Proceduralist Reflections on Tax Consequences of Home Mortgage Foreclosures

Abstract:     
In tax law and theory, procedure gets short shrift. Yet sometimes, procedure makes all the difference. That seems to me to be particularly true regarding the recent publicity over the tax consequences of foreclosures on taxpayers' principal residences. H.R. 3648, passed by the U.S. House of Representatives on October 4, 2007, and pending in Congress as of the date of this article, purports to address the alleged problem with the law. This article examines the pending legislation and, more importantly, examines the overlooked role of procedure in creating the problems faced by taxpayers who are told they have taxable income even when they have just taken a huge financial hit in losing their home.

My thesis is that Congress is amending the wrong statute. H.R. 3648 does little to help those taxpayers who find themselves in foreclosures because it completely ignores procedure. Congress should instead amend the statutes concerning third-party reporting procedure because current statutes force both the IRS and taxpayers into an inefficient process to find the right substantive answer. While I will also make a few observations about its substance, I will focus mostly on the procedural aspects of the bill - or lack thereof. I propose an alternative statutory reform that can fix what is a very real problem for a great many taxpayers, taxpayers who theoretically owe nothing but as a practical matter get stuck with a hefty tax bill. Part I of this article reviews the substantive issue. Part II explains why the issue presented is really a procedural problem. Part III critiques H.R. 3648 and explains how true reform could be accomplished through a simpler amendment.

Number of Pages in PDF File: 6

Keywords: mortgage crisis, mortgages, home mortgage foreclosure, mortgage foreclosure, foreclosures, cancellation, debt, discharge, indebtedness, COD, DOI, section 108, 1099, tax procedure, third-party reporting, information returns

JEL Classification: H24, K34, D1

Accepted Paper Series