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Understanding the Assignment of Mortgages: What You Need To Know

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A mortgage is a legally binding agreement between a home buyer and a lender that dictates a borrower's ability to pay off a loan. Every mortgage has an interest rate, a term length, and specific fees attached to it.

Written by Attorney Todd Carney .  Updated November 26, 2021

If you’re like most people who want to purchase a home, you’ll start by going to a bank or other lender to get a mortgage loan. Though you can choose your lender, after the mortgage loan is processed, your mortgage may be transferred to a different mortgage servicer . A transfer is also called an assignment of the mortgage. 

No matter what it’s called, this change of hands may also change who you’re supposed to make your house payments to and how the foreclosure process works if you default on your loan. That’s why if you’re a homeowner, it’s important to know how this process works. This article will provide an in-depth look at what an assignment of a mortgage entails and what impact it can have on homeownership.

Assignment of Mortgage – The Basics

When your original lender transfers your mortgage account and their interests in it to a new lender, that’s called an assignment of mortgage. To do this, your lender must use an assignment of mortgage document. This document ensures the loan is legally transferred to the new owner. It’s common for mortgage lenders to sell the mortgages to other lenders. Most lenders assign the mortgages they originate to other lenders or mortgage buyers.

Home Loan Documents

When you get a loan for a home or real estate, there will usually be two mortgage documents. The first is a mortgage or, less commonly, a deed of trust . The other is a promissory note. The mortgage or deed of trust will state that the mortgaged property provides the security interest for the loan. This basically means that your home is serving as collateral for the loan. It also gives the loan servicer the right to foreclose if you don’t make your monthly payments. The promissory note provides proof of the debt and your promise to pay it.

When a lender assigns your mortgage, your interests as the mortgagor are given to another mortgagee or servicer. Mortgages and deeds of trust are usually recorded in the county recorder’s office. This office also keeps a record of any transfers. When a mortgage is transferred so is the promissory note. The note will be endorsed or signed over to the loan’s new owner. In some situations, a note will be endorsed in blank, which turns it into a bearer instrument. This means whoever holds the note is the presumed owner.

Using MERS To Track Transfers

Banks have collectively established the Mortgage Electronic Registration System , Inc. (MERS), which keeps track of who owns which loans. With MERS, lenders are no longer required to do a separate assignment every time a loan is transferred. That’s because MERS keeps track of the transfers. It’s crucial for MERS to maintain a record of assignments and endorsements because these land records can tell who actually owns the debt and has a legal right to start the foreclosure process.

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Assignment of Mortgage Requirements and Effects

The assignment of mortgage needs to include the following:

The original information regarding the mortgage. Alternatively, it can include the county recorder office’s identification numbers. 

The borrower’s name.

The mortgage loan’s original amount.

The date of the mortgage and when it was recorded.

Usually, there will also need to be a legal description of the real property the mortgage secures, but this is determined by state law and differs by state.

Notice Requirements

The original lender doesn’t need to provide notice to or get permission from the homeowner prior to assigning the mortgage. But the new lender (sometimes called the assignee) has to send the homeowner some form of notice of the loan assignment. The document will typically provide a disclaimer about who the new lender is, the lender’s contact information, and information about how to make your mortgage payment. You should make sure you have this information so you can avoid foreclosure.

Mortgage Terms

When an assignment occurs your loan is transferred, but the initial terms of your mortgage will stay the same. This means you’ll have the same interest rate, overall loan amount, monthly payment, and payment due date. If there are changes or adjustments to the escrow account, the new lender must do them under the terms of the original escrow agreement. The new lender can make some changes if you request them and the lender approves. For example, you may request your new lender to provide more payment methods.

Taxes and Insurance

If you have an escrow account and your mortgage is transferred, you may be worried about making sure your property taxes and homeowners insurance get paid. Though you can always verify the information, the original loan servicer is responsible for giving your local tax authority the new loan servicer’s address for tax billing purposes. The original lender is required to do this after the assignment is recorded. The servicer will also reach out to your property insurance company for this reason.  

If you’ve received notice that your mortgage loan has been assigned, it’s a good idea to reach out to your loan servicer and verify this information. Verifying that all your mortgage information is correct, that you know who to contact if you have questions about your mortgage, and that you know how to make payments to the new servicer will help you avoid being scammed or making payments incorrectly.

Let's Summarize…

In a mortgage assignment, your original lender or servicer transfers your mortgage account to another loan servicer. When this occurs, the original mortgagee or lender’s interests go to the next lender. Even if your mortgage gets transferred or assigned, your mortgage’s terms should remain the same. Your interest rate, loan amount, monthly payment, and payment schedule shouldn’t change. 

Your original lender isn’t required to notify you or get your permission prior to assigning your mortgage. But you should receive correspondence from the new lender after the assignment. It’s important to verify any change in assignment with your original loan servicer before you make your next mortgage payment, so you don’t fall victim to a scam.

Attorney Todd Carney

Attorney Todd Carney is a writer and graduate of Harvard Law School. While in law school, Todd worked in a clinic that helped pro-bono clients file for bankruptcy. Todd also studied several aspects of how the law impacts consumers. Todd has written over 40 articles for sites such... read more about Attorney Todd Carney

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• GAINS & LOSSES

A Road Map of Tax Consequences of Modifying Debt

• Individual Income Taxation

The economy is still struggling to emerge from the “great recession.” According to a congressional panel overseeing Treasury’s Troubled Asset Relief Program (TARP), about $1.4 trillion worth of commercial real estate loans will come due in the next four years. Nearly half of the commercial real estate assets secured by these loans are now worth less than the outstanding debt. 1 Outside of some key U.S. markets (e.g., New York City, Washington, D.C.), the U.S. commercial real estate market has been sluggish, mirroring job growth.

For many borrowers who purchased real estate in the 2006–2008 period, the sale of the real estate asset is not economically feasible since the property is most likely still underwater. Often, distressed borrowers with liquidity issues cannot generate enough cash to service their debt, or they do not have enough equity in the property to refinance. Many of these borrowers rely on a debt restructuring transaction, in the form of debt modifications, to help them de-lever the property and work out existing debt.

On the other side of the market from distressed borrowers are the purchasers of distressed debt. There was much discussion and speculation last year about “green shoots” in the economy and the opportunities in the emerging asset class of “distressed debt.” A flurry of activity is starting to hit the marketplace now as these investments have become a viable asset class as evidenced by new “distressed debt funds” being raised in the market.

Debt restructurings are not limited only to owners of real estate loans, but they are also occurring across all industry lines and all types of taxpayers. When the market was at its peak, there were many leveraged buyouts (LBOs) of companies where excessive use of leverage was quite common. Other types of typical financing transactions include loans such as syndicated bank loans and any unsecured debt in general. The recession, coupled with steep declines in revenue, has required a portion of the debt to be restructured to avoid liquidity issues.

This article examines the potential tax consequences to lenders, borrowers, and purchasers of debt in connection with modifications of debt instruments, as well as a discussion of recent proposed and final regulations in the area of debt modifications.

A modification of a debt instrument may result in a deemed taxable exchange of the old debt instrument for a new debt instrument. Deemed exchanges could, in turn, trigger the recognition of cancellation of debt (COD) 2 income and the accrual of original issue discount (OID) 3 deductions over the remaining term of the debt to the borrower and immediate gain/loss recognition and OID income to the lender. Interest limitations may also affect the deductibility of the OID. A two-step analysis determines whether a deemed exchange has occurred. First, were the terms of the debt instrument modified? Second, was the modification significant? If the modification was significant, what are the tax consequences to the borrower and lender?

A road map of these steps in debt modification is provided in the exhibit .

The IRS issued the current debt modification regulations under Regs. Sec. 1.1001-3 in 1996 in response to the Supreme Court’s decision in Cottage Savings . 4  In Cottage Savings , a savings and loan institution sold interests in an underlying pool of mortgages and purchased comparable interests in a different pool of mortgages from a different lender. The purchased mortgages were relatively close in value to those in the original pool, but had different obligors and collateral. The institution recognized a loss on the exchange for tax purposes, but not for financial purposes. The IRS challenged the institution’s claimed loss.

The Court held that the exchange of mortgage portfolios by two savings and loan companies was a taxable event even though the overall portfolios had virtually identical economic characteristics. The Court said the mortgage loans were materially different because they had different obligors and were secured by different properties. Regs. Sec. 1.1001-3, which was amended in 2011, lays out the rules under which the alteration of terms of the old debt instrument will be deemed a taxable exchange.

With some careful planning and a full understanding of the debt modification rules, the tax adviser can plan for and optimize the tax consequences of debt restructurings.

Two-Part Test

Step one: has a modification occurred.

“Modification” is broadly defined in the regulations. In general, a modification means any alteration, including any deletion or addition, in whole or in part, of a legal right or obligation of the issuer or a holder of a debt instrument, whether the alteration is evidenced by an express agreement (oral or written), conduct of the parties, or otherwise. A modification can occur from amending the terms of a debt instrument or through exchanging one debt instrument for another. 5

There are three main exceptions to the broad definition of a modification:

Terms of a debt instrument: An alteration of a legal right or obligation that occurs by operation of the terms of a debt instrument is not a modification (e.g., an annual resetting of the interest rate based on the value of an index). 6 Certain alterations, however, would constitute a modification, even if the alterations occur by operation of the terms of a debt instrument.

One example is a change in obligor or the addition or deletion of a co-obligor. Another example is a change in the nature of the debt instrument (i.e., an alteration that results in a change from recourse to nonrecourse or vice versa). 7 An alteration that results from the exercise of an option provided to an issuer or a holder to change a term of a debt instrument is a modification unless the option is unilateral and, in the case of an option exercisable by a holder, the exercise of the option does not result in a deferral of, or a reduction in, any scheduled payment of interest or principal. 8

Failure to perform: The failure of an issuer to perform its obligations under a debt instrument is not a modification. Although the issuer’s nonperformance is not a modification, the agreement of the holder not to exercise its remedies under the debt instrument may be a modification.

Absent a written or oral agreement to alter other terms of the debt instrument, an agreement by the holder to stay collection or temporarily waive an acceleration clause or similar default right (including such a waiver following the exercise of a right to demand payment in full) is not a modification unless and until the forbearance remains in effect for a period that exceeds two years following the issuer’s initial failure to perform and any additional period during which the parties conduct good-faith negotiations or during which the issuer is in bankruptcy. 9

Failure to exercise an option: If a party to a debt instrument has an option to change a term of the instrument, the failure of the party to exercise that option is not a modification. 10

Step Two: Was the Modification Significant?

Assuming a modification occurred, the next question is whether the modification is significant. The regulations provide six rules for addressing whether a modification is significant:

• General test—facts and circumstances;
• Change in yield;
• Change in timing of payments;
• Change in obligor or security;
• Changes in the nature of a debt instrument; or
• Changes to accounting or financial covenants.

Whether a modification of any term is a significant modification is determined under each applicable rule and, if not specifically addressed in those rules, under the general facts-and-circumstances test. 11 For instance, a deferral of payments that changes the yield of a fixed-rate debt instrument must be tested under both the change-in-yield test and the change-in-timing-of-payments test. 12

General test: Under the general test, a modification is a significant modification only if, based on all facts and circumstances, the legal rights or obligations are altered to a degree that is economically significant. In making a determination under the facts-and-circumstances test, all modifications to the debt instrument are considered collectively, so that a series of such modifications may be significant when considered together although each modification, if considered alone, would not be significant. 13 The general test does not apply if there is a specific rule that applies to the particular modification. 14

Change-in-yield test: This test applies to debt instruments that provide only for fixed payments, debt instruments with alternative payment schedules subject to Regs. Sec. 1.1272-1(c) (instruments subject to contingencies), debt instruments that provide for a fixed yield subject to Regs. Sec. 1.1272-1(d) (such as certain demand loans), and variable-rate debt instruments. If a debt instrument does not fall within one of these categories (e.g., a contingent payment debt instrument), then whether a change in the yield of the debt instrument is a significant modification is determined under the general facts-and-circumstances test. 15

In general, a change in the yield of a debt instrument is a significant modification if the yield varies from the annual yield on the unmodified instrument (determined as of the date of the modification) by more than the greater of: (1) one-quarter of 1% (25 basis points) or (2) 5% of the annual yield of the unmodified debt instrument (0.05 × annual yield). 16

A reduction in principal reduces the total payments on the modified instrument and would result in a reduced yield on the instrument, often resulting in a significant modification. As such, the regulations give the same effect to changes in principal amounts as to changes in interest rates.

Example 1: A debt instrument issued at par has an original term of 10 years and provides for the payment of $100,000 at maturity with annual interest payments at a rate of 10%. At the end of the fifth year, and after the annual payment of interest, the issuer and holder agree to reduce the amount payable at maturity to $80,000. The annual interest rate remains at 10% but is payable on the reduced principal.

In applying the change-in-yield rule, the yield of the instrument after the modification (measured from the date that the parties agree to the modification to its final maturity date) is computed using the adjusted issue price of $100,000. With four annual payments of $8,000, and a payment of $88,000 at maturity, the yield on the instrument after the modification for purposes of determining if there has been a significant modification is 4.332%. Thus, the reduction in principal is a significant modification. 17

Change in timing of payments: In general, a modification that changes the timing of payments (including any resulting change in the amount of payments) due under a debt instrument is a significant modification if it results in the material deferral of scheduled payments. Examples would include either an extension of the final maturity date or a deferral of payments due prior to maturity (such as a deferral of interest payments). There are many facts and circumstances to consider including the length of the deferral, the original term of the debt instrument, the amounts of the payments that are deferred, and the time period between the modification and the actual deferral of payments. 18

The regulations provide for a safe harbor where the modification will not be significant if the deferred payments are required to be paid within the lesser of five years or one-half the original term of the instrument. For purposes of the safe-harbor rule, the term of an instrument is determined without regard to any option to extend the original maturity, and deferrals of de minimis payments are ignored. Deferrals are tested on a cumulative basis so that, when payments are deferred for less than the full safe-harbor period, the unused portion of the period remains for any subsequent deferrals. 19

Example 2: A zero-coupon bond has an original maturity of 10 years. At the end of the fifth year, the parties agree to extend the maturity for a period of two years without increasing the amount payable at maturity.

The safe-harbor period starts with the date the payment that is being deferred is due (the original maturity date) and ends five years from this date. Thus, the deferral of the payment at maturity for a period of two years is not a material deferral under the safe-harbor rule and thus is not a significant modification. Although this extension of maturity is not a significant modification, the modification also decreases the yield of the bond and must also be tested under the change-of-yield rules. 20

Change in obligor or security: The substitution of a new obligor on a nonrecourse debt instrument is not a significant modification. 21 Conversely, a substitution of a new obligor on a recourse debt instrument is generally a significant modification. 22 There are a few possible exceptions for substitutions of obligors on a recourse debt instrument. These exceptions include the following:

• The new obligor is an acquiring corporation to which Sec. 381(a) applies;
• The new obligor acquires substantially all of the assets of the obligor; and
• The change in obligor is a result of either a Sec. 338 election or the filing of a bankruptcy petition. 23

Moreover, for an exception to apply, the change in obligor must not result in a change in payment expectations or a significant alteration (an alteration that would be a significant modification but for the fact that the alteration occurs by operation of the terms of the instrument). 24 In general, a change in payment expectations occurs if, as a result of a transaction, there is a substantial enhancement or impairment of the obligor’s capacity to meet the payment obligations after the modification as compared to before the modification. In the case of an enhancement, the test is based on whether the obligor’s capacity to meet its obligations under the debt instrument was primarily speculative before the modification and adequate after the modification, and, in the case of an impairment, on whether the obligor’s capacity to meet its obligations under the debt instrument was adequate before the modification and is primarily speculative after the modification. 25

Example 3: A recourse debt instrument is secured by a building. In connection with the sale of the building, the purchaser of the building assumes the debt and is substituted as the new obligor on the debt instrument. The purchaser does not acquire substantially all of the assets of the original obligor.

The transaction does not satisfy exception (1) or (2) listed above. Thus, the substitution of the purchaser as the obligor is a significant modification. 26

The addition or deletion of a co-obligor on a debt instrument is a significant modification if the addition or deletion of the co-obligor results in a change in payment expectations. 27 For recourse debt instruments, a modification that releases, substitutes, adds, or otherwise alters the collateral for, a guarantee on, or other form of credit enhancement for a recourse debt instrument is a significant modification if the modification results in a change in payment expectations. 28

For nonrecourse debt instruments, a modification that releases, substitutes, adds, or otherwise alters a substantial amount of the collateral for, a guarantee on, or other form of credit enhancement for a nonrecourse debt instrument is a significant modification. A substitution of collateral on a nonrecourse debt instrument is not a significant modification, however, if the collateral is fungible or otherwise of a type where the particular units pledged are unimportant, such as government securities or financial instruments of a particular type and rating. In addition, the substitution of a similar commercially available credit enhancement contract is not a significant modification, and an improvement to the property securing a nonrecourse debt instrument does not result in a significant modification. 29

Example 4: A parcel of land and its improvements (a shopping center) secure a nonrecourse debt instrument. The obligor expands the shopping center with the construction of an additional building on the same parcel of land. After the construction, the improvements that secure the nonrecourse debt include the new building.

