Tag Archives: Bankruptcy


Fennemore Craig attorney among Leading Women in Litigation

Fennemore Craig, a leading Mountain West law firm, announced Cathy Reece, chair of the firm’s Bankruptcy, Creditors Rights and Restructuring practice group, has been selected as one of the Top 250 Women in Litigation in 2015 by Benchmark Litigation for the fourth consecutive year.

“The firm’s strength is built on the commitment of our attorneys to their clients and practice,” said Steve Good, managing partner of Fennemore Craig. “We congratulate Cathy on her dedication to the legal profession and for being recognized as one of the leading female litigators in the nation.”

Reece has wide-ranging experience in every aspect of corporate workouts and bankruptcies, as well as, assisting clients in structuring complex transactions and purchasing distressed assets. She has been recognized by Best Lawyers in America and Southwest Super Lawyers, and was presented in 2014 with the Legal Advisor of the Year award from M&A Advisors. Reece earned her J.D. from Arizona State University and her B.A. from the University of Arizona.



Andy Landeen joins Ryley Carlock

Ryley Carlock & Applewhite added attorney Andrea (Andy) Landeen to the firm’s Creditors’ Rights and Bankruptcy, Lending and Commercial Litigation practice groups, where she will continue her practice of representing lenders and other creditors in pre- and post-judgment litigation.

“We’re very excited about what Andy brings to the firm as well as our creditors’ rights and bankruptcy team,” said Scott Jenkins, Jr. who leads the firm’s lending, creditor’s rights and bankruptcy group.  “With Andy’s diverse experience, she will help us better serve our expanding client base.”

Prior to joining the firm, Andy also represented debtors in litigation in involving commercial real estate transactions arising from judicial and non-judicial foreclosures, as well as representing sub-contractors and materialmen in construction defect and/or mechanics’ lien dispute in both state and federal courts, and the Arizona Registrar of Contractors.

“I am so excited to join Ryley Carlock & Applewhite not only because of the culture of professionalism, teamwork and commitment to excellence for which the firm is known, but also because of the balanced approach and high regard this firm has towards its attorneys as well as its clients.  I look forward to working with my team and growing with the firm.”

Landeen attained her law degree, cum laude from the Sandra Day O’Connor College of Law, Arizona State University and her undergraduate summa cum laude from Smith College.

Dayton, Matt

Tiffany & Bosco Expands Financial Services Practice

The law firm of Tiffany & Bosco P.A. announced that Matthew D. Dayton has joined the firm’s Las Vegas Office as an associate in the firm’s national financial services practice. His practice focuses primarily on real estate, foreclosure mediation/arbitration, unlawful detainer, and bankruptcy and creditor’s rights.

Matthew is admitted to practice before the United States District Court for the Districts of Nevada and Utah.  Matthew is a member of the Southern Nevada Association of Bankruptcy Attorneys and is a committee co-chair of the newly formed Nevada Creditor Association. He received his J.D.in 2009 from the William S. Boyd School of Law – University of Nevada, Las Vegas, and his B.A. from Brigham Young University.

Mark S. Bosco, Shareholder and head of the firm’s financial services practice stated, “Matthew is a very talented and hardworking attorney, and we are pleased he has joined our firm’s national financial services practice. He will join our team in serving many of our banking and real estate clients throughout Las Vegas and Utah.

Dayton, Matt

Tiffany & Bosco Expands Financial Services Practice

The law firm of Tiffany & Bosco P.A. announced that Matthew D. Dayton has joined the firm’s Las Vegas Office as an associate in the firm’s national financial services practice. His practice focuses primarily on real estate, foreclosure mediation/arbitration, unlawful detainer, and bankruptcy and creditor’s rights.

Matthew is admitted to practice before the United States District Court for the Districts of Nevada and Utah.  Matthew is a member of the Southern Nevada Association of Bankruptcy Attorneys and is a committee co-chair of the newly formed Nevada Creditor Association. He received his J.D.in 2009 from the William S. Boyd School of Law – University of Nevada, Las Vegas, and his B.A. from Brigham Young University.

