner released them from any future payments on the lease. Then subtract the escrow fees and some other charges they netted out $6,000, and have additional legal expenses still to pay for.

FMV would then be the $100K correct, as that is what they could and did sell for. But then as I think out loud here while I am posting, fair market value of the business was basically -0-. The $100K that t/p collected actually was to turn over the lease that they had guaranteed, not really goodwill of the actual business as there was none.

I have ann outstanding note of something like $114K on the repossession. Then I have legal costs, escrow fees and have this $88K in lease payments.

Additional guidance or suggestions would be welcomed at this point. The original note was on an installment sale (goodwill) that went sour, so do I report on Schedule D the loss of the note defaulted of $114K then offset with the $100K applied to that, or take the $100K as income for lease transfer and then take the $88K as expense along with attorney fees, etc. on the form 1065 as lease/rent expense.

What a mess!

Many thanks,

Sandy

[Roland Slugg]

Dear Sandy

Since your client chose to take the legal steps and pay the necessary costs to regain title to the assets once sold, or at least the goodwill asset, it means that he believed the leasehold had a value that could either: (1) be used to operate a business again, or (2) be re-sold at a gain. Thus, there is no deductible loss created by the act of regaining rights to the leasehold. Instead the legal fees and other costs should be capitalized and added to the basis in the installment note. (That basis is the remaining amount that would not have been taxed if the note had been paid in full.)

If your client then sells the "business" again, that new basis will offset the selling price. If he doesn't sell again but just closes down, he will have an abandonment loss at that time.

There will doubtless be other costs incurred between the repo date and the date the property is either reopened for business, sold, or shut down. Those expenses will either be pre-opening expenses or will need to be capitalized depending on the facts of the situation.

[veritas]

What about this?

"had to pay additional lease expense as they were a guarantor on the lease"


This clearly indicates to me the money was expended because the landlord wanted his money.

I'll bet some of the legal fees were to see about how to walk away from the whole mess.

[S T]

Veritas Landlord and Legal

That is a very true possibility, and ultimately what was probably in the back of the t/p minds, was how to remove themselves from the fact that they guaranteed the lease at the onset of the business.

So can you assist in sorting this out, so I can report it properly.

You can email me if you would rather not post.

Thanks

Sandy

[veritas]

lease

I would lean towards deducting as a business expense.

If I paid money to cancel a lease and not to enter into a new lease it would be deductible as a business expense.

What type of entity did your client originally use for the business?

[S T]

Entity

The business was set up as a Limited Partnership. My t/p is the General Patner with 80% which is an S Corp , so I have the flow through from Limited to S Corp, then to the personal return. Limited partners are family that invested a small amount into this venture, and we just want them to be able to take their loss on their investment in 2007.

How do you discern what legal costs would be allocated to what part of this "mess".?

Thanks Veritas for hanging in here with me!

Sandy