The building is an improvement to the property securing the nonrecourse debt instrument and its inclusion in the collateral securing the debt is not a significant modification. 30 If the priority of a debt instrument changes relative to other debt of the issuer and results in a change of payment expectations, the modification would be significant. 31

Change in the nature of a debt instrument: In general, a change in the nature of a debt instrument from recourse to nonrecourse, or vice versa, is a significant modification. There are two exceptions to this rule. First, a defeasance of tax-exempt bonds is not a significant modification if the defeasance occurs by operation of the terms of the original bond and the issuer places in trust government securities or tax-exempt government bonds that are reasonably expected to provide interest and principal payments sufficient to satisfy the payment obligations under the bond. 32

Second, a modification that changes a recourse debt instrument to a nonrecourse debt instrument is not a significant modification if the instrument continues to be secured only by the original collateral and the modification does not result in a change in payment expectations. For this purpose, if the original collateral is fungible or otherwise of a type where the particular units pledged are unimportant (for example, government securities or financial instruments of a particular type and rating), replacement of some or all units of the original collateral with other units of the same or similar type and aggregate value is not considered a change in the original collateral. 33

A modification of a debt instrument that results in an instrument that is not debt for federal income tax purposes is a significant modification. 34 For purposes of this rule, any deterioration in the financial condition of the obligor between the issue date of the unmodified instrument and the date of modification (as it relates to the obligor’s ability to repay the debt) is not taken into account unless, in connection with the modification, there is a substitution of a new obligor or the addition or deletion of a co-obligor. 35

Recently finalized regulations on issuer’s financial condition: Recently, the IRS issued regulations that address whether a deterioration in the issuer’s creditworthiness is taken into account in determining whether a modified debt instrument is still classified as debt for tax purposes. The IRS issued proposed regulations in June 2010 36 that were finalized on Jan. 7, 2011, 37 clarifying that, when determining whether a modified debt instrument is still classified as debt for tax purposes, the deterioration of the issuer’s creditworthiness is not taken into account. What precipitated the new regulations was the apparent limitation of the rule disregarding a deterioration in the issuer’s creditworthiness only for purposes of determining whether a debt instrument has been significantly modified and not for purposes of determining whether the modified debt instrument continued to be debt for all tax purposes.

Taxpayers requested clarification of when the credit quality of the issuer would be considered in determining the nature of the instrument resulting from an alteration or modification of a debt instrument. Absent the clarification, the concern was that the new instrument could be treated as equity due to the lack of certainty of repayment or a lack of sufficient collateral. The preamble to the proposed regulations clarifies that any decrease in the fair market value (FMV) of a debt instrument (regardless of whether it is publicly traded or not) between the issue date of the debt instrument and the date of the modification is not taken into account for purposes of determining whether the modified debt instrument continues to be debt for all tax purposes to the extent the decrease in FMV is attributable to the deterioration in the financial condition of the issuer and not to a modification of the terms of the debt instrument.

If the debt is modified and the resulting instrument is not characterized as debt for tax purposes (and is instead treated as equity for tax purposes), the transaction would be treated as an exchange of the old debt instrument for equity of the issuer. Whether this exchange results in COD income to the issuer is controlled by Sec. 108(e)(8). 38

The final regulations remove a potential concern in workouts of debt of financially troubled debtors since the modified debt would still be treated as debt for tax purposes, provided there is no change in obligor, and provided there is no change in the terms of the debt that would be inconsistent with debt treatment (such as eliminating a maturity date). If the debt is not publicly traded, the modification often would take place without the debtor having to recognize COD income, so long as the principal amount is not reduced and the debt has adequate stated interest. In contrast, if the debt is publicly traded, the debtor’s creditworthiness would affect the value of the debt, and the debtor would likely have COD income even if the debt was respected as debt for tax purposes. The tax consequences of modifying non–publicly traded debt and publicly traded debt are discussed in more detail later in this article.

Changes in financial and accounting covenants: A modification that adds, deletes, or alters customary accounting or financial covenants is not a significant modification. 39 Nonetheless, the issuer may make a payment to the lender in consideration for agreeing to the modification. The payment would be taken into account in applying the change-in-yield test. 40 Therefore, a modification to a debt instrument’s covenants can result in a significant modification if the lender receives a payment for agreeing to the modification.

Tax Consequences of the Deemed Exchange

Once the determination has been made that a modification of a debt instrument is significant, the tax adviser must analyze the tax consequences to the borrower and the holder. The borrower’s tax consequences are determined by comparing the issue price of the new debt to the adjusted issue price of the old debt. 41 Generally speaking, the adjusted issue price is the principal amount if the debt was not issued at a discount and provided for current payments of interest at a fixed or variable rate. Gain or loss to the holder/lender is measured by the difference between the issue price of the new debt and the tax basis of the old debt. The holder can have a different tax basis than the adjusted issue price. For instance, the holder could have bought the debt from the original lender at a discount.

To determine the issue price of the new debt, a determination must be made if the debt is publicly traded (discussed below) or not. For this purpose, either the old debt or the new debt (or both) can be publicly traded. If the debt is publicly traded, the issue price is equal to the FMV of the debt instrument. 42 The rules address publicly traded debt issued for property and non–publicly traded debt issued for publicly traded property. The property is the old debt instrument that is being exchanged for the new debt instrument. If the debt is not publicly traded, the issue price is equal to the principal amount of the debt instrument if the instrument has adequate stated interest. 43 An instrument has adequate stated interest if the stated principal amount is less than or equal to the imputed principal amount. 44 As a general rule, a debt instrument has adequate stated interest if it bears interest at least equal to the applicable federal rate (AFR) under Sec. 1274(d).

The following examples illustrate various scenarios and outcomes depending on whether the debt is publicly traded or not. 45

Example 5: Debt is not publicly traded: The original terms of the loan provide for a 10% interest rate. The $100 principal amount of the loan is equal to the amount of cash that was loaned. The lender is the original lender (and, consequently, has a $100 basis in the loan). The lender agrees to reduce the rate to 6%, which is above the current AFR. Assume that all accrued interest has been paid as of the date of the modification, and no accrued interest is being forgiven.

Impact to lender: Although the modification is significant, no loss is recognized since the issue price of the new debt is $100 (the principal amount) and the lender’s tax basis is $100.

Impact to borrower: No COD income is recognized because the issue price of $100 is the same as the adjusted issue price of $100.

Example 6: Debt is publicly traded: The original terms of the loan provide for a 10% interest rate. The $100 principal amount of the loan is equal to the amount of cash that was loaned. The lender agrees to reduce the rate to 6%. Assume that all accrued interest has been paid as of the date of the modification, and no accrued interest is being forgiven. The debt is publicly traded and has an FMV of $80.

Impact to borrower: $20 of COD income is recognized equal to the difference between the new issue price of $80 and the original amount borrowed of $100. The exchange also creates $20 of OID, resulting in interest deductions to the borrower over the remaining term of the new debt. 46 The modified loan has OID because it is treated as a new loan for tax purposes, with an issue price of $80 and a stated redemption price at maturity of $100. Consideration should be given to any interest limitation that would affect the deductibility of the OID, including Sec. 163(e)(5) (applying to corporate debt with a high yield that meets certain requirements provided in Sec. 163(i)).

Impact to lender: $20 of loss 47 is recognized in this deemed debt-for-debt exchange because the lender’s amount realized is the new issue price of $80 less the lender’s original tax basis of $100. The exchange also creates OID income of $20 to be taken into income as interest over the remaining term of the new debt.

Example 7: Debt is not publicly traded: The original lender sells the debt to a third party for $80, which is less than the principal amount of the debt. After the transfer, interest terms are renegotiated from 10% to 6%, which is above the current AFR.

Impact to borrower: None.

Impact to original lender: $20 loss is recognized from the sale of the loan for $80.

Impact to third-party buyer: $20 gain due to the receipt of the new debt instrument with an issue price of $100 in exchange for the old loan in which he had a tax basis of $80. 48

Example 8: Debt is publicly traded: The original lender sells the debt to a third party for $80, which is the current FMV of the debt. Immediately after the transfer, interest terms are renegotiated from 10% to 6%.

Impact to borrower: COD of $20 and OID deductions of $20 over the life of debt instrument.

Impact to original lender: Loss of $20 is recognized.

Impact to third-party buyer: OID income of $20 over the life of debt instrument. (If the terms of the debt had not been renegotiated, the $20 discount would not have been treated as OID. Instead, it would represent market discount to the third-party purchaser. Market discount is not required to be included in income as it accrues. Instead, accrued market discount is recognized when principal payments are made or when the debt is sold. 49 Because a significant modification occurred, the modified debt is treated as newly issued for tax purposes. Therefore, the modified debt is being issued at $80, resulting in $20 of OID, which must be included in income as it accrues.)

As evidenced by the examples above, depending on the facts and circumstances, there could be adverse tax consequences to the borrower, lender, or purchaser of debt if there is a significant modification of the debt instrument.

The ultimate effect of these trans-actions depends on the parties’ tax positions. For example, if a corporation has significant net operating losses that are expiring, it may be beneficial to trigger gain in the exchange (and generate future OID deductions). Moreover, a borrower with COD could use the various exclusions of such COD income under Sec. 108 for some or all of that COD. 50

When Is Debt Considered "Publicly Traded"?

In January 2011, the IRS issued proposed regulations (REG-131947-10) addressing when property is considered to be traded on an established market (publicly traded) for purposes of determining the issue price of a debt instrument. Under the current regulations, issue price is generally determined in the following order:

• The amount of money paid for the debt instrument;
• If the debt instrument is publicly traded and is not issued for money, the FMV of the debt instrument;
• If the debt instrument is not publicly traded and not issued for money but is issued for property that is publicly traded (including a debt-for-debt exchange where the old debt is publicly traded), then the issue price of the debt instrument is the FMV of the publicly traded property; or
• If none of the above, Sec. 1274 applies and the issue price will be the stated principal amount where there is adequate stated interest. 51

Under the current regulations, property (including a debt instrument) is considered traded on an established market if it is described in Regs. Sec. 1.1273-2(f) at any time during the 60-day period ending 30 days after the issue date of the debt instrument. Property described in Regs. Sec. 1.1273-2(f) is (1) exchange listed property, (2) market-traded property (i.e., property traded on a board of trade or in an interbank market), (3) property appearing on a quotation medium, and (4) readily quotable debt instruments. 52

Few debt instruments are listed on an exchange. For most debt instruments, the important questions are whether the instruments appear on a quotation medium or are readily quotable. A quotation medium is defined as a system of general circulation that provides a reasonable basis to determine FMV by disseminating either recent price quotations of one or more identified brokers, dealers, or traders, or actual prices of recent sales transactions. 53 For example, trade information appearing in the Trade Reporting and Compliance Engine (TRACE) database maintained by the Financial Industry Regulatory Authority would likely cause the instrument to be publicly traded.

A debt instrument is considered readily quotable if price quotations are readily available from dealers, brokers, or traders. 54 Determining whether a debt instrument is readily quotable requires fact gathering, and tax practitioners may differ on what types of facts would cause a debt instrument to be considered readily quotable.

In issuing the proposed regulations, the IRS explained that commentators had criticized the definition of “established market” as difficult to apply in practice and noted that the current regulations were outdated. Due to the increased amount of debt workouts in recent years, the issue has turned into a hot topic. Generally, not many debt instruments are listed on an exchange, as they are typically traded in privately negotiated transactions between a securities dealer or broker and a customer. A dealer or broker may quote a firm price that enables a customer to buy or sell at that firm price subject to volume limitations, which is referred to as a “firm quote.” A dealer, broker, or listing service may also quote a price that indicates a willingness to buy or sell a specific debt instrument but not necessarily at the specified price (referred to as an “indicative quote”).

The preamble explained that commentators struggled to apply the definition of an established securities market to the informal marketplace in which most debt instruments changed hands. The proposed regulations were intended to simplify, clarify, and generally expand the determination of when property is traded on an established market.

The proposed regulations identify four ways for property (including a debt instrument) to be traded on an established market. In each case, the time period for determining whether the property is publicly traded is the 31-day period ending 15 days after the issue date of the debt instrument.

The following are the four categories that the proposed regulations identify:

• Property is listed on an exchange;
• A sales price for the property is reasonably available;
• A firm (or executable) price quote to buy or sell the property is available; or
• One or more indicative quotes (i.e., price quotes other than firm quotes) are available from a dealer, broker, or pricing service (an indicative quote).

For the second category, a sales price is considered reasonably available if the sales price (or information sufficient to calculate the sales price) appears in a medium that is made available to persons that regularly purchase debt instruments (including a price provided only to certain customers or subscribers) or to persons that broker such transactions.

The proposed regulations provide that the FMV of property described in Regs. Sec. 1.1273-2(f) will be presumed to be equal to its trading price, sales price, or quoted price, whichever is applicable. If there is more than one price or quote, a taxpayer may use any reasonable method, consistently applied, to determine the price. When there is only an indicative quote, a taxpayer can use any method that provides a reasonable basis to determine the FMV if the taxpayer determines that the quote (or average quotes) materially misrepresents the FMV, provided the taxpayer can establish that the method chosen more accurately reflects the value of the property. The regulations, as proposed, would apply to debt instruments issued on or after the publication date of the Treasury decision adopting the rules as final regulations.

The proposed regulations would resolve a number of uncertainties regarding whether debt is publicly traded. Unfortunately, for some troubled debtors, these proposed regulations would be biased toward treating certain debt instruments as publicly traded. Given that the FMV of these troubled loans is significantly less than their principal amount, a significant amount of COD income may be realized if there is a significant modification to the debt instrument that results in a debt-for-debt exchange. Tax advisers should be aware of these potential consequences, assuming the rules in the proposed regulations are finalized, and try to mitigate any adverse tax effects through careful planning.

A tax adviser needs a working knowledge of the tax consequences of modifying debt. This knowledge is critical to avoiding unpleasant surprises when advising a client engaging in a debt workout. A tax adviser needs to know not only when a debt-for-debt exchange is deemed to take place, but also the resulting tax consequences. Additionally, a tax adviser should be aware of recent developments in the area, including regulations addressing whether a deterioration in the issuer’s creditworthiness should cause a debt instrument to be reclassified as equity. These developments also include proposed regulations that would expand the definition of “publicly traded” to cover a broader range of debt instruments.

Author’s note: The author would like to thank Richard Fox, a principal in the Real Estate Tax Group at Ernst & Young LLP, for his insightful comments and contributions to this article.

1 Congressional Oversight Panel, Commercial Real Estate Losses and the Risk to Financial Stability (Feb. 10, 2010).

2 COD income results from the cancellation or reduction of indebtedness (see Sec. 108).

3 OID means the excess of a debt instrument’s stated redemption price at maturity over its issue price (Sec. 1273(a)(1)).

4 Cottage Savings Ass’n , 499 U.S. 554 (1991).

5 Regs. Sec. 1.1001-3(c)(1)(i).

6 Regs. Sec. 1.1001-3(c)(1)(ii).

7 Regs. Sec. 1.1001-3(c)(2)(i).

8 Regs. Sec. 1.1001-3(c)(2)(iii). The regulations provide a definition of a “unilateral option” in Regs. Sec. 1.1001-3(c)(3).

9 Regs. Sec. 1.1001-3(c)(4)(ii).

10 Regs. Sec. 1.1001-3(c)(5).

11 Regs. Sec. 1.1001-3(e)(1).

12 Regs. Sec. 1.1001-3(f)(1).

13 Regs. Sec. 1.1001-3(e)(1).

14 Regs. Sec. 1.1001-3(f)(1).

15 Regs. Sec. 1.1001-3(e)(2)(i).

16 Regs. Sec. 1.1001-3(e)(2)(ii).

17 Regs. Sec. 1.1001-3(g), Example (3).

18 Regs. Sec. 1.1001-3(e)(3)(i).

19 Regs. Sec. 1.1001-3(e)(3)(ii).

20 Regs. Sec. 1.1001-3(g), Example (2).

21 Regs. Sec. 1.1001-3(e)(4)(ii).

22 Regs. Sec. 1.1001-3(e)(4)(i)(A).

23 Regs. Secs. 1.1001-3(e)(4)(i)(B), (C), (D), (F), and (G).

24 Regs. Sec. 1.1001-3(e)(4)(i)(E). The requirement that a significant alteration not occur does not apply if the transaction falls under Sec. 368(a)(1)(F) (a change in form or place of incorporation).