Mark S. Bosco, Shareholder and head of the firm’s financial services practice stated, “Matthew is a very talented and hardworking attorney, and we are pleased he has joined our firm’s national financial services practice. He will join our team in serving many of our banking and real estate clients throughout Las Vegas and Utah.


Frutkin Law Firm Continues to Grow

The Frutkin Law Firm has added James Arrowood to its growing roster of attorneys. This is the third attorney hired by the firm in the past year. Arrowood brings extensive experience in business law, dispute resolution, and business negotiations to the firm.

As a Senior Counsel Attorney at The Frutkin Law Firm, Arrowood focuses his practice in the areas of conflict resolution and litigation, real estate, strategic financial and tax planning, and business law. He has also developed an emerging practice related to the special legal and financial needs of successful medical professionals and groups.

Before joining the firm, Arrowood served as counsel at one of the largest law firms in the world and as in-house counsel at several companies. As a result of his experience, he gained a wide breadth of business and legal knowledge, including an appreciation for business considerations in light of legal issues. Arrowood also spent a year living in London, England where he studied international law and interned in the House of Lords (England’s equivalent of our Supreme Court/Senate at the time). After law school, Arrowood worked as a litigator for a large firm in Philadelphia and then continued on to Washington D.C., New York, and Los Angeles before making Arizona his home base in 2010.

Arrowood graduated from the law school at University of Notre Dame in 2002 after he earned dual Bachelor of Arts degrees from University of California, Irvine in 1999. He has bar admissions in Arizona, California, and New Jersey, as well as affiliations with the 9th Circuit, California District Courts, District Court for Arizona, Eastern District Court for Pennsylvania, and United States Tax Court.

The Frutkin Law Firm now consists of ten attorneys with decades of experience in the core areas of business law, bankruptcy, estate and tax planning, and civil litigation. For more information on The Frutkin Law Firm and practices areas, visit www.frutkinlaw.com.

Jaclyn Foutz

Jaclyn Foutz Joins Andante Law Group

Andante Law Group of Daniel E. Garrison, PLLC announced that Jaclyn D. Foutz has joined the firm as an attorney.  Her practice is concentrated in commercial litigation, bankruptcy, reorganization and capital recovery.  She represents creditors in collection and enforcement matters, as well as in all facets of bankruptcy proceedings and advising clients on creditors’ rights.

Daniel E. Garrison, Managing Partner of Andante Law Group stated,  “We are pleased to have Ms. Foutz join our firm.  She is a very talented litigation and bankruptcy attorney who will compliment our firm’s corporate restructuring, business bankruptcy, loan workouts and enforcement, and commercial litigation practice.

Prior to joining the Andante Law Group, Ms. Foutz was with Ballard Spahr LLP in Phoenix.  She began her legal career clerking for Justice Andrew Hurwitz at the Arizona Supreme Court.  Before re-entering private law practice, Ms. Foutz founded and was General Counsel to the Human Tribe Project, a patient support and fundraising website.

She earned her BS from the University of Arizona in 2000 and her JD in 2005 from Arizona State University, Sandra Day O’Connor College of Law.  She is licensed in both state and federal courts in Arizona and U.S. District Court for the Eastern District of Michigan.

Pamela Overton Risoleo

31 Phoenix Greenberg Traurig attorneys earn honors

The international law firm Greenberg Traurig, LLP with 50 Arizona-based attorneys, has 22 attorneys on the 2013 Southwest Super Lawyers list, an independent rating service of outstanding lawyers from more than 70 practice areas. In addition, the publication also named nine Greenberg Traurig attorneys as Southwest Rising Stars.

“We are extremely proud of this independent recognition by Super Lawyers,” said John E. Cummerford, a co-managing shareholder in Greenberg Traurig’s Phoenix office. “The professionals included on this list are exceptional and truly deserving of this honor. I’m proud of the strength and local roots of our Phoenix office which is supported by our firm’s national resources and global reach.”

Super Lawyers, a Thomson Reuters organization, is a research-driven, peer-influenced rating service of lawyers who have attained a high degree of peer recognition and professional achievement. The mission of Super Lawyers is to bring visibility to those attorneys who exhibit excellence in practice.

