Finding herself in default on the mortgage loan secured by her New Jersey home, Carol Callahan enlisted the help of a company which had sent her an unsolicited mailing, offering to help individuals in her situation save their real property from foreclosure. While the company (REI) did successfully negotiate a discounted payoff of her mortgage loan, it also convinced her to convey her house to an affiliate and ended up keeping more than half of the purported sale proceeds for itself. Then, after a New Jersey court decision gave Callahan her house back and things were finally starting to look up for her, the IRS came in and contended that she had recognized both gain and COD income. In a recent decision, the Tax Court declined to end Callahan's tale of woe, but did give her a little good news.
The Saga Begins
The ordeal for Callahan began in 2007, when she was in default on the $1,550,000 mortgage loan secured by her New Jersey home on which she was personally liable (the "Wall Street loan").1 After unsuccessfully attempting to modify or refinance the loan, she turned to REI for help. Ronald Losner of REI worked out an agreement with the mortgage lender in which the mortgage lender agreed to accept $850,000 in full discharge of Callahan's $1,550,000 loan. Also, as arranged by Losner, Callahan signed a contract to sell the property to Losner's associate, Alon Wolkowitz, for $1,750,000. (Notably, this contract price was actually greater than the full amount of the outstanding mortgage on the property.) The contract showed that the $1,750,000 purchase price would be applied as follows:
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