25 Regs. Sec. 1.1001-3(e)(4)(vi).

26 Regs. Sec. 1.1001-3(g), Example (6).

27 Regs. Sec. 1.1001-3(e)(4)(iii).

28 Regs. Sec. 1.1001-3(e)(4)(iv)(A).

29 Temp. Regs. Sec. 1.1001-3T(e)(4)(iv).

30 Regs. Sec. 1.1001-3(g), Example (9).

31 Regs. Sec. 1.1001-3(e)(4)(v).

32 Regs. Sec. 1.1001-3(e)(5)(ii)(B)(1).

33 Temp. Regs. Sec. 1.1001-3T(e)(5)(ii)(B)(2).

34 Regs. Sec. 1.1001-3(e)(5)(i).

35 Id.; Regs. Sec. 1.1001-3(f)(7)(ii).

36 REG-106750-10.

37 T.D. 9513 (Regs. Secs. 1.1001-3(c)(2)(ii), (e)(5), and (f)(7)).

38 Many other tax consequences can result from this exchange of debt for equity of the issuer including: (1) converting a single-member disregarded entity into a partnership for tax purposes, (2) a distribution under Sec. 752 due to a reduction of debt (and possible gain recognition to the partners), (3) a change in the treatment of the investment for the Secs. 856(c)(2)–(4) income and asset tests for REITs, (4) a change in the character and sourcing of income, (5) a change in the withholding tax treatment under Secs. 1441–1446, and (6) the cessation of interest accruals and the nonapplication of Sec. 166.

39 Regs. Sec. 1.1001-3(e)(6).

40 Regs. Sec. 1.1001-3(e)(2)(iii)(A).

41 Sec. 108(e)(10); Regs. Sec. 1.61-12(c).

42 Sec. 1273(b)(3); Regs. Secs. 1.1273-2(b) and (c).

43 Sec. 1273(b)(4); Sec. 1274(a); Regs. Sec. 1.1274-2(b).

44 Sec. 1274(c)(2). The imputed principal amount is generally the present value of all payments under the instrument.

45 These examples assume that the debt instruments in question are not “securities” for purposes of Sec. 368(a)(1)(E) and that the installment method will not be applied.

46 The various tax issues related to COD income along with COD exclusions or deferrals under Sec. 108 are beyond the scope of this article. The measurement and taxation of OID is also beyond the scope of this article.

47 The loss could be ordinary if the lender is in the trade or business of lending, or capital if the debt was a capital asset in the lender’s hands. If the exchange of the old loan for a new loan qualifies as a recapitalization under Sec. 368(a)(1)(E), the loss is not recognized.

48 A portion of the $20 gain may be treated as ordinary income under the market discount rules of Sec. 1276 depending on how long the buyer held the debt instrument before the modification.

49 Sec. 1276(b).

50 Sec. 108(a). Usually, the exclusion of COD from income results in a corresponding reduction of tax attributes under Sec. 1017.

51 Regs. Sec. 1.1273-2.

52 Regs. Secs. 1.1273-2(f)(2)–(5).

53 Regs. Sec. 1.1273-2(f)(4).

54 Regs. Sec. 1.1273-2(f)(5). Several safe harbors are provided to exclude debt instruments from being considered readily quotable, including issuances having an original principal amount of no more than $25 million and situations where the borrower does not have any other debt that would fall within the other categories of publicly traded under Regs. Secs. 1.1273-2(f)(2)–(4).

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Mortgage Assignment Laws and Definition

(This may not be the same place you live)

  What is a Mortgage Assignment?

A mortgage is a legal agreement. Under this agreement, a bank or other lending institution provides a loan to an individual seeking to finance a home purchase. The lender is referred to as a creditor. The person who finances the home owes money to the bank, and is referred to as the debtor.

To make money, the bank charges interest on the loan. To ensure the debtor pays the loan, the bank takes a security interest in what the loan is financing — the home itself. If the buyer fails to pay the loan, the bank can take the property through a foreclosure proceeding.

There are two main documents involved in a mortgage agreement. The document setting the financial terms and conditions of repayment is known as the mortgage note. The bank is the owner of the note. The note is secured by the mortgage. This means if the debtor does not make payment on the note, the bank may foreclose on the home. 

The document describing the mortgaged property is called the mortgage agreement. In the mortgage agreement, the debtor agrees to make payments under the note, and agrees that if payment is not made, the bank may institute foreclosure proceedings and take the home as collateral .

An assignment of a mortgage refers to an assignment of the note and assignment of the mortgage agreement. Both the note and the mortgage can be assigned. To assign the note and mortgage is to transfer ownership of the note and mortgage. Once the note is assigned, the person to whom it is assigned, the assignee, can collect payment under the note. 

Assignment of the mortgage agreement occurs when the mortgagee (the bank or lender) transfers its rights under the agreement to another party. That party is referred to as the assignee, and receives the right to enforce the agreement’s terms against the assignor, or debtor (also called the “mortgagor”). 

What are the Requirements for Executing a Mortgage Assignment?

What are some of the benefits and drawbacks of mortgage assignments, are there any defenses to mortgage assignments, do i need to hire an attorney for help with a mortgage assignment.

For a mortgage to be validly assigned, the assignment document (the document formally assigning ownership from one person to another) must contain:

• The current assignor name.
• The name of the assignee.
• The current borrower or borrowers’ names. 
• A description of the mortgage, including date of execution of the mortgage agreement, the amount of the loan that remains, and a reference to where the mortgage was initially recorded. A mortgage is recorded in the office of a county clerk, in an index, typically bearing a volume or page number. The reference to where the mortgage was recorded should include the date of recording, volume, page number, and county of recording.
• A description of the property. The description must be a legal description that unambiguously and completely describes the boundaries of the property.

There are several types of assignments of mortgage. These include a corrective assignment of mortgage, a corporate assignment of mortgage, and a mers assignment of mortgage. A corrective assignment corrects or amends a defect or mistake in the original assignment. A corporate assignment is an assignment of the mortgage from one corporation to another. 

A mers assignment involves the Mortgage Electronic Registration System (MERS). Mortgages often designate MERS as a nominee (agent for) the lender. When the lender assigns a mortgage to MERS, MERS does not actually receive ownership of the note or mortgage agreement. Instead, MERS tracks the mortgage as the mortgage is assigned from bank to bank. 

An advantage of a mortgage assignment is that the assignment permits buyers interested in purchasing a home, to do so without having to obtain a loan from a financial institution. The buyer, through an assignment from the current homeowner, assumes the rights and responsibilities under the mortgage. 

A disadvantage of a mortgage assignment is the consequences of failing to record it. Under most state laws, an entity seeking to institute foreclosure proceedings must record the assignment before it can do so. If a mortgage is not recorded, the judge will dismiss the foreclosure proceeding. 

Failure to observe mortgage assignment procedure can be used as a defense by a homeowner in a foreclosure proceeding. Before a bank can institute a foreclosure proceeding, the bank must record the assignment of the note. The bank must also be in actual possession of the note. 

If the bank fails to “produce the note,” that is, cannot demonstrate that the note was assigned to it, the bank cannot demonstrate it owns the note. Therefore, it lacks legal standing to commence a foreclosure proceeding.

If you need help with preparing an assignment of mortgage, you should contact a mortgage lawyer . An experienced mortgage lawyer near you can assist you with preparing and recording the document.

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Assignment, novation or sub-participation of loans             

Transfers of loan portfolios between lending institutions have always been commonplace in the financial market.  A number of factors may come into play – some lenders may wish to lower their risks and proportion of bad debts in their balance sheets; some may undergo restructuring or divest their investment portfolios elsewhere, to name a few.  The real estate market in particular has been affected by the announcement of the “three red lines” policy by the People’s Bank of China in 2020 which led to a surge of transfers, or attempted transfers, of non-performing loans.  Other contributing factors include the continuous effects of the Sino-US trade war and the Covid-19 pandemic.

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Transferability of Loans

The legal analysis regarding the transferability of loans can be complex.  The loan agreement should be examined with a view to identifying any restrictions on transferability of the loan between lenders, such as prior consent of the debtor and, in some cases, whether such consent may be withheld.  Other general restrictions may apply given that most banks have internal confidentiality rules and data protection requirements, the latter of which may also be subject to governmental regulations.  Certain jurisdictions may restrict the transfer of loans relating to specific types of receivables – mortgage or consumer loans being prime examples.  It is imperative to conduct proper due diligence on the documentation and underlying assets in order to be satisfied with the transferability of the relevant loans.  This may be complicated further if there are multiple projects, facility lines or debtors.  It is indeed common to see a partial transfer of loans to an incoming lender or groups of lenders.

Methods of Transfer

The transfer of loans may be carried out in different ways and often involves assignment, novation or sub-participation.

A typical assignment amounts to the transfer of the rights of the lender (assignor) under the loan documentation to another lender (assignee), whereby the assignee takes on the assignor’s rights, such as the right to receive payment of principal and interest on the loan.  The assignor is still required to perform any obligations under the loan documentation.  Therefore, there is no need to terminate the loan documentation and, unless the loan documentation stipulates otherwise, there is no need to obtain the debtor’s consent, but notice of the assignment must be served on the debtor.  However, many debtors are in fact involved in the negotiation stage, where the parties would also take the opportunity to vary the terms of the facility and security arrangement.

Novation of a loan requires that the debtor, the existing lender (transferor) and the incoming lender (transferee) enter into new documentation which provides that the rights and obligations of the transferor will be novated to the transferee.  The transferee replaces the transferor in the loan facility and the transferor is completely discharged from all of its rights and obligations.  This method of transfer does require the prior consent of the relevant debtor.

Sub-participation is often used where a lender, whilst wishing to share the risks of certain loans, nonetheless prefers to maintain the status quo.  There is no change to the loan documentation – the lender simply sells all or part of the loan portfolio to another lender or lenders.  From the debtor’s perspective, nothing has changed and, in principle, there is no need to obtain the debtor’s consent or serve notice on the debtor.  This method of transfer is sometimes preferred if the existing lender is keen to maintain a business relationship with the debtor, or where seeking consent from the debtor or notifying the debtor of any transfer is not feasible or desirable.  In any case, there would be no change to the balance sheet treatment of the existing lender.

Offshore Security Arrangements

The transfer of a loan in a cross-border transaction often involves an offshore security package.  A potential purchaser will need to conduct due diligence on the risks relating to such security.  From a legal perspective, the security documents require close scrutiny to confirm their legality, validity and enforceability, including the nature and status of the assets involved.  Apart from transferability generally, the documents would reveal whether any consent is required.  A lender should seek full analysis on the risks relating to enforcement of security, which may well be complicated by the involvement of various jurisdictions for potential enforcement actions.

A key aspect to the enforcement consideration is whether a particular jurisdiction requires that any particular steps be taken to perfect a security interest relating to the loan portfolio (if the concept of perfection applies at all) and, if so, whether any applicable filing or registration has been made to perfect the security interest and, more importantly, whether there exists any prior or subsequent competing security interest over all or part of the same assets.  For example, security interests may be registered in public records of the security provider maintained by the companies registry in Bermuda or the British Virgin Islands for the purpose of obtaining priority over competing interests under the applicable law.  The internal register of charges of the security provider registered in the Cayman Islands, Bermuda or the British Virgin Islands should also be examined as part of the due diligence process.  Particular care should be taken where the relevant assets require additional filings under the laws of the relevant jurisdictions, notable examples of such assets being real property, vessels and aircraft.  Suites of documents held in escrow pending a potential default under the loan documentation should also be checked as they would be used by the lender or security agent to facilitate enforcement of security when the debtor defaults on the loan.

Due Diligence and Beyond

Legal due diligence on the loan documentation and security package is an integral part of the assessment undertaken by a lender of the risks of purchasing certain loan portfolios, regardless of whether the transfer is to be made by way of an assignment, novation or sub-participation.  Whilst the choice of method of transfer is often a commercial decision, enforceability of security interests over underlying assets is the primary consideration in reviewing sufficiency of the security package in any proposed loan transfer.

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Assignment: Definition in Finance, How It Works, and Examples

Adam Hayes, Ph.D., CFA, is a financial writer with 15+ years Wall Street experience as a derivatives trader. Besides his extensive derivative trading expertise, Adam is an expert in economics and behavioral finance. Adam received his master's in economics from The New School for Social Research and his Ph.D. from the University of Wisconsin-Madison in sociology. He is a CFA charterholder as well as holding FINRA Series 7, 55 & 63 licenses. He currently researches and teaches economic sociology and the social studies of finance at the Hebrew University in Jerusalem.

Yarilet Perez is an experienced multimedia journalist and fact-checker with a Master of Science in Journalism. She has worked in multiple cities covering breaking news, politics, education, and more. Her expertise is in personal finance and investing, and real estate.

What Is an Assignment?

Assignment most often refers to one of two definitions in the financial world:

• The transfer of an individual's rights or property to another person or business. This concept exists in a variety of business transactions and is often spelled out contractually.
• In trading, assignment occurs when an option contract is exercised. The owner of the contract exercises the contract and assigns the option writer to an obligation to complete the requirements of the contract.

Key Takeaways

• Assignment is a transfer of rights or property from one party to another.
• Options assignments occur when option buyers exercise their rights to a position in a security.
• Other examples of assignments can be found in wages, mortgages, and leases.

Uses For Assignments

Assignment refers to the transfer of some or all property rights and obligations associated with an asset, property, contract, or other asset of value. to another entity through a written agreement.

Assignment rights happen every day in many different situations. A payee, like a utility or a merchant, assigns the right to collect payment from a written check to a bank. A merchant can assign the funds from a line of credit to a manufacturing third party that makes a product that the merchant will eventually sell. A trademark owner can transfer, sell, or give another person interest in the trademark or logo. A homeowner who sells their house assigns the deed to the new buyer.

To be effective, an assignment must involve parties with legal capacity, consideration, consent, and legality of the object.

A wage assignment is a forced payment of an obligation by automatic withholding from an employee’s pay. Courts issue wage assignments for people late with child or spousal support, taxes, loans, or other obligations. Money is automatically subtracted from a worker's paycheck without consent if they have a history of nonpayment. For example, a person delinquent on $100 monthly loan payments has a wage assignment deducting the money from their paycheck and sent to the lender. Wage assignments are helpful in paying back long-term debts.

Another instance can be found in a mortgage assignment. This is where a mortgage deed gives a lender interest in a mortgaged property in return for payments received. Lenders often sell mortgages to third parties, such as other lenders. A mortgage assignment document clarifies the assignment of contract and instructs the borrower in making future mortgage payments, and potentially modifies the mortgage terms.

A final example involves a lease assignment. This benefits a relocating tenant wanting to end a lease early or a landlord looking for rent payments to pay creditors. Once the new tenant signs the lease, taking over responsibility for rent payments and other obligations, the previous tenant is released from those responsibilities. In a separate lease assignment, a landlord agrees to pay a creditor through an assignment of rent due under rental property leases. The agreement is used to pay a mortgage lender if the landlord defaults on the loan or files for bankruptcy . Any rental income would then be paid directly to the lender.

Options Assignment

Options can be assigned when a buyer decides to exercise their right to buy (or sell) stock at a particular strike price . The corresponding seller of the option is not determined when a buyer opens an option trade, but only at the time that an option holder decides to exercise their right to buy stock. So an option seller with open positions is matched with the exercising buyer via automated lottery. The randomly selected seller is then assigned to fulfill the buyer's rights. This is known as an option assignment.

Once assigned, the writer (seller) of the option will have the obligation to sell (if a call option ) or buy (if a put option ) the designated number of shares of stock at the agreed-upon price (the strike price). For instance, if the writer sold calls they would be obligated to sell the stock, and the process is often referred to as having the stock called away . For puts, the buyer of the option sells stock (puts stock shares) to the writer in the form of a short-sold position.

Suppose a trader owns 100 call options on company ABC's stock with a strike price of $10 per share. The stock is now trading at $30 and ABC is due to pay a dividend shortly. As a result, the trader exercises the options early and receives 10,000 shares of ABC paid at $10. At the same time, the other side of the long call (the short call) is assigned the contract and must deliver the shares to the long.

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Mortgage Tax and Assignment of Mortgage

April 3, 2013 Paul A. Sarcona, Esq.

New York State, pursuant to Title 11, Chapter 26, Administrative Code, Tax Law Section 253-a imposes an additional tax to the borrowers of lending transactions for (the privilege of) borrowing monies against real property. How does that affect me? Here is an example, you love a beautiful two family home in New York City (it does not matter where), you offer $500,000 and you apply for a $400,000 mortgage amount. New York City and New York State has the right to impose a mortgage tax for monies borrowed. So, your closing costs just when up by $7,170 ($400,000 multiplied by 1.8% minus $30.00).