Six Greenberg Traurig attorneys were also recognized on the “Top 50 Southwest Super Lawyers” list. They are: Brian H. Blaney, Rebecca L. Burnham, Robert S. Kant, Jeffrey H. Verbin, E. Jeffrey Walsh and Quinn P. Williams.

Three Greenberg Traurig attorneys were included in the Super Lawyers “Top 25 Arizona Women” list. They are: Rebecca Lynne Burnham, Stacey F. Gottlieb and Pamela Overton Risoleo.

More than 60 percent of the attorneys in Greenberg Traurig’s Phoenix office are included in the 2013 ranking. The attorneys named Southwest Super Lawyers include: Gil Rudolph, Jeffrey H. Verbin (Banking), David D. Cleary (Bankruptcy), Brian H. Blaney, Robert S. Kant, Bruce E. Macdonough, Quinn Williams (Corporate/Securities), Michelle De Blasi (Environmental), John E. Cummerford, Jerry Fellows, Frank G. Long (Intellectual Property), Laurent R. G. Badoux (Labor and Employment), Nicole M. Goodwin, Stacey F. Gottlieb, Pamela Overton Risoleo, Brian J. Schulman, Peter W. Sorensen, E. Jeffrey Walsh (Litigation), Rebecca Lynne Burnham, Kevin J. Morris, David M. Paltzik and Lesa J. Storey (Real Estate). Southwest Rising Stars include: Greenberg Traurig attorneys Michael L. Aguirre, Logan V. Miller, Katherine A. Swenson and Jeremy D. Zangara (Corporate/Securities), Kimberly A. Warshawsky (Intellectual Property), Dana L. Hooper, Nathan T. Mitchler, Laura Sixkiller and Tracy L. Weiss (Litigation.)

The selection process is multi-phased and includes independent research, peer nominations and peer evaluations. Super Lawyers Magazine features the list and profiles of selected attorneys and is distributed to attorneys in the state or region and the ABA-accredited law school libraries. Super Lawyers is also published as a special section in leading city and regional magazines across the country. In the United States, Super Lawyers Magazine is published in all 50 states and Washington, D.C., reaching more than 13 million readers.


Wanslee Elected to Gust Rosenfeld Executive Committee

Gust Rosenfeld announced that Madeleine C. Wanslee has been elected to its Executive Committee, the governing body of the firm.

Wanslee is Co-Chair of the firm’s Bankruptcy, Restructuring and Creditors’ Rights Practice Group.  Her practice focuses on creditors’ rights and related state and federal court litigation, including commercial and consumer bankruptcy, loan workouts, foreclosure, deficiency and guarantor actions.  She has handled numerous appeals and has argued a case before the United States Supreme Court.  Wanslee is recognized in the Bankruptcy and Creditor-Debtor Rights Law category of The Best Lawyers in Americaâ and in the Bankruptcy and Creditor-Debtor Rights category of Southwest Super Lawyersâ.  She earned her law degree from Gonzaga University School of Law.

Founded in 1921, Gust Rosenfeld provides legal counsel to individuals, businesses, and governments. Our firm’s attorneys enjoy thriving practices in public law, litigation, finance, real estate, corporate, environmental, employment, creditors’ rights, franchise law, estate planning, and tax. Gust Rosenfeld maintains offices in Phoenix and Tucson.

Arizona Economic Forecast 2011

Arizona Bankers Association rejects bankruptcy court theory

On February 7, The Arizona Bankers Association joined 10 other western state bankers associations along with the American Bankers Association on a brief (the associations’ brief) to the Ninth U.S. Circuit Court of Appeals urging the reversal of a Ninth Circuit Bankruptcy Appellate Panel (the BAP) decision with far reaching and negative implications for real estate lenders in the western United States.

The lower court decision essentially would allow small creditors in chapter 11 bankruptcies to make the decision on whether to accept the reorganization plan, disregarding the needs of the holder of the largest claim.  It does this by segregating claims with potential and speculative third party sources of payment from the rest of the unsecured class of claimants.

“Allowing a third party guarantee to actually diminish a real estate lender’s rights in bankruptcy makes responsible underwriting that much more difficult,” said Paul Hickman with the Arizona Bankers Association.  Having a third party source of repayment adds flexibility to underwriting and ultimately allows real estate lenders to qualify more borrowers.  “Now we potentially have case law in this district that not only makes that inconsequential, but could make the deal less attractive to a lender,” said Hickman.