These closing costs are not often anticipated by your lender (if located out-of-state) and are substantial enough that it should not be overlooked. Some lenders do not disclose this amount properly as it varies in each county in New York State.

It should be noted that mortgage taxes cannot be collected on cooperative units because cooperative units are not real property.

How do I calculate the mortgage tax?

• Mortgage tax varies from county to county so determine the correct percentage applicable to your county.
• Multiply the percentage by the loan amount.
• Factor in nuances for the county that the property is located in, i.e., New York City imposes a 0.125 % tax rate for transactions over $500,000 and depending on the type of property (vacant land, 1-2 family, commercial), the tax rate changes.

For certain transactions, lenders also pay mortgage tax in the amount of 0.25%

Mortgage Tax Savings

In order to avoid having to pay mortgage tax twice, an exemption exists in accordance pursuant to Title 11, Chapter 26, Administrative Code, Tax Law Section 255, which allows borrowers to pay mortgage tax on the difference between the new loan amount and the principal amount of the old loan. This amounts to huge mortgage tax saving, which reduces your closing costs.

How does this work? To put it in more simple terms in the form of an example, JPMorgan Chase Bank (Chase) currently holds a loan with the borrower. Borrower wants to refinance with Wells Fargo Bank, NA (Wells Fargo). My office contacts Chase to arrange for Chase to assign its mortgage to Wells Fargo. At the closing, Chase is paid with the funds from Wells Fargo refinance. The mortgage is NOT satisfied of record; essentially giving the appearance that Wells Fargo bought the loan from Chase.

Additional documents will be signed at the closing to effectuate the tax savings. For example, the difference between the existing principal balance and the new loan amount is called the “new money”. If new money is borrowed, the borrower must sign a gap note and gap mortgage. The new money is taxed in accordance with the tax rate applicable to your county.

REMEMBER – The new money is the only amount that is taxable. If there is no new money, there is no mortgage tax.

An agreement is also executed between the new lender and borrower called a “Consolidation, Extension and Modification Agreement”, which consolidates the old loan with the new loan, extends the term of the loan and modifies the terms of the old loan.

Are there are any fees other than the mortgage tax?

Yes. Due to the additional documentation that has to be signed and obtained from the old lender, your attorney or the lender’s attorney may charge for the additional services of procuring the necessary documentation. The old lender charges processing fees, which range from $1,000.00 to in excess of $2,000.00.

Why not do CEMAs all the time?

There are certain instances where the costs to obtain the assignment of mortgage outweighs the savings. Additionally, there is a time factor that is involved. In some cases, the old lender may take a long time to locate the documentation. In the meanwhile, rate lock fees may have expired and lenders may charge for extensions of the rate lock.

How long does the process take?

Each lender handles the process differently and has different turn-around times. Generally, each lender says 4 to 6 weeks for processing time. Some lenders’ processing times are better than others.

Are there any up front fees or documentation required?

Every lender is different. Some fees are charged up front and some are charged at closing by the lender. These fees are generally not-refundable. Additionally, some lenders require a borrower’s authorization and mortgage schedule from a title commitment to start the process.

Do all lenders assign its loans upon request?

No. A lender has no obligation to assign its loan to your new lender at your request. It is really a privilege and not a right to request an assignment of mortgage. Most of the well-known lenders will assign its loans upon request.

If you are a lender, mortgage broker or borrower in a refinance or purchase transaction and are having trouble with these calculations or need assistance in procuring an assignment, feel free to contact my office.

Filed Under: Real Estate

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How to handle the accounting for collateral assignment split-dollar life insurance plans.

By Marc Giampaola , Director, Assurance Services & Michael Parillo , Senior Manager, Managed Services & Consulting

Split-dollar life insurance is an arrangement between two parties to share the costs and benefits of a permanent insurance policy. Often these arrangements are between an employer (the “company”) and an employee (the “executive”), involving a whole life or indexed universal life (“IUL”) policy. Companies generally use the policies as a Supplemental Executive Retirement Plan (“SERP”), which are considered non-qualified benefit plans.

The two most common types of split-dollar life insurance arrangements are endorsement and collateral assignment, which are defined based on which party controls the policy. Within these agreements, there are multiple documents executed, most commonly:

• Life insurance policy – Issued by the insurance company to the policy owner on the life of the insured.
• Split-dollar agreement – Agreement between employer and employee providing details of the agreement.
• Promissory note – A loan issued by the company to the employee for the cost of the policy.

Endorsement split-dollar life insurance is an employer-owned policy that endorses some or all of the death benefits to the employee’s beneficiary. The employer owns and controls the policy and, therefore, makes all policy decisions (i.e., surrender). A separate agreement is entered into between the employer and employee to define the split of costs and benefits between the two parties.

Collateral assignment split-dollar life insurance policies are owned by the employee with some benefits assigned to the employer. The employee owns and controls the policy while the employer makes the premium payments. Premiums are loans to the employee. Some level of interest on the amount borrowed must be paid. The employer is ultimately reimbursed for the premiums paid and related interest from the death benefit or the cash surrender proceeds.

There are different types of collateral assignment arrangements based on the structuring of the note within the agreement. They are as follows:

• Non-recourse arrangements rely solely on the underlying insurance policy for all repayment of principal and interest to the employer. The employee, or the employee’s estate, is not responsible for funding any shortfall by the policy to return the premium and related interest; however, any shortfall could be taxable to the employee as forgiveness of debt income.
• Limited recourse arrangements rely primarily on the underlying insurance policy for all repayment of principal and interest owed to the employer. However, if there is a shortfall, the employee or the employee’s estate may be called upon to make up the deficiency. These arrangements generally have terms requiring the employer to seek payment from the life insurance company first; the employee is secondarily liable.
• Full-recourse arrangements are similar to limited-recourse arrangements, with the difference that the employer can seek repayment of the principal and interest from the employee directly if there is a shortfall, without first pursuing any recovery from the life insurer. The employee has substantially the same net liability for any shortfall but would have the burden of satisfying the shortfall and then pursuing recovery from the policy.
• Providing cash to the insurance company and establishing a premium deposit account;
• Establishing a deposit account at a bank or credit union under the employee’s name; or
• Purchasing a single premium immediate annuity (SPIA).

The method of funding has no impact on the accounting, as there is a single loan made to the employee.

Most commonly, companies utilize collateral assignment split-dollar life insurance set up under non-recourse or limited-recourse arrangements. As such, the focus of the accounting section will be on these types of arrangements.

RELEVANT GUIDANCE

• ASC 310: Receivables (“ASC 310”)
• ASC 325: Investments – other (“ASC 325”)
• Loans and investments, November 2020 Edition (“PwC Loans Guide”)

ACCOUNTING FOR SPLIT-DOLLAR ARRANGEMENTS

The accounting for split-dollar arrangements is generally the same regardless of the structure of the agreement. Additionally, whether the promissory note is non-recourse or limited-recourse has no effect on the journal entries recorded over the life of the arrangement.

Recording the Loan at Issuance

In executing the transaction, the employer provides funding for the premium payments of the life insurance policy in exchange for a promissory note from the employee. The transaction meets the definition of a loan as defined by ASC 310-10, which states:

A contractual right to receive money on demand or on fixed or determinable dates that is recognized as an asset in the creditor’s statement of financial position. Examples include but are not limited to accounts receivable (with terms exceeding one year) and notes receivable.

Upon issuance of the loan, the employer provides cash through one of the funding methods described above and establishes a loan receivable from the executive. As an example, assume the defined loan amount is $3.0 million. The value of the loan is measured at issuance equal to the cash outlay by the Company. ASC 310-10-30-2 states:

As indicated in paragraph 835-30-25-4, when a note is received solely for cash and no other right or privilege is exchanged, it is presumed to have a present value at issuance measured by the cash proceeds exchanged.

In these arrangements, the company does not provide any other right or privilege. The promissory note is received in exchange for the cash needed to fund the premiums of the policy. As such, the value of the loan is equal to the cash paid.

The journal entry to record the example transaction is:

Recording the Interest Accrual

Once the loan is established, it begins earning interest based on the note rate, typically the long-term Applicable Federal Rate for the month and year the agreement becomes effective. Interest compounds annually. In the example transaction, assume an annual interest rate of 2.50%. Each month the company earns interest on the outstanding loan balance, and a journal entry is recorded to accrue interest on the loan. Interest is paid from the death benefit and, therefore, increases the receivable from the executive in each accounting period. The entry below represents the monthly accrual of interest:

(calculated as $3,000,000 loan * 2.5% interest / 12 months)

Recording the Settlement of the Loan

The loan is settled upon death or surrender of the policy. The company is entitled to the value of the original loan and accrued interest from inception. The cash owed to the company is paid from the death benefit or surrender value, with the remainder being paid to the employee (surrender) or the employee’s estate (death). Based on the example, assuming settlement and surrender of the insurance policy 24 months post entering into the policy (i.e., $150,000 interest earned), the entries to record the receipt of cash and settlement of the receivables are as follows:

Other Considerations for Subsequent Measurement

Collectability.

At each period-end, the company needs to analyze the value of the outstanding loan for changes in the valuation. Generally, these loans are considered not held for sale and, therefore, are reported at outstanding principal adjusted for any charge-offs, allowance for loan losses, deferred fees, and unamortized premiums or discounts based on ASC 310-10-35-47, which states:

Loans and trade receivables that management has the intent and ability to hold for the foreseeable future or until maturity or payoff shall be reported in the balance sheet at outstanding principal adjusted for any chargeoffs, the allowance for loan losses (or the allowance for doubtful accounts), any deferred fees or costs on originated loans, and any unamortized premiums or discounts on purchased loans.

Additionally, the company should analyze at each period-end any probable collection issues and the need for an allowance that would reduce the asset balance.

Value of the Loan

With an insurance policy securing the loan, further consideration is needed to determine the value of the loan. For endorsement arrangements, the employer owns the policy and, therefore, owns the surrender decision. The company values the loan at the lesser of the premiums paid or cash surrender value of the policy as of the period end date. This amount can generally be obtained from the statement provided by the insurance company.

For collateral assignment arrangements, the employee owns the policy, so the company does not control the surrender decision. However, the company does maintain the right to collect on the loan under the collateral assignment. Therefore, the company may need to consider the cash surrender value of the policy when determining the value of the loan. ASC 325-30-35-1 states:

An asset representing an investment in a life insurance contract shall be measured subsequently at the amount that could be realized under the insurance contract as of the date of the statement of financial position…

Depending on the type of note used in the agreement–non-recourse or limited-recourse– when determining the carrying value of the loan at each period-end.

Limited-Recourse

For limited-recourse, the loan is secured by the cash surrender value of the insurance policy, but the company also has the option to seek repayment from the employee if the cash surrender value is less than the outstanding loan amount. Since the loan is secured by both the policy and by the employee, the cash surrender value is not the only consideration when determining the value of the outstanding loan. As such, the value of the outstanding loan does not need to be adjusted if the cash surrender value is less than the outstanding loan, and there is no further consideration needed at period-end for these types of arrangements.

Non-recourse

For non-recourse notes, the loan is secured solely by the cash surrender value of the policy and, therefore, potential for a loss related to the loan exists if the cash surrender value is less than the loaned amount. The cash surrender value is the realizable amount of a life insurance contract at any given date. The accounting guidance does not allow a life insurance asset to exceed cash surrender value less an allowance for credit losses. The company is entitled to the premiums paid plus interest earned under these arrangements. The carrying value of the portion of the loan for which premiums were paid would need to consider the cash surrender value. This portion of the loan would be valued by the company as the lesser of the cash surrender value and the cumulative premiums paid by the reporting entity.

This is based on the premise that surrender is not within the control of the company and it is uncertain whether the company will be reimbursed for cumulative premiums paid upon death or surrender. Any premiums paid in excess of this amount should be recorded as an expense.

As an example, if the outstanding loan related to a non-recourse policy was $3,000,000 and the cash surrender value of the policy was $2,500,000, the company would need to reduce the carrying value of the loan to the cash surrender value and recognize a loss related to the loan. The entry below represents how the company would record the adjustment:

While the general accounting for these arrangements is similar, specific details and terms within all documents included in the agreement need to be evaluated when determining the appropriate accounting, and companies should consult their accountant with any questions. Additionally, there are potential individual income tax implications for the executive related to these arrangements that should be considered.

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Insight Article

Debt and taxes: restructuring, settlement, assignment considerations.

Often a distressed target business will have significant liabilities on its balance sheet including bank debt, shareholder loans or other related party debts.

Transactions frequently result in payouts, settlements or restructuring of the target’s debt and could have undesirable tax consequences to the target if not structured with timing and responsibility for tax exposures in mind.

Debt forgiveness

Section 80 of the Canadian  Income Tax Act (Act)  governs the tax treatment of situations where a ‘commercial debt obligation’ is forgiven. A debt is forgiven when it is wholly or partially settled for an amount less than the outstanding principal balance, which generally includes any accrued but unpaid interest amounts.

A ‘commercial debt obligation’ for tax purposes is generally an obligation incurred for the purposes of gaining or producing income and on which interest charged would be deductible and therefore could include a noninterest bearing loan.

The difference between the settlement value and the principal amount is referred to as the ‘forgiven amount’ and will reduce various tax attribute pools of the debtor in the following order:

• Noncapital losses and farm losses
• Net-capital losses
• The capital cost and undepreciated capital cost (UCC) of depreciable property as designated by the debtor in prescribed form
• Resource expenditures
• Adjusted cost base (ACB) of capital properties
• ACB of certain shares where the debtor is specified shareholder
• ACB of certain shares, debts and partnership interests

For a debtor other than a partnership, where the forgiven amount cannot be fully applied to the above tax attributes and no exceptions apply; 50 per cent of the remainder is included in income.

Settlement for less than principal

The simplest type of debt forgiveness occurs where a company settles its obligations, using cash or other assets, for less than the outstanding principal amount. In the context of a transaction, this may occur where the agreement requires the target to be ‘debt-free’ on acquisition and often, there are insufficient assets available to satisfy all amounts owing. While it may be difficult to settle arm’s length debt at less than the principal amount, non-arm’s length debt or shareholder debts may frequently be settled at less than face value resulting in debt forgiveness.

Debt replacement

Replacement, restructuring or refinancing may give rise to debt forgiveness in certain circumstances such as when the principal amount of the ‘new’ debt is less than the principal amount of the ‘old’ debt.

In a transaction context, it is not uncommon for a target business to be recapitalized or existing debt to be replaced with new borrowing. By comparing the principal amount of the old and new debts rather than their fair market values (FMV), the rules effectively allow for replacement of debt, facilitating changes in the repayment and commercial terms as well as the interest rates without triggering the debt forgiveness rules. It is important to consider any tax implications, including debt forgiveness, particularly if the principal amounts differ.

Debt to equity conversions

In some instances, creditors will opt to convert their debt into equity of the debtor corporation. In contrast to debt-for-debt exchanges, debt to equity conversions are valued for debt forgiveness purposes at the FMV of the shares issued.

Often in the context of a private company transaction, shareholders or other non-arm’s length creditors will convert all, or a portion of debt to equity prior to sale. Accordingly, a forgiveness event may occur where the FMV of the equity issued is less than the principal amount of the debt settled. Acquisition of control implications should be considered, and where a non-resident is involved, the thin capitalization rules and withholding tax may apply.

Distressed preferred shares can be issued to lenders only where the company is in receivership, bankruptcy or is expected to default on its obligations. These shares may be issued in settlement of debt without the application of the forgiveness rules, but must be structured properly to avoid inadvertent tax consequences.

Debt parking

Where a non-arm’s length party acquires a commercial debt obligation from the debtor for less than 80 per cent of its principal amount, the debt may become a ‘parked obligation’ giving rise to a debt forgiveness event. Originally, this legislation was intended to capture situations where arm’s length debt was acquired by a party related to the debtor at a discount and with no intent to settle. The application in practice is much broader and can extend to transactions where a buyer assumes the position of creditor in the target business at a discounted value, regardless of the buyer’s intention to settle.

Planning for debt forgiveness

In most instances, distressed businesses will have beneficial tax attributes such as operating losses and capital losses the purchaser is expecting to inherit. The impact of acquisition of control and debt forgiveness rules should be considered as part of the tax due diligence process to ensure attributes are utilized prior to closing when required.

If a forgiven amount still remains after reducing the tax attributes, an insolvency deduction may be available, limiting the income inclusion to two times the fair market value of net assets. This deduction may be of limited use in a transaction context where a positive net asset value can readily be determined due to value attributed to unrecorded assets such as goodwill.

Any remaining unapplied forgiven amount may be eligible for inclusion in income over a five-year period by claiming a reserve or transferred to a related corporation once all tax attributes of the debtor have been exhausted. In a transaction context this may permit sellers to transfer the forgiven amounts pre-closing to a related company outside of the transaction perimeter.