The lower court’s decision allows the debtor to gerrymander the creditor classes to permit a small class of unsecured claimants with a relatively small aggregate claim to accept the reorganization plan over the objection of the single asset real estate lender with a much larger claim.  The associations’ brief asserts that the lower court’s “theory . . . contradicts historical bankruptcy policy, drowns plan classification in an interpretive swamp with no logical bottom, and undermines policies on good lending practice.”

The case is In re Loop 76, LLC, Case No. 12-60021, which appeals a BAP decision, In re Loop, LLC, 465 B.R. 525 (9th Cir. BAP 2012).  The BAP decision affirmed four orders of the Arizona bankruptcy court, In re Loop 76, LLC, 442 B.R. 713 (Bankr. D. Ariz. 2010).

The 109-year-old Arizona Bankers Association represents commercial and community banks operating in the State of Arizona, irrespective of asset size or deposit base.

Download the AMICUS CURIAE BRIEF here.

Two attorneys become shareholders

Tiffany & Bosco Names New Shareholders

The law firm of Tiffany & Bosco P.A. announced that attorneys Lance R. Broberg and Benjamin A. Thinnes have been named Shareholders.

Broberg joined the firm in 2005 and his practice is concentrated in the area of general civil and commercial litigation, and focuses in matters regarding intra-corporate disputes and “business divorce.”  Broberg also serves clients with commercial landlord-tenant disputes, assists creditors in bankruptcy actions, and prosecutes appellate matters. Broberg is a 2002 graduate of Arizona State University, and received his J.D. from the University of Arizona James E. Rogers College of Law in 2005. He is actively involved in the Arizona State High School Mock Trial Program and serves as a director of the Northern Arizona Advisory Board of the American Lung Association of the Southwest.

Thinnes practices in the area of real estate transactions and finance, including purchase and sale transactions, leasing, real estate financing (including HUD insured loans for multi-housing projects), master-planned developments, and golf course and private club developments involving purchases, sales, financing, turnovers, and equity conversions.  Prior to joining Tiffany & Bosco, P.A., in 2011, Thinnes served as general counsel for one of the country’s preeminent private golf-community developers, during which time he acted as counsel in all facets of the law relating to the planning, development, and operation of private golf communities, both in the United States and abroad. He graduated from the University of Arizona, in 1996; and the University of San Diego School of Law, with a J.D, in 2002.

Michael Tiffany, managing partner and shareholder stated, “We are pleased to announce that Mr. Broberg and Mr. Thinnes have been named shareholders. They are dedicated, hard-working, and interested in their clients’ well-being. They are a great asset to our firm and to our community.”

For more information on Tiffany & Bosco and their new shareholders, visit Tiffany & Bosco’s website at tblaw.com.

Arizona’s Top Lawyers – 2012 Banking & Business/Corporate Law

Arizona Business Magazine used its own research, solicited input from legal experts, and referenced professional ratings and rankings to determine the legal professionals who made the 2012 Top Lawyers list.

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Banking Healthcare
Business/Corporate Law Intellectual Property
Construction Litigation Mergers and Acquisitions
Real Estate
Environmental Law Securities and Corporate Finance
Estate and Trust Litigation Tax



Michael A. Bosco ◆ Tiffany & Bosco
602-255-6002 ◆ tblaw.com
Bosco represents more than 40 top banks and mortgage lenders — including Freddie Mac and Fannie Mae — and private mortgage insurance companies.

Mark S. Bosco ◆ Tiffany & Bosco
602-255-6006 ◆ tblaw.com
Bosco is a lecturer at regional and national mortgage banking and default servicing seminars, and he has published numerous articles on mortgage banking, default servicing and related topics.

Scott DeWald ◆ Lewis and Roca
602-262-5333 ◆ lrlaw.com
DeWald’s practice focuses on the legal needs of high-tech, e-commerce and emerging companies and limited liability companies.

Dean Dinner ◆ Nussbaum Gillis & Dinner, P.C.
480-609-0011 ◆ nussbaumgillis.com
Negotiated and documented DIP financing transactions for both factoring companies and asset based lenders.