Key takeaway

Consideration of a target’s existing debt is common to almost every private company acquisition. The impact of any transaction or structuring on those liabilities should be considered as part of the tax due diligence process. Working with a tax professional well-versed in M&A transactions will ensure any tax consequences can be appropriately addressed in the most efficient manner.

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• Business and industry

Company Taxation Manual

Ctm61605 - close companies: loans to participators and arrangements conferring benefit on participators: repayment of- assignment/novation, assignment or novation of debt.

It may be claimed that a loan has been repaid through either assignment or novation of the debt. It is important to establish the full facts surrounding the various arrangements and the book-keeping steps before deciding whether the arrangements amount to an assignment, a novation or something else and what the consequences will be in terms of repayment of the loans or charges on the participator under ITTOIA05/S415.

As a general rule in contract law, liabilities cannot be assigned because a person is entitled to know to whom he is to look for the satisfaction of his rights under a contract.

A liability may be transferred with the consent of all the parties involved but this is in effect the rescission of one contract and the substitution of a new one in which the same acts are to be performed by different parties. This is called a novation and it can only take place by agreement between all the parties. There must be consideration, which will usually take the form of the discharge of the old contract.

For a novation to be effective all parties must consent to it and there must be an intention to novate. This is the essential difference between a novation and an assignment.

A common form of novation occurs where A is indebted to B and C is indebted to A, and all three parties mutually agree that C shall become B’s debtor in place of A. Certain conditions, however, must be fulfilled, in order for the novation to be effective. These conditions are:

• that the intermediate debt of A to B should be extinguished
• that the same or a larger amount should be due from C to A, than A to B and
• that a defined and ascertained liability should be transferred

If the debt is novated it has been released and not repaid. Section 458 relief would be due on the original debt, and ITTOIA05/S415 may apply. Depending on the facts, the new loan may also be subject to a new charge under Section 455.

As Millett J explained in Collins v Addies (65TC at page 201F):

as a matter of law it is not possible for a debtor to assign a legal liability … the transaction has to take the form of a novation … that undoubtedly constitutes a release of the old debt and its replacement by an entirely new debt.

An assignment is the transfer of the benefit of a contract to a third party. As a result of which the assignee becomes entitled to sue the debtor under the contract. The debtor under the contract is not a party to the assignment and his consent is not necessary for its validity.

No particular form of words is necessary and consideration is not required to support the assignment provided the assignor has done everything required to be done by him to make the assignment complete. There must be some act by the assignor showing that he is passing the chose in action to the assignee. Further, the assignee must give notice to the debtor in order to make their title effective against the debtor. No such notice is necessary as between the assignor and the assignee.

Relief under S458 may or may not be due in the case of an assignment; this will depend on the facts. Has the loan from the close company actually been repaid or is it still outstanding, albeit from a different debtor? How exactly is it that the original debtor no longer owes the money?

Neither assignment nor novation

If the arrangements do not meet either the requirements for a novation or an assignment, then consider who now owes what to whom and how. In this type of case, consider the overall positions of:

• who received what from each of the companies involved
• who repaid each of the various debts and
• when was each of the debts repaid

in order to decide whether there has been a repayment, a release or a write off and therefore the CTA10/S455 and ITTOIA05/S415 consequences.

See also CTM61602 and CTM61604 for circumstances in which certain other types of transaction are not considered to constitute repayments.

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Want To Buy a New Home and Keep Your Current Low Interest Rate? Try ‘Porting’ Your Mortgage

High interest rates are one of the most significant hurdles buyers face when jumping into the housing market right now. As anyone who purchased a home in the last few years knows, interest rates have more than doubled since 2020. For a 30-year fixed-rate mortgage , you’re looking at an average interest rate somewhere between the mid-6% and +7%  as of late.

So if you need to move, you might feel financially overwhelmed by the prospect of giving up your low, locked-in interest rate for a new rate that could be twice as high.

Enter “mortgage porting,” the practice of transferring the terms of your existing mortgage over to a new property. But how exactly does it work, and what will you need to qualify? Here’s some expert advice on what you’ll want to know before you consider porting your mortgage.

What is porting a mortgage?

Porting a mortgage essentially means transferring your mortgage to a new house. This will include the current terms of your loan, such as the interest rate and payment schedule.

But you can’t simply take your loan and plop it onto your new home. Instead, porting a mortgage often involves reapplying for your current loan, even though you already qualified once.

The only catch? You have to find out whether you and your mortgage are eligible.

How to determine if your mortgage is eligible

The thought of saving tons of money over the life of a new loan is a game-changer if you’re currently shopping for a home and facing high interest rates. But make sure you can port your mortgage before diving too deeply into your new home search.

“Eligibility for porting a mortgage is varied—you never know what you’re gonna get,” says financial advisor James Allen , of Billpin . “Some lenders allow it, others don’t. And not all mortgages are portable.”

For example, most variable-rate mortgages (a type of loan where the rate is not fixed) can’t be ported at all.

Another thing that will affect your eligibility is the amount of your mortgage as it compares to the home you want to buy.

“You can’t port if you’re moving into a less expensive home and don’t require the entire existing mortgage,” says Dennis Shirshikov , of real estate investment company Awning.com .

However, you might be able to port your mortgage if you’re moving into a home with an asking price equal to or higher than your current home loan.

“If the mortgage you’ll need for the new property is larger, your lender may offer you a ‘blend and extend,’” says Allen. “It’s like mixing the old and new, where you end up with a rate that mixes your old and current rates.”

Are you eligible?

Another thing to consider is whether you, as a borrower, are eligible for porting.

“The standard requirement is an excellent repayment history and meeting your lender’s affordability criteria for the new property,” says Shirshikov.

Your lender will likely want you to complete an entirely new loan application, including  affordability checks and  a credit check for you and your co-applicant.

Some lenders may even impose additional conditions, such as asking you to top-up your mortgage (i.e., borrow against any equity you have in your home) if the new property is more expensive.

When porting is a good idea

Porting your mortgage makes sense if you secured more favorable loan terms in the past and won’t be able to replicate them without porting.

“Porting is most advantageous when your current mortgage rate is significantly lower than market rates,” says Shirshikov. “However, if the current market rates are lower or the same, it might be worth exploring a new mortgage instead.”

How to port your mortgage

The first step in porting your mortgage is talking to your existing mortgage team.

“Speak with your current lender to confirm portability and understand the process,” says Shirshikov. “Remember to consider all costs, including potential penalties or fees associated with porting, to make sure it makes sense financially.”

While lenders usually make eligibility decisions promptly, processing time can still take up to several weeks. So it’s a good idea to start the process early.

“The timeline depends on factors like the real estate market and your personal circumstances, but typically it aligns with the closing date of your new property,” says Shirshikov.

The final word

Before settling on porting your mortgage, be sure to shop around the market and confirm that your current interest rate is still the best one out there.

Depending on the kind of loan you need, the amount, and any other life circumstances that might have changed since you last took out a mortgage—there could be better rates on the market.

The bottom line? Porting a mortgage is about as much work as applying for a new one, so always make sure it’s a deal worth securing.

Larissa Runkle (@therealtorwriter) is a real estate copywriter and journalist living in Colorado.

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• SBI Not Liable To Deduct TDS On...

SBI Not Liable To Deduct TDS On Transactions Related To Assignment Of Loans By NBFC: ITAT

Mariya paliwala.

12 May 2024 2:30 PM GMT

The Mumbai Bench of Income Tax Appellate Tribunal (ITAT) has held that the State Bank of India (SBI) is not liable to deduct tax at source (TDS) on transactions related to the assignment of loans by non-banking financial companies (NBFC).

The bench of Om Prakash Kant (Accountant Member) and Sandeep Singh Karhail (Judicial Member) has observed that since the NBFC is not acting as an agent of the assessee in respect of the loans advanced to the borrowers, therefore, we are of the considered view that no question arises of deduction of tax at source under Section 194H of the Income Tax Act, 1961, and the findings of the CIT(A) in this regard are set aside.

The bench stated that the levy of tax under Section 201(1) and the levy of interest under Section 201(1A) for non-deduction of TDS under Sections 194J and 194H are not sustainable.

The assessee is a public sector bank. During the survey and post-survey inquiry in the cases of Securitization Trust, it was noticed that the assessee is also engaged in the transactions of purchasing from various NBFCs under different sectors of loan via the direct assignment route.

However, it was also noticed that the assessee has purchased 90% of the underlying assets under the direct assessment route but has not received the total reward or interest attached to its 90% share. During the assessment proceedings, the assessee was asked to furnish specific details about the direct assignment deals done by them. However, despite regular follow-ups, very meager information was provided by the assessee. On the information provided by the assessee in respect of very few direct assignment deals, information about pool yield and details of interest kept back by the NBFCs were not available.

Therefore, notices under Section 133(6) were issued to the NBFCs to obtain pool yield and interest kept back by the NBFCs. As per the replies received from some of the NBFCs, it was noticed that there is a difference between the pool yield and the coupon rate given to the assessee.

Thus, it was noticed that the assessee is not receiving total interest attached to their share, and direct assignment agreements are executed to receive only a certain percentage of their share, and any excess interest (difference between pool yield and coupon rate) on the 95% or 90% share of the assessee is retained by the NBFCs, which is in violation of RBI guidelines on direct assignment transactions.

The assessee was asked to show cause as to why it should not be treated as an assessee in default under Section 201(1)/201(1A) in respect of interest pertaining to assets assigned to the assessee but allowed to be kept back with the NBFC.

The Assessing Officer-TDS (AO-TDS), after considering the details available on record, held that the assessee has committed default by not deducting TDS in respect of such interest pertaining to the assets assigned to the assessee but allowed to be kept back with the NBFC. The assessee who has purchased 95% or 90% of the underlying assets, as the case may be, as per Minimum Retention Requirement (MMR) guidelines, from the NBFC should also receive the total reward or interest attached to the 95% or 90% share.

The CIT(A) partially allowed the appeal of the assessee and held that as per the RBI guidelines, the entire risk and reward should have come to the assessee, and the assessee should get an entire 15% of the interest, as if there is a default on a particular loan (for the 90% pool assigned to the assessee), the entire loss will come to the assessee. Therefore, the learned CIT (A) held that there is no basis on which 5% of the interest should go to the NBFC. The CIT (A) held that on the date of the receipt of 10% interest by the assessee, two transactions had actually taken place, i.e., 15% interest on the pool accrued to the assessee. The assessee paid 5% interest on the pool to the NBFC.

The issue raised was whether the interest retained by the NBFCs on the pool of assets purchased by the assessee falls within the category of “interest” for the purpose of Section 194A, within the category of “fees for professional or technical services” for the purpose of Section 194J, or within the category of “commission/brokerage” for the purpose of Section 194H.

The tribunal held that the NBFCs have already offered to tax in their return of income the interest earned on loans sold to the assessee, and the requisite documents as per the first proviso to Section 201(1) were also furnished by the assessee before the CIT (A). Therefore, tax under Section 201(1) is, in any case, not leviable on the assessee. The levy of interest under Section 201(1A) is also not sustainable.

Counsel For Appellant: P. J. Pardiwala

Counsel For Respondent: Kishore Dhule

Case Title: State Bank of India Versus DCIT(TDS)

Case No.: ITA no.1928/Mum./2023

Click Here To Read The Order

ITAT: Rules on TDS applicability for transactions between SBI & NBFCs regarding loan assignment

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Surplus from assignment of loan to third party was not cessation or extinguishment of liability u/s 41(1).

Case law details, cable corporation of india limited vs dcit (itat mumbai).

Conclusion: Surplus resulting from assignment of loan at present value of future liability was not cessation or extinguishment of liability as loan was to be repaid by the third party and therefore could not be brought to tax in the hands of the assessee under section 41(1).

Held: Assessee was in the line of manufacturing of cable and trading thereof and not in the purchase and sale of shares and securities. It had borrowed a sum of Rs. 12.00 crores from M/s MPPL to be repaid over a period of 100 years and the amount was utilized for the purchase of shares.  The liability of loan of Rs. 12 crores to be discharged over a period of 100 years was assigned to the third parties M/s CPPL by making a payment of Rs. 0.36 crores in terms of present value of the future liability and the surplus resulting from assignment of loan liability was credited to the Profit & Loss Account under the head income from other sources but while computing the total income, the said income was reduced from the income on the ground that the surplus of Rs. 11.64 crores represented the capital receipt and therefore not taxable.  AO held the surplus Rs. 11.64 Cr resulting from the assignment of loan to M/S CPPL under tripartite agreement between assessee , M/S MPPL and M/S CPPL as a revenue receipt liable to tax. It was held the loan was utilized for purchasing shares which was capital asset in the business of the assessee and the surplus resulting from assignment of loan was a capital receipt not liable to be taxed either u/s 28(iv) or u/s 4 1(1). More so, the surplus resulting from assignment of loan at present value of future liability was not cessation or extinguishment of liability as the loan was to be repaid by the third party and therefore could not be brought to tax in the hands of the assessee.

FULL TEXT OF THE ITAT JUDG E MENT

1. The present appeals filed by the assessee are arising out of order of the Ld. Commissioner of Income-Tax (Appeals)-4 [hereinafter referred to as CIT(A)], Mumbai, in Appeal No.CIT(A)- 4/DC.2(1)/IT-1/03-04 dated 17/08/2010 and order dated 03/09/2012 respectively.

ITA No. 7417/Mum/2010.

2. The grounds of the assessee raised are as under:

1. The learned Commissioner of Income-tax (Appeals) erred in upholding the action of the learned Deputy Commissioner Income-tax (The Assessing Officer) in holding that the “Gain on Assignment of Loan Obligation $$ constitutes $$ income” chargeable to lax in the hands of appellant. The appellant submits that the “Gain on Assignment of Loan Obligation” is capital receipt and not an income chargeable to lax,

2. The appellant submits that the following observations/findings of the learned Commissioner of Income tax (Appeals) are not at all relevant to the issue under consideration:-

(a) The sum of Rs, 12.75 cores given by the appellant to Memoric Pictures Pvt, Ltd. (MPPL) as share application money was received back as loan to appellant;

(b) The treatment to the aforesaid transaction of loan, share application and assignment of loan in the books of the appellant, MPPL and Champions Pictures Pvt. Ltd. (CPPL);

(c) The appellant and the other companies have changed their accounting period under the Companies Act,

3. (a) The appellant submits that the learned Commissioner of Income tax (Appeals) failed to take note of the distinction between loan taken for the purpose of business and the business of buying and selling of loan.

(b) The appellant submits that the learned Commissioner of Income tax (Appeals) erred in holding that as MPPL and CPPL got merged with the appellant, it got the benefit of Rs, 11.64 Crores which was originally a loan and a capital transaction but due to influx of time the same changed its character.

(c) The appellant submits that the learned Commissioner of Income tax (Appeals) erred in relying on the decision of the Supreme Court in the case of CIT V T. V. Sunderam lyanger & Sons Ltd. [222 ITR 344 (SC) as the said decision was not applicable to the facts of the appellant’s case, there being no benefit on account of any trading operation.

4. The appellant submits that the Assessing Officer be directed to treat the “Gain on Assignment of Loan Obligation'” as a capital receipt and not as an income and to modify the assessment in accordance with the provisions of the Act.

5. Each of the above grounds of appeal are independent and without prejudice to each other.

6. The appellant craves liberty to add, to alter and / or amend the grounds of appeal as and when given.

3. The facts in brief are that the assessee company is engaged in the business of manufacturing and sales of cables. During the year, the assessee filed the return of income on 29/11/2000 declaring a loss of Rs. 41,67,90,642/- which was processed u/s 143(1) of the I.T.Act on 13/12/2000 accepting the returned income. Thereafter, the case of the assessee was selected for scrutiny and statutory notices were duly issued and served upon the assessee. During the year, the assessee entered into an agreement dated 17/11/1999 with Memoric Pictures Private Limited (hereinafter referred to as MPPL) whereby MPPL had agreed to advance an interest free loan of Rs. 12 crores to the assessee company. As per the said agreement, the assessee company was to repay the said loan amount to MPPL over a period of 100 years. The said loan was utilised for the purchase of shares by the assessee and was not used for its line of activity/business. Thereafter, the assessee entered into tripartite agreement dated 01/03/2000 entered into between the assessee company, MPPL and Champion Pictures Private Limited (hereinafter referred as CPPL) under which the obligation of repaying the above mentioned loan of Rs. 12 crores was assigned to CPPL at a discounted present value of Rs. 0.36 crores. The resultant difference of Rs. 11.64 crores was credited by the assessee to the profit and loss account as “Gain on Assignment of Loan obligation under the head income from other sources”. However, while computing the taxable income the assessee reduced the said amount from the taxable receipt on the ground that same constitute a capital receipt in the hands of the assessee and is not taxable. Thereafter during the course of assessment proceedings, the AO after noticing the said transactions issued show cause notices to the assessee as to why the profit on assignment of loan should not be added to the income of the assessee, which was replied by the assessee vide letter dated 21/11/2002 as under: –

“Our client is not engaged in the business of buying and selling of loans and the aforesaid transactions was a one-time transaction. The difference arising on transfer of the obligations of repaying the loan cannot be treated as business receipt (there being no receipt at all) or profit arising out of business of the assessee company. Further, any amount, which is not a business receipt, cannot be taxed under the head “Profit and Gains of Business or Profession”. We may further submit that:

• Our client received a sum of Rs. 12 crores as a loan. Receipt of money, as loan, can never be “income” in the hands of our client.
• Our cline was able to obtain a “benefit” because CPPL agreed to repay the loan on behalf of our client and for obtaining this benefit our client was required to pay a sum of only Rs. 0.36 crores.

The question is whether this benefit is “Income” and if so whether, it is taxable as “Profits and Gains from Business or profession” or as “Capital Gains “or as “Income from Other Sources”.

It is submitted that a “benefit” arising to a person is not “Income” unless the Act specifically so provide, e.g.

• In relation to salary income, “perquisites and benefits” are specifically provided to fall within the scope of the term “income” under section 17(2) and (3) of the Act.
• In relation to business income, “perquisites and benefit” are specifically provided to fall within the scope of the term “income” under section 28(iv) of the Act.

Since our client is not an individual who earns salary income, no portion of the benefit derived by it can be taxed as “Salaries

The “benefit” arising to our client did not arise from business. The transfer of the liability to repay the loan was not a transfer in the course of business. The difference arising on such transfer cannot be taxed as “Business income.”

The sum of Rs. 12 crores was received by way of a loan and not as a “business receipt”. The subsequent transactions of assignment of the loan does not change the character of the amount and turn the same into a “business receipt”. This view is supported by the ruling in case of Morely v Tattersall (22 TC 51). (Copy of the decision is enclosed at pages 182 to 190)

Further, Section 41(1) of the Act reads as under:

(1) Where an allowance or deduction has been made in the assessment for any year in respect of loss, expenditure or trading liability incurred by the assessee (hereinafter referred to as the first-mentioned person) and subsequently during any previous year,-

(a) The first-mentioned person has obtained, whether in cash or in any other manner whatsoever, any amount in respect of such loss or expenditure or some benefit in respect of such trading liability by way of remission or cessation thereof, the amount obtained by such person or the value of benefit accruing to him shall be deemed to be profits and gains of business or profession and accordingly chargeable to income-tax as the income of that previous year, whether the business or profession in respect of which the allowance or deduction has been made is in existence in that year or not or

(b) ——–“

On perusal of the aforesaid section, it can be observed that where an assessee has:

• Claimed as deduction in computing his taxable profits for any year, any loss, expenditure, or trading liability; or
• Has been allowed as deduction in computing his taxable profits for any year, any loss, expenditure, or trading liability and where the assessee has obtained any benefit by way of remission or cessation of such loss, expenditure, or trading liability then in such an event, the amount so claimed/allowed as deduction is chargeable to tax in the year of such remission/cession.

In the present case:

• Our client had taken a loan of R. 12 crores from MPPL which has been subsequently assigned to CPPL at a discounted present value
• Such loan is not in the nature of “loss”, “expenditure” or “trading liability”
• Our client has neither claimed nor has been allowed to claim any deduction in computing its taxable profits for any year in respect of such amount.

Therefore, the provisions of section 41(1) of the Act are not applicable to the instant case. Thus, no amount can be taxed in the hands of our client by virtue of section 41(1) of the Act.

4. The Ld. AO after considering the submissions of the assessee was not convinced therewith for various reasons. The Ld. AO referred to decision of CIT vs Karthikeyan, 201 ITR 866(SC) wherein, it has been held that the word income is inclusive and also referred to various sub clauses to section 2(24) which according to AO widens the import of word “Income”. The AO relied on the decision of Supreme court in the case of CIT Vs Kadambande (1992) 195 ITR 877(SC) wherein the Hon’ble Supreme Court held that the word income does not include only the specific items as enumerated in the various sub-clauses but also all such receipts s which can be described as income in its nature and general meaning. The idea behind providing inclusive definition in section 2(24) is not to limit its meaning but to wide its Act and thus the AO came to conclusion that the income/gain/surplus/benefit of any kind is to be brought to tax and accordingly Rs. 11.64 crores accrued to the assessee as a result of assignment of loan has to brought to tax. The Ld. AO also referred to the provisions of Section 41(1) of the Act and held that since the loan was assigned to, M/s CPPL at discounted amount on Rs. 0.36 crores vide tripartite agreement between M/s MPPL, M/s CPPL and the assessee. M/s. CPPL accepted the liability after receiving Rs. 0.36 crores from the assessee and balance of Rs. 11.64 crores remained with the assessee company. The lender M/s MPPL had accepted arrangement of assignment the loan to CPPL and CPPL started paying the instalment to MPPL as per the said tripartite agreement. Thus the AO held that liability of the assessee company was ceased/extinguished the Ld. AO held that the provision of Section 41(1) are applicable to this case as the assessee has obtained benefit in respect of trading liability by way of cessation liability to the tune of Rs. 11.64 crores as the assessee during the course of his business borrowed funds to the tune of Rs. 12 crores and assigned the same to M/s CPPL for Rs. 0.36 crores thereby resultant benefit of Rs. 11.6 crores by cessation of liability is a trading surplus and has to be taxed.

5. The AO also further observed that the assessee himself has credited Rs. 11.64 crores to the P&L account as gain on assignment of loan under the head other income. The AO also brushed aside the contentions of the assessee that assessee has not claimed any deduction in the computing the taxable profits for any year in respect of such amount /loan. The Hon’ble Supreme Court decision in CIT vs T.V.Sundaram Iyengar & Sons Ltd. [(1996) 222 ITR 344 was heavily relied by the AO wherein Hon’ble Supreme court has held that if a common sense view of the matter was taken, the assessee because of trading operation, had become richer by the amount which it transferred to its profit and loss account. The money had arisen out of trading transactions. The Court held that although the amounts received originally were not of income nature, but the amounts remained with the assessee for a longer period unclaimed by the trade parties. By lapse of time, the claim of deposit became time barred and it become a trade surplus. The AO also referred to CIT vs Aries Advertising Pvt. Ltd. 255 ITR 510 wherein the Madras High Court after relying on the decision of Hon’ble Apex Court in the case of CIT vs. T.V. Sundaram Iyengar & Sons Ltd. (Supa). Finally the Ld. AO relying on various decisions as stated above added Rs. 11.64 crores to the income of the assessee under the head profit and gains from business by framing assessment u/s 143(3) dated 23/03/20 13.

6. In the appellate proceedings the Ld. CIT(A), after taking into account the contentions of the assessee, dismissed the appeal of the assessee by observing holding as under:

13. I have carefully considered the facts of the case and the submissions of the appellant. During the course of hearing of appeal, some further information was also obtained from the assessee. It is seen that complete facts have not been brought on record either by the A.O. or by the assessee in its submissions. On the basis of information obtained during the course of hearing of appeal it is seen that on 27/7/99 the appellant company applied for 10 lakh equity shares of Rs.10 each at a premium of Rs.75/- per share and Rs.4,25,000/- optionally convertible non-cumulative redeemable 12% preference shares of Rs. 100/- each aggregating to Rs. 12.75 crore being 100% of the issues subscribed and paid up capital of M/s. MPPL. The appellant company made following payments to M/s. MPPL towards share application money

14. On the same dates MIs. MPPL issued following cheques by way of loan to the appellant company:

15. Within four months of the transactions the loan was assigned to M/s. CPPL by paying a sum of Rs.35,50,500/-. In the balance-sheet of M/s. CPPL the loan amount is shown at Rs.35,50,500/- and not Rs. 12 crore. A perusal of the balance-sheet of M/s. MPPL for the F. Y. 2000-0 1 shows that the share application money of Rs. 12.75 crore was returned back to the appellant company though the loan advance of Rs. 12 crore continues to appear in the balance-sheet. Thus, the sum of Rs. 12.75 crore given by the appellant company to M/s. MPPL as share application money was received back as loan on the same day. It is also informed by the appellant that M/s. MPPL and M/s. CPPL amalgamated with Cable Care Telecom Ltd. w.e.f. 30/6/2002. On 1/7/2002 Cable Care Telecom Ltd. amalgamated with the appellant The scheme of amalgamation was duly approved by the Hon’ble Mumbai High Court.

16. The transaction was shown in the books of account of the three companies HL the following manner:

In the books of  Cable Corporation of India Ltd.:

In the books of Memory Pictures P. Ltd.:

In the books of Champion Pictures P. Ltd.:

It is also worth noting that all the three companies changed their accounting period several times between F. Y. 98-99 to F. Y. 2001-02.

17. In the facts and circumstances of the case I hold that the A. O. is justified in treating the loan of Rs, 11,64,49,500/- as income of the assessee. I do not agree with the authorized representative that the loan was not received in course of business or that the assessee is not in the business of buying and selling loan. Obviously the assessee has obtained the loan for its business. It is abundantly clear that the assessee is not required to repay the loan as the loan was assigned CPPL for a sum of Rs.35.50 Lac. From the facts narrated above it is also abundantly clear that the assessee company was amalgamated with MPPL and CPPL within two years with the result that no one is to pay anyone. In other words the a ” identity of payer and payee has disappeared. Accordingly it can be concluded that the assessee got the benefit of Rs. 11.64 crore which was originally a loan and a capital transaction but due to influx of time the same has changed its character. In the facts and circumstances of the case, this is required to be treated as income of the assessee in view of Supreme Court’s decision in the case of CIT vs. T. V. Sundaram lyengar & Sons Ltd. (222 ITR 344) wherein it was held that, if a commonsense view of the matter were taken, the assessee, because of the trading operation, had become richer by the amount which it transferred to its profit and loss account. The moneys had arisen out of ordinary trading actions. Although the amounts received originally were not of income the amounts remained with the assessee for a long period unclaimed by the trade parties. By lapse of time, the claim of the deposit became time-barred and the amount attained a totally different quality. It became a definite trade surplus. This ground of appeal is dismissed.

7. The Ld. AR submitted before the bench that the assessee has taken a loan of Rs. 12 Crores from M/s MPPL vide agreement dated 17/11/1999 which was to be repaid over a period of 100 years. The ld AR submitted that the said loan was invested in the purchase of shares by referring to the copy of Balance Sheet as on 31 st March, 2000 particularly Sch © “Loans & Advances” and a note was appended in Sch (9) to that effect that assessee had paid Rs. 12,75,00,000/- of the purchase of shares which has been shown under the head of “Loans & Advances “pending the allotment of shares. The assessee entered into a tripartite agreement dated 0 1/03/2000 between M/s CPPL and M/s MPPL whereunder the assessee has assigned the said loan to CPPL at present value of Rs. 0.36 crores and thus there is credit balance of Rs. 11.64 crores in the books of the assessee which was credited the profit and loss account but while filing the return of income the same was reduced on the ground that the same is not taxable at all on the ground that the same is not income of the assessee u/s 2(24) of the Act nor covered by the provision of section 41(1) of the Act.

8. The Ld. AR vehemently submitted before us that the provision of Section 41(1) of the Act was not applicable to the assessee as assessee has not claimed any allowance/ deductions in respect of the loan taken from M/s MPPL which is undisputed and uncontroverted fact. The Ld. AR submitted that it is pre-condition or sine quo non that there should be allowance/ deduction by the assessee in any AY in respect of said expenditure or trading liability in order to bring the impugned item of addition in the ambit of section 4 1(1) of the Act but that is not the case of the assessee. The Ld. AR submitted that in this case, the assessee has only taken a loan from M/s MPPL and there is no waiver of any loan by the said company. The loan was in fact assigned to third party M/S CPPL at net present value of the future liability which cannot be termed as waiver/extinguishments of loan in any case. The Ld. AR relied heavily on the decision of CIT Vs Mahindra & Mahindra Ltd. 404 ITR 001 (SC) and submitted that the order of the CIT(A) is bad in law as it is against the provisions of Act and also contrary to ratio laid down by the Hon’ble Apex Court in the case of CIT vs Mahindra & Mahindra Limited (supra). The Ld. AR further submitted that in the present case the obligation to repay was taken over by the third company M/s CPPL and therefore, there is no question of cessation/extinguishment of any loan liability. The Ld. AR in defense of his arguments relied on decision of special bench in the case of Sulzer India Ltd Vs JCIT 2010 42 SOT 457(Mumbai Spl. bench). The Ld. AR submitted that in the said decision, the Hon’ble Special bench held that where under a scheme brought out by the State Government, if some dealer opted to pay the future liability at discounted value at net present value immediately then it would be similar case of collecting the amount of net present value of future liability and therefore, such payment of net present value of future liability could not regarded as remission or cessation of liability so as to attract the provision of section 41(1) of the Act where the dealers have collected the sale tax under deferred sales tax scheme which is provided by the State Government to incentivize the a section of the trade and industry. The said decision of the special bench of the tribunal was further affirmed by the Bombay High court as reported in 369 ITR 71 7(Bom). The Hon’ble apex court in the case of CIT Vs Balkrishna Industries Ltd. (2017) 88 taxmann.com 273(SC) , the decision of he Hon’ble Bombay in the case of CIT Vs Sulzer India Ltd 369 ITR 717 (Bom) was considered and accepted. The ld AR submitted that in the case of The Ld. AR also submitted that the loan was utilized for the purpose of investments in shares and not used in connection with the business activities of the assessee at all and therefore that can not fall under section 41(1) the said extinguishment/cessation of liability is in the nature of capital receipt and can not be brought to tax u/s 4 1(1) of the Act as the necessary conditions contained therein are not satisfied in the case of the assessee. The Ld. AR submitted that the decisions relied upon by the lower authorities in the case of CIT vs. T.V.Sunderam Iyengar & Sons limited 222 ITR 344 is clearly distinguished on facts as in the said case it has been held that if the assessee become the richer because of trading operation and the amount was transferred to P&L account then the said money has arisen out of ordinary trading operation whereas in the present case the facts are completely different as the assessee has utilized the money for the purchases of shares and not for the trading purposes. Finally the Ld. AR prayed before the bench that in view of the ratio laid down by the hon’ble Supreme Court in the case of CIT Vs Mahindra & Mahindra Ltd (Supra) and various judicial forums , the order of CIT(A) may be set aside and the AO may be directed to delete the addition of Rs. 11.64 Cr.

9. The Ld. DR on the other hand relied heavily on the order of authorities below by submitting that the assessee has accrued a benefit / surplus of Rs. 11.64 crores following a tripartite agreement between the assessee, M/S MPPL and M/S CPPL whereunder M/S CPPL has undertaken the liability of Rs. 12.00 Cr to be repaid over 100 years at present value of Rs. 0.36 crores and therefore, it is a clear cut case of business benefit accruing in favour of the assessee. The Ld. DR further contended that the said loan was taken by the assessee for working capital purchases though the same was utilized for purchase of shares. Therefore, it would not change the character of the transaction. The Ld. DR relied on the decision of Solid containers Ltd. Vs DCIT 2009 187 taxmann 192 Bombay wherein it is held that value of any benefit arising from business or excise of profession by way of extinguishment of the liability has to be taxed u/s 28 of the Act as it was directly arising out of business activity. The Ld. DR submitted that in this case the assessee has taken a loan for a business purposes which was written back during the year as a result of consent terms between the assessee and the lender. The assessee claimed a said loan a capital receipt and not covered u/s 41(1) of the Act. The Tribunal following the decision of Hon’ble Apex Court in the case of T.V.Sunderam Iyengar & Sons Ltd upheld the order of AO by treating the same as business receipt taxable under section 28 of the Act and the said order of the Tribunal was upheld by the jurisdictional High Court. The Ld. DR further contended that the case of Solid containers Ltd vs DCIT (supra) has not been considered in the Mahindra & Mahindra Ltd. (Supra) by the Hon’ble Supreme Court. The Ld. DR also relied on the decision of Madras high Court in the case of CIT vs. Ramaniyam Homes (P) Ltd. (2016) 68 taxmann.com 289 (Madras) wherein it has been held that if the principal loan is waived off by the bank under one time settlement scheme , the same would constitute income falling under the head 28(iv) of the Act. The Ld. DR also relied on the case of Golden Tobacco Ltd. vs ACIT, ITA No. 9127/Mum/2004 AY 2001-02 dated 27/06/2018. Finally the Ld. DR submitted that since in this case the assessee has obtained benefit by way of extinguishment of loan taken from M/s MPPL as a result of assignment in favour of the M/S CPPL resulting into benefit of Rs. 11.64 crores which is obviously and definitely income of the assessee which has to be taxed under the provisions of section 41(1) of the Act. The ld. DR submitted that considering the various decisions of the jurisdictional High Court and coordinate benches, the order of CIT may be confirmed.

10. In the rebuttal, the Ld. AR submitted that the loan was utilized for purchase of shares and therefore the loan was utilized for non business purposes and is beyond the ambit of section 41(1) of the Act. The Ld. AR also submitted that the benefit has accrued in the favor of the assessee has paid/discharged at present value of the future liability and the case of the assessee is clearly covered by the decision of Hon’ble Apex Court in the case of Mahindra and Mahindra Ltd (Supra). As a result of assignment of the loan , the lender will get the repayment of loan from third party instead of the assessee. So it is not cessation/extinguishment of liability as is squarely covered by the decision of special bench, Mumbai in the case Sulzer India Ltd Vs JCIT (Supra) which has upheld by Bombay High Court in the case of CIT Vs Sulzer India Ltd 369 ITR 717 (Bom) which was also referred to by the Apex Court in the case of CIT Vs Balkrishan Industries Ltd (2017) 88 taxmann.com273(SC). The Ld. A.R. contended that whereas the case of the Hon’ble Supreme Court in the case of Mahendra & Mahendra Ltd (supra) is applicable, the decisions of jurisdictional High Court or other forums can not be applied to the decide the assessee’s case as rendered under different facts. Finally the Ld. AR prayed for the bench that in view of the binding decision of the Hon’ble Apex Court and various other judicial forums ,the order of CIT(A) may be set aside and the appeal of the assessee allowed.

11. We have heard rival submissions and perused the material available on record including the decisions relied by the rival parties and impugned order of CIT(A) under challenge before us. The undisputed facts are that the assessee has borrowed a sum of Rs. 12.00 crores from M/s MPPL to be repaid over a period of 100 years. Undisputably the amount was utilized for the purchase of shares and the amount invested was Rs. 12.75 Cr as is apparent from the Balance Sheet as at 31 st March, 2000. The assessee is in the line of manufacturing of cable and trading thereof and not in the purchase and sale of shares and securities. Therefore, it is apparent from the facts before us that the loan was utilized for the purpose of purchase of shares which is not a trading activity of the assesse. It is also undisputed that the liability of loan of Rs. 12 crores to be discharged over a period of 100 years was assigned to the third parties M/s CPPL by making a payment of Rs. 0.36 crores in terms of present value of the future liability and the surplus resulting from assignment of loan liability was credited to the Profit & Loss Account under the head income from other sources but while computing the total income, the said income was reduced from the income on the ground that the surplus of Rs. 11.64 crores represented the capital receipt and therefore not taxable. It is also true that both companies M/S MPPL and M/S CPPL were amalgamated with the assessee later on with all consequences. So the issue before us is whether the surplus Rs. 11.64 Cr resulting from the assignment of loan to M/S CPPL under tripartite agreement between the assessee , M/S MPPL and M/S CPPL is a revenue receipt liable to tax or a capital receipt as has been claimed by the assessee. Considering the facts of the case of the assessee , admittedly the loan of Rs. 12.00 Cr amount was utilized for purchase of shares and was not used for in relation to trading activity at all. The purchase of shares by the assessee is a non trading transaction and is of capital nature. The surplus resulting from the assignment of loan as referred to above is not resulting from trading operation and therefore not to be treated as revenue receipt. The provisions of section 41(1) of the Act are not applicable to the said surplus as the basic conditions as envisaged in section 41(1) are not fulfilled. In other words, the assessee has not claimed it as deduction in the profit & loss account in the earlier or current year. In order to bring a allowance or deduction within the ambit of section 41(1) of the Act , it is necessary that a deduction/allowance is granted to the assessee. In the present case before us, it abundantly clear that the loan was utilized for the purpose of purchasing the shares which is not the business of the assessee and therefore the surplus arising from the assignment of loan can not be said to have arisen from the trading operation of the assessee. We have carefully perused decision of Hon’ble Apex court in the case of CIT Vs Mahindra & Mahindra Ltd (Supra). The Hon’ble Apex Court has held that waiver of loan taken for acquiring capital assets can not be brought to tax either under the provisions of section 28(iv) or under section 4 1(1) of the Act. The Hon’ble apex court held that it can not be brought to tax u/s 28(iv) because the benefit has to be in some other form than in the shape of money. Since the waiver represented cash/money, the provisions of section 28(iv) are not applicable. It was further held that waiver can also not be taxed u/s 4 1(1) of the Act as sine qua non for for bring a receipt u/s 41(1) is that there has to be allowance or deduction claimed by the assessee in respect of loss, expenditure or trading liability incurred. In the instant case before us the loan was utilized for purchasing shares which is capital asset in the business of the assessee and the surplus resulting from assignment of loan is a capital receipt not liable to be taxed either u/s 28(iv) or u/s 4 1(1) of the Act . In our considered view the case of the assessee is squarely covered ratio laid in the said decision by the Apex Court in the case of CIT Vs Mahindra & Mahindra Ltd (Supra). Accordingly the surplus arising from assignment of loan is not covered by the provisions of section 41(1) of the Act and consequently can not be brought to tax either u/s 28(iv) or u/s 41(1) of the Act. We further note that the surplus has resulted from the assignment of liability as the assessee has entered into tripartite agreement under which the loan was to be repaid by the third party in consideration of payment of net present value (NPV) of future liability. Thus surplus resulting from assignment of loan at present value of future liability is not cessation or extinguishment of liability as the loan is to be repaid by the third party and therefore can not be brought to tax in the hands of the assessee. Similar issue has been decided by the special bench, Mumbai in the case Sulzer India Ltd Vs JCIT (Supra) which has upheld by Bombay High Court in the case of CIT Vs Sulzer India Ltd 369 ITR 717 (Bom).The view taken by the Bombay High Court has been affirmed by the Apex Court in the case of CIT Vs Balkrishan Industries Ltd (2017) 88 taxmann.com273(SC) wherein it has been surplus resulting from the payment of net present value of future liability is cessation/extinguishment of liability and therefore can not be taxed as trading receipt. The said decision was rendered in the context of surplus made by the assessee when it chose to pay the net present value of the liability which was to be discharged after seven years is paid at present value of future liability under a scheme floated by the State Govt. Under the scheme the sales tax collected under deferred scheme to incentivize the industry was to be paid after certain years but the Govt came with another scheme offering the industry to pay the present value of that sales tax liability to be discharged in future. Applying the same analogy to the assessee case, we hold that the assessee has assigned the loan by paying the present value of future liability and the surplus is not taxable as it is not cessation or extinguishment of liability. The decisions relied by the ld DR are also perused and found to be not applicable to the present case. Therefore in view of the above discussions and various decisions of the Hon’ble Apex court and Jurisdictional High Court , we are inclined to set aside the order of CIT(A) and direct the AO to delete the addition of Rs. 11.64 Cr.

The appeal of the assessee is allowed.

7369/Mum/2012

The assessee has challenged in this appeal the confirmation of penalty by the ld CIT(A) as imposed by the ld AO u/s 271(1)(c) of the Act. Since we have allowed the appeal of the assessee deleting the addition in quantum appeal, therefore the penalty has no legs to stand and is ordered to be deleted.

In result both the appeals of the assessee are allowed.

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IRS Issues FAQs On Retirement Plan Distributions And Loans Following Major Disasters

The IRS has answered some frequently asked questions (FAQs) related to distributions from retirement plans, IRAs, and retirement plan loans for individual taxpayers impacted by federally declared major disasters.

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House destroyed by the passage of a hurricane in Florida

The IRS has answered some frequently asked questions (FAQs) relating to rules for distributions from retirement plans, IRAs, and retirement plan loans for individual taxpayers impacted by federally declared major disasters.

SECURE 2.0 Act—which, again, sounds like a sequel to an action movie—is a follow-up to 2019's retirement-heavy legislation, the SECURE Act. President Biden signed the SECURE 2.0 Act into law on December 29, 2022, as part of the Consolidated Appropriations Act of 2023 . SECURE 2.0 Act made several changes to existing law, including:

• Automatic Enrollment . Beginning in 2025, employers who start new retirement plans after December 29, 2022, will be required to automatically enroll eligible employees in their retirement plan—exceptions exist for small companies with ten or fewer employees, new companies, or church and government agencies. However, employees don't have to participate and may opt out.
• Roth Account Matches. Employers can amend their existing plans to allow employees to receive vested matching contributions to Roth accounts—this is a change from when matching was only on a pre-tax basis.
• RMDs. SECURE 2.0 made several changes to RMDs (required minimum distributions). Some of the changes were confusing—and the IRS has been rolling out guidance. Last year, Notice 2022-53 noted that final RMD regulations will apply no earlier than the 2023 distribution calendar year. Notice 2023-54 added another year of relief by excusing 2023 missed RMDs for non-eligible designated beneficiaries of IRA owners who died in 2020 or 2021 after the required beginning date. And, not to be outdone, Notice 2024-35 added yet another year of relief (you can read more here ).
• Qualified Charitable Distributions . Before the SECURE Act and SECURE 2.0, individuals aged 70½ or older could donate $100,000 annually to qualifying charities from their IRA—the contribution can count towards the taxpayer's required RMD. As of 2023, that amount is indexed for inflation. Additionally, taxpayers who are 70½ or older can now make a one-time election of up to $50,000—indexed for inflation—from their IRA to a split-interest entity like a charitable remainder unitrust.
• Student Loans. SECURE 2.0 allows employers to make matching contributions to retirement plans based on employees' student loan payments. The match amount is calculated as if the employee contributed their loan amount to the plan even if they did not make any elective contributions.
• 529 Plans . Beginning this year (2024), you can roll any unused 529 plan funds into a Roth IRA without a penalty. You can read more about that here .

Section 331

Another significant change tied to SECURE 2.0 was the treatment of retirement accounts and loans following a qualified disaster. Section 331 of SECURE 2.0 allows qualified individuals—those whose principal residence during the incident period of a qualified disaster is in the qualified disaster area and who have sustained a related economic loss—flexibility when taking those distributions or loans. The FAQs focus on that relief on three fronts:

• Expanded distribution and tax relief . Up to $22,000 of qualified disaster recovery distributions from eligible retirement plans (certain employer-sponsored retirement plans, such as section 401(k) and 403(b) plans and IRAs) can be distributed to qualified individuals per disaster without being subject to the 10% early withdrawal penalty. Income taxes would still be payable on the distribution but can be spread over three years. You can repay those amounts (and escape the related tax) within three years.
• Relief to repay distributions taken for principal residence purchase or construction . Individuals who claimed a first-time homebuyer distribution from an IRA or a hardship withdrawal from a section 401(k) or 403(b) plan if the distribution was to be used to purchase or construct a principal residence in a qualified disaster area can put those funds back into the plan without a penalty if they were not used to buy or build a residence.
• Plan loan relief. The maximum loan amount that a qualified individual may borrow under an eligible retirement plan (not including an IRA) is boosted to $100,000 (or 100% of your vested account balance). An employer may also extend the repayment term by an additional year.

The incident period for a qualified disaster—any disaster for which the President has declared a major disaster after December 27, 2020—is specified by the Federal Emergency Management Agency (FEMA) as the period during which the disaster occurred. That could be a single day (for example, in the case of a tornado) or multiple days (for example, in the case of a hurricane or snowstorm). You can determine the incident period by checking out the FEMA website .

Economic loss may include loss, damage to, or destruction of real or personal property from fire, flooding, looting, vandalism, theft, wind, or other causes, as well as loss related to displacement from your home or loss of your job or business due to temporary or permanent layoffs.

Qualified disaster recovery distributions are those made to a qualified individual from an eligible retirement plan on or after the first day of the incident period of a qualified disaster and before the date that is 180 days after the latest of December 29, 2022, the first day of the incident period with respect to the qualified disaster, or the date of the disaster declaration of the qualified disaster.

Employers do not have to allow for qualified disaster recovery distributions or loans from your retirement plan. However, if an employer does not treat a distribution as a qualified disaster recovery distribution, you may still treat a distribution as such on their federal income tax return if they are a qualified individual and the distribution meets the requirements to be a qualified disaster recovery distribution. Use Form 8915-F, Qualified Disaster Retirement Plan Distributions and Repayments , to report qualified disaster recovery distributions.

(You're probably getting the sense that even with the FAQs, this can be tricky—and expensive if you goof—so it's a good idea to consult with your tax professional.)

So, this is great, right?

Not so fast. These are FAQs, not Regulations. That means that they are issued to provide guidance but, by the IRS' own admission, cannot be relied upon—and they may be updated or modified upon further review. Taxpayers can rely on Treasury Regulations and sub-regulatory guidance published in the Internal Revenue Bulletin (IRB)—think Revenue Rulings, Revenue Procedures, Notices, and Announcements, but not FAQs. The latter has not —and will not be—published in the IRB. That means if an FAQ turns out to be wrong (or misleading), the law, not the FAQs, will control.

In other words, FAQs are intended to be a way for the IRS to get information out quickly. But you should be aware that it’s not the same as official guidance.

Nonetheless, the IRS notes that "a taxpayer who reasonably and in good faith relies on these FAQs will not be subject to a penalty that provides a reasonable cause standard for relief, including a negligence penalty or other accuracy-related penalty, to the extent that reliance results in an underpayment of tax." You can read more about reliance here .

More Information

These FAQs related to the SECURE 2.0 Act, were announced in IR-2024-132 and have been memorialized in Fact Sheet 2024-19 .

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Can you use a HELOC to pay off your mortgage loan?

By Angelica Leicht

Edited By Matt Richardson

May 10, 2024 / 1:28 PM EDT / CBS News

With home values soaring over the past few years, many homeowners are now sitting on significant amounts of home equity . In fact, as of the first quarter of 2024, nearly 46% of mortgaged residential properties in the U.S. were considered equity-rich, according to a recent report from ATTOM , a real estate data firm. This means the combined loan balances on the property were no more than 50% of the estimated market value.

With the average homeowner sitting on about $193,000 of tappable home equity , it's no wonder home equity lines of credit (HELOCs) and home equity loans have become popular borrowing options. And, these home equity tapping options don't just allow homeowners to borrow against the equity in their homes; they do so with interest rates that are often lower than what you can get with other financing options, like personal loans and credit cards. 

The ability to access large sums of cash at a low interest rate is certainly appealing. And, you can tap into your home's equity for nearly any purpose, adding to the allure. But can you use a HELOC, in particular, to pay off your mortgage loan? And, if so, should you? Below, we'll detail what to know.

Ready to get started? Compare the best HELOC rates available to you here .

The short answer is in most cases, yes — you can use a HELOC to pay off what you owe on your current mortgage loan. There's no restriction preventing you from using HELOC funds for this purpose. However, there are some important considerations and potential roadblocks.

For example, lenders typically won't let you borrow more than 80% to 90% of your home's appraised value with a HELOC. So if your remaining mortgage balance is quite high compared to your home's value, the HELOC alone may not provide enough funds to fully pay off what you owe. You'd need to have a significant equity cushion to pull this off.

And, even if the HELOC credit limit is enough to cover your mortgage payoff amount, you'll likely need additional cash on hand to pay other fees and costs associated with closing on a HELOC . This includes appraisal fees, title fees and any other lender charges. Those costs should be calculated in to help determine whether this route makes sense financially.

It's also worth noting that when you pay off your mortgage, the lender will remove their lien from your property's title. The HELOC lender will then take the first lien position on your home. Some HELOC lenders require that you pay off any other loans and liens on the home first before they take this leading secured position, so if you have other loans that used your home as collateral, you may be required to pay for those out of pocket as part of this process.

And, most HELOC lenders will require a credit check and look at your income, debts and ability to repay the line of credit, just like they would with any new mortgage loan. So while it's possible to use a HELOC to pay off a mortgage loan, those with lower credit scores or higher debt-to-income (DTI) ratios may not qualify for a high enough HELOC limit to do so.

Don't wait for rates to climb; learn more about the top home equity loan options now .

Should you use a HELOC to pay off your mortgage loan?

Whether you should use a HELOC to pay off your entire mortgage balance depends on your unique financial situation, your plans for the property and your tolerance for the risk that comes with variable interest rates. 

When it makes sense

There are some instances when it could potentially be a smart move to take this approach, including:

• When you want to eliminate mortgage insurance: If you're currently paying for private mortgage insurance (PMI) on your existing loan because you put less than 20% down on your home, paying it off with a HELOC could allow you to not only eliminate your mortgage, but this recurring expense automatically as well.
• When you need temporarily lower payments: If you're going through a period of reduced income, underemployment or other short-term financial hardship, you may be able to lower your monthly payments by only paying interest on the money you borrow during the HELOC's draw period . You'll eventually need to pay back the principal on your loan, but temporarily reducing your monthly mortgage obligations could provide much-needed monthly payment relief for a while.
• When you plan to sell soon: If you expect to sell the home within the next few years, it could make sense to pay off your existing mortgage, especially if you can get a HELOC with a lower variable interest rate during your limited remaining time owning the property.

When it doesn't make sense

On the other hand, there are some situations when using a HELOC for a mortgage payoff may not be the best idea , including:

• When you're planning to stay long-term: If you plan to remain in the home for five to 10 more years, you may prefer the fixed interest rate and consistent payment amount that comes with a traditional mortgage compared to a variable-rate HELOC .
• When you're close to payoff: If you only have five years or less remaining on your current mortgage, it may make more sense to simply finish out those fixed payments to become mortgage-free rather than restart the payoff clock with a HELOC.
• When the HELOC rate is much higher: Be sure to compare the current variable rate on a HELOC vs. your existing mortgage rate . If the HELOC rate is significantly higher, the extra interest could outweigh any potential benefits.

The bottom line

If you want to use a HELOC to pay off your mortgage, it's certainly possible to do. But whether a HELOC should be used to pay off your mortgage depends almost entirely on your financial profile and goals. If you're going to pursue this route, just be sure to crunch the numbers, understand the terms and explore all alternatives first. That way, you can make an educated decision on how to best handle your mortgage obligations and avoid financial trouble down the road.

Angelica Leicht is senior editor for CBS' Moneywatch: Managing Your Money, where she writes and edits articles on a range of personal finance topics. Angelica previously held editing roles at The Simple Dollar, Interest, HousingWire and other financial publications.

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Your tax refund could be bigger this year. Here’s what to do with it

FILE - Travelers walk through Miami International Airport on Nov. 22, 2023, in Miami. Experts say paying down debt and saving for a rainy day remain the safest things to do with your tax refund. Some consumers are spending the money, however, on things like travel and patio furniture.(AP Photo/Lynne Sladky, File)

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NEW YORK (AP) — The average taxpayer is getting a $2,852 refund, $75 more than last year, based on the most recent IRS data. So what should you do with that money ?

Experts generally advise putting it toward debt and savings , but, for many people, that’s unrealistic.

A tax refund is typically the “biggest extra windfall of the year,” said Courtney Alev, consumer financial advocate at Credit Karma.

“One thing we do see is a propensity to consider a tax refund something to splurge with. One in four taxpayers see it as free money and plan to spend it on something they would not otherwise,” she said. “While this behavior is completely understandable, given how hard up people are — with the rising cost of living, and high interest rates , the best thing you can do is use it as an opportunity to advance your financial goals.”

Emily Garcia, 30, who works in marketing for a medical imaging software company in Toledo, Ohio, said she and her husband, with whom she filed jointly, were refunded about $1,000 and spent the money on patio furniture.

“We wanted to dress up the backyard, to make it seem nice, and furniture’s not cheap,” she said. “It was a nice thing to have the refund check to be able to buy what we were looking at.”

Though Garcia and her husband bought a house two years ago, which they’re still in the process of paying off, they decided not to put the refund toward their mortgage.

”The debt’s not going anywhere,” said Garcia. “A thousand dollars is not going to make a dent. But it’s a good amount to buy something like furniture.”

Megan McClelland, 38, who works as a head high school counselor in Petaluma, California, is spending her refund — just over $1,000 — on travel, such as trips for a bachelorette and a wedding.

In October, McClelland had the last of her outstanding student loans cancelled through the Public Service Loan Forgiveness program , and so is debt free for the first time in years. She said that the $500 she had budgeted for her monthly student loan payments is now going into her savings account, so she sees the refund as a chance to spend on “things that I probably otherwise wouldn’t be able to pay for — or that would bring me into debt.”

In the past, McClelland said, she would typically have had to work extra shifts, moonlighting at a winery or as a caterer, to take a trip — or put the travel on the credit card. Now she can use the tax refund instead.

“The way the tax refund works in my mind is I can use it more for ‘fun money,’” she said.

As of late last month, the IRS had processed about 141 million returns and refunded roughly $261 billion to taxpayers, 2.2% more than at that time in 2023.

Matt Schulz, chief credit analyst at LendingTree, echoed the idea that paying down debt and contributing to savings are the two most financially sound things to do with a tax refund, though he said people should do both simultaneously, rather than choosing between the two.

“If you pay down debt to zero and you don’t have any savings, all that happens is the next time you have an emergency expense — like a flat tire or taking your dog to the vet — that expense just goes back on your credit card and you’re right back in debt,” he said. “If you can build a little bit of savings while you’re paying off loans you can break that cycle of debt so many people find themselves in.”

Said Alev: “Life is short, we want to reward ourselves. And we see a diverse set of responses (with tax refunds). Our best tip is to use that refund to get your financial life on track. At the treetop, that’s what we’re seeing and advising.”

The Associated Press receives support from Charles Schwab Foundation for educational and explanatory reporting to improve financial literacy. The independent foundation is separate from Charles Schwab and Co. Inc. The AP is solely responsible for its journalism.

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Treasury, IRS issue frequently asked questions regarding disaster relief related to retirement plans and IRAs

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IR-2024-132, May 3, 2024

WASHINGTON — The Internal Revenue Service today issued frequently asked questions (FAQs) in Fact Sheet 2024-19 , relating to rules for distributions from retirement plans and IRAs and for retirement plan loans, for certain individuals impacted by federally declared major disasters.

The FAQs relate to the SECURE 2.0 Act of 2022 (SECURE 2.0) provision that provides for ongoing disaster relief for certain distributions and loans in the case of federally declared major disasters. Prior to the changes made by SECURE 2.0, there was no disaster relief allowing these distributions and loans that applied generally for all major disasters.

The FAQs are intended to assist individuals, employers, and retirement plan and IRA service providers, and they are divided into four categories:

• General information
• Taxation and reporting of qualified disaster recovery distributions
• Repayment of qualified distributions taken for the purpose of purchasing or constructing a principal residence in a qualified disaster area
• Loans from certain qualified plans
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Do I get a refund if I paid off my HECS last year? How do I get the payment?

Nicole from Sydney was out with friends when she found out the federal government had made changes to the way HECS or HELP loans were indexed.

She was shocked, and not in a good way.

"My gut dropped because I'd just paid off $36,000."

Nicole's student debt was affecting her ability to buy her first home.

"The difference that my having a HECS debt made to my borrowing power was close to $100,000. Obviously, with house prices the way that they are at the moment, not having that extra $100,000 of borrowing capacity was the difference between me being able to buy a property and not being able to buy a property," Nicole explained.

So, she decided to pay the debt off, using the savings she'd earmarked for her home deposit.

That payment went through on May 2, just days before the federal government announced it would tie indexation to either CPI or the wage price index (WPI), whichever was lower, and backdate the change to last year.

The change would see indexation for the previous year slashed from 7.1 per cent, to 3.2 per cent.

The tax office will apply credits to current and former students' loans to reflect the lower rate.

Paying WPI instead of CPI on last year's debt would have saved Nicole around $1,600. But paying it off in a lump sum means she has no tax office debt to credit.

She got in touch with Hack to find out if she'll get any of that money back.

Do I get backpay if paid my HECS off last year?

In a word, yes.

We asked the office of Federal Education Minister Jason Clare for a bit more detail.

"Anyone who paid off their HELP loan during the year will receive an indexation credit once legislation has passed and the Australian Taxation Office (ATO) has processed the indexation credit," a spokesperson for the minister said.

"Individuals who have fully paid their HELP loan may receive their indexation credit as a cash refund, if they have no other tax liability."

In other words, if you don't owe the tax office any money this year, you could be getting a nice tax return.

How do I get the credit on my loan?

The 'credit' — which is the difference between the amount of money you paid when the loan was calculated under CPI, versus what it is now under WPI, will be applied by the tax office automatically.

Essentially, it'll be used to draw down your overall loan.

But if you don't have a loan because you paid it off, like Nicole, you could get it back in the form of a return when you lodge your tax this year.

Retrospective changes 'frustrating'

It's important to note that only people who were subject to last year's 7.1 per cent indexation are eligible for a credit.

Thomas from Melbourne sought advice from his accountant before deciding to raid his savings and pay off a whopping $45,000 in debt in May last year – weeks before the 7.1 per cent indexation was applied.

"I paid off prior to the 7.1 per cent indexation being applied to avoid incurring an extra approximately $3,500 being applied to my HECS debt," Thomas told Hack.

"However, if it was known that the indexation was to be changed to be the lower of CPI or WPI, that would've informed my decision and I would not have voluntarily repaid, instead, retaining the sum to put towards a house deposit."

Thomas acknowledges that the changes will be positive for a lot of people but says it's "frustrating" that the government applied the changes retrospectively.

"How can young people best plan, financially, for the future, when the government moves the goal posts?"

Just under 3 million Australians have a HECS or HELP debt, and the federal government says lowering the rate of indexation will cost the federal budget around $3 billion in revenue foregone.

HECS and HELP indexation is applied annually, every June – and the effect of its addition is to bump up the amount owed, in line with inflation.

The 7.1 per cent rise last year, based on CPI — which the government, under the change, is now reversing – was the highest hike since 1990.

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Former CEO and Controlling Shareholder of Fat Brands Inc., Former CFO, and a Tax Advisor Indicted in Alleged Scheme to Conceal $47 Million Paid to CEO in the Form of Shareholder Loans

LOS ANGELES – Andrew A. Wiederhorn, the former CEO and current controlling shareholder of the publicly traded Fat Brands Inc. (FAT), has been indicted on federal charges alleging a scheme to conceal $47 million in distributions he received in the form of shareholder loans from the IRS, FAT’s minority shareholders, and the broader investing public, the Justice Department announced today.

According to the indictment returned Thursday by a federal grand jury, Wiederhorn – assisted by FAT’s chief financial officer and his outside accountant at advisory firm Andersen – concealed millions of dollars in reportable compensation and taxable income and evaded the payment of millions of dollars in taxes, while causing FAT itself to violate the Sarbanes-Oxley Act’s prohibition on direct and indirect extensions of credit to public-company CEOs in the form of a personal loan.

“This defendant, the former CEO of a publicly traded company, is alleged to have engaged in a long-running scheme to defraud investors and the United States Treasury to the tune of millions of dollars,” said United States Attorney Martin Estrada. “Instead of looking out for shareholders, the defendant allegedly treated the company as his personal slush fund, in violation of federal law. The Corporate and Securities Fraud Strike Force of my office focuses on rooting out corporate malfeasance by corporate insiders, and we will continue to protect the public by bringing these important prosecutions.”

“The indictment alleges that with the assistance of his co-defendants, Mr. Wiederhorn repeatedly evaded his taxes and the law as he engaged in a cover-up to avoid being accountable to shareholders,” said Krysti Hawkins, the Acting Assistant Director in Charge of the FBI's Los Angeles Field Office. “Rather than continuing to fund his lavish lifestyle, Mr. Wiederhorn will face serious consequences for his alleged criminal actions.”

“The allegations contained in the indictment against Mr. Wiederhorn show that he is a serial tax cheat. His actions over decades hurt not only his company and its shareholders, but also every American taxpayer,” said Special Agent in Charge Tyler Hatcher, IRS Criminal Investigation, Los Angeles Field Office. “Failing to honestly and accurately report income shortchanges Americans, and places undue strain on honest taxpayers. CI is committed to investigating this sort of criminal behavior to ensure accountability and equity in the tax system.”

The defendants charged in the indictment are:

• Wiederhorn, of Beverly Hills;
• William J. Amon, of Los Angeles, a certified public accountant, attorney, and one-time managing director of Andersen’s Los Angeles Office, who provided tax-advisory services to Wiederhorn, FAT, and FAT’s former affiliate, Fog Cutter Capital Corporation (FOG);
• Rebecca D. Hershinger, a Los Angeles-area resident who formerly served as FAT’s CFO and, in that role, certified FAT’s public filings; and
• Fat Brands Inc., a publicly traded global franchising company based in Beverly Hills that acquired and developed casual-dining restaurant concepts, including Fatburger, Johnny Rockets, Hurricane Grill and Wings, Yalla Mediterranean, and Ponderosa and Bonanza Steakhouses.

Wiederhorn is expected to be arraigned this afternoon in United States District Court in downtown Los Angeles. The remaining defendants are expected to be arraigned during the first week of June.

According to the indictment, Wiederhorn began disguising distributions to himself in the form of shareholder loans approximately 30 years ago, when he served as CEO of another company, Wilshire Credit Corporation (WCC). After forgiving himself some $65 million in putative debts owed to WCC, Wiederhorn resolved a federal grand jury investigation into that and related conduct by pleading guilty in 2004 in the District of Oregon to the payment of illegal gratuities and filing a false federal tax return. FOG and its affiliates are successor corporate entities to WCC and its affiliates.

From at least 2006 through 2021, Wiederhorn was the subject of efforts by the IRS to collect personal income tax and trust fund taxes he owed personally and as a responsible party and guarantor for entities, including FOG, the indictment states. The IRS efforts included levies and liens on Wiederhorn’s accounts and assets due to outstanding taxes he owed. The IRS, beginning in 2016, assessed Wiederhorn penalties for FOG’s failure to pay trust fund taxes and failure to establish a payment plan. By March 2021, Wiederhorn’s unpaid personal income tax liability to the IRS totaled approximately $7,743,952, inclusive of statutory interest and penalties, according to the indictment.

Beginning no later than 2010 and continuing through early 2021, Wiederhorn allegedly caused employees of FAT and FOG to compensate him by distributing to him approximately $47 million for his personal use and benefit. Wiederhorn, Amon, Hershinger and others miscategorized these distributions as “shareholder loans” and failed to disclose as reportable compensation to the IRS, SEC and the broader investing public, the indictment alleges.

Neither FAT nor FOG required Wiederhorn to post collateral, make interest payments or observe any of the other commercial requirements and realities of true loans, according to the indictment, which adds that Wiederhorn generally determined for himself the amount, timing and form of both extension and forgiveness of these “loans” without informing the directors of either FAT or FOG.

“After defendant FAT became an issuer of securities through its IPO [initial public offering], defendant Wiederhorn caused millions of dollars from defendant FAT’s accounts to be disbursed to defendant Wiederhorn and his family members for their personal benefit,” according to the indictment. “These disbursements were used to fund the purchase of private-jet travel, vacations, a Rolls Royce Phantom, other luxury automobiles, jewelry, and a piano.”

The indictment goes on to outline several transfers of hundreds of thousands of dollars that Wiederhorn caused others at FAT to make directly from FAT accounts to pay Wiederhorn’s personal American Express credit-card debts.

“Wiederhorn, posing as both ‘lender’ and ‘borrower,’ caused defendant FAT and FOG to extend to him and then ‘forgive’ tens of millions of dollars in distributions made in the fraudulent form of loans – all while paying no income tax on these distributions and, in fact, using them to generate net operating losses to provide defendant FAT with financially beneficial tax treatment,” the indictment alleges.

Although FAT publicly claimed that it was “cooperating with the government” in connection with this investigation, after members of FAT’s Board communicated with the government, Wiederhorn removed every director other than himself in March 2023 and reconstituted FAT’s Board with a majority of non-independent directors under his control, according to the indictment.

Wiederhorn is charged with one count of endeavoring to obstruct the administration of the Internal Revenue Code, six counts of tax evasion, and one count of false statements and omission of material facts in statements to accountants in connection with audits and reviews.

Both Wiederhorn and Hershinger are charged with four counts of wire fraud, two counts of false statements and omission of material facts in statements to accountants in connection with audits and reviews, and one count of certifying faulty financial reports.

Wiederhorn, Hershinger and FAT are charged with two counts of extension and maintenance of credit in the form of personal loan from issuer to executive officer.

Hershinger is also charged with one count of making false statements to federal investigators, including, among things, denying that company funds were being used to pay Wiederhorn’s personal American Express bill.

Amon is charged with four counts of aiding and assisting the filing of false tax returns.

Any investors who believe they were victims of the crimes alleged in the indictment are encouraged to go to https://www.justice.gov/usao-cdca/united-states-v-andrew-wiederhorn-william-j-amon-rebecca-d-hershinger-and-fat-brands-inc for further information and updates regarding this matter.

Wiederhorn has also been charged in a separate indictment for illegally possessing a firearm and ammunition after being convicted of a felony.

An indictment is merely an allegation, and the defendant is presumed innocent unless and until proven guilty beyond a reasonable doubt in a court of law.

The FBI and IRS Criminal Investigation are investigating this matter.

Separately, the U.S. Securities and Exchange Commission has also filed a civil enforcement action against Wiederhorn, Hershinger, FAT, and another FAT executive.

This case is being prosecuted by Assistant United States Attorneys Adam P. Schleifer of the Corporate and Securities Fraud Strike Force and Kevin B. Reidy of the Major Frauds Section.

Ciaran McEvoy Public Information Officer [email protected] (213) 894-4465

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