Richard Goldsmith ◆ Lewis and Roca
602-262-5341 ◆ lrlaw.com
Goldsmith practices primarily in the areas of lending, equipment leasing and sales, real estate, and general contract drafting.

W. Scott Jenkins ◆ Ryley Carlock and Applewhite
602-440-4890 ◆ rcalaw.com
Jenkins is a member of the fi rm’s Bankruptcy and Creditor’s Rights, Real Estate, Litigation, and Transportation practice groups.

Thomas E. Littler ◆ Gordon Silver
602-256-0400 ◆ gordonsilver.com
Littler represents debtors and creditors, trustees, official committees, and secured creditors in reorganizations in a wide range of industries.

Jared Parker ◆ DeConcini McDonald Yetwin & Lacy, P.C.
602-282-0500 ◆ deconcinimcdonald.com
Parker focuses on business restructuring and bankruptcy, litigation and creditors’ rights.

John Randolph ◆ Sherman & Howard
602-240-3000 ◆ sah.com
Randolph represents lenders in connection with workouts, prejudgment strategy and remedies and trustee’s sales foreclosures.

William G. Ridenour ◆ Ridenour, Hienton & Lewis
602-254-9900 ◆ rhkl-law.com
Ridenour’s practice emphasizes transactional, banking and corporate law.

Gil Rudolph ◆ Greenberg Traurig, LLP
602-445-8206 ◆ gtlaw.com
Rudolph representats finance companies, mortgage lenders, banks, title insurance companies and other consumer financial service providers.


Mark Barker ◆ Jennings, Haug & Cunningham, LLP
602-234-7828 ◆ jhc-law.com
Barker has a busy commercial transaction practice representing financial institutions and Arizona small businesses, commercial litigation practice with an emphasis on surety law, construction law and business dispute resolution.

Edwin D. Fleming ◆ Burch & Cracchiolo, P.A.
602-234-9921 ◆ bcattorneys.com
Fleming has successfully prosecuted and defended professionals, including lawyers and accountants, in cases involving high-stakes financial fraud and securities issues.

Dan Garrison ◆ Andante Law Group
480-421-9449 ◆ andantelaw.com
In 2007, Garrison received the “Turnaround of the Year” Award from the Arizona Chapter of the Turnaround Management Association.

Larry A. Hammond ◆ Osborn Maledon
602-640-9361 ◆ omlaw.com
Hammond served as an Assistant Watergate Special Prosecutor in 1973- 1974. One of his specialities is commercial litigation.

John L. Hay ◆ Gust Rosenfeld PLC
602-257-7468 ◆ gustlaw.com
Hay practices general corporate and commercial law, with emphasis on representing small- and medium-sized businesses.

John A. Klecan ◆ Renaud Cook Drury Mesaros, PA
602-307-9900 ◆ rcdmlaw.com
Klecan has been involved in precedent-setting products liability litigation, in Arizona and other jurisdictions.

P. Robert Moya ◆ Quarles & Brady
602-230-5580 ◆ quarles.com
Moya’s practice focuses on middle-market and emerging entrepreneurial and growth companies.

Brett Johnson ◆ Snell & Wilmer
602-382-6312 ◆ swlaw.com
Johnson’s practice includes representation in business, export, government contracting, and health care matters.

Michael Manning ◆ Stinson Morrison Hecker LLP
602-212-8503 ◆ stinson.com
Manning’s practice focuses on antitrust, business litigation, class actions, business litigation, governance, risk and compliance.

Kevin Olson ◆ Steptoe & Johnson
602-257-5275 ◆ steptoe.com
Olson’s focus is general corporate advice, mergers and acquisitions, securities and corporate finance, and other commercial transactions.

Brian Spector ◆ Jennings Strouss
602-262-5977 ◆ jsslaw.com
Spector is a business lawyer and litigator whose practice focuses on debt resolution, bankruptcy litigation and collection matters.

Arizona Business Magazine has used its best efforts in assembling material for this list, but does not warrant that the information contained herein is a complete or exhaustive list of the top lawyers in Arizona, and hereby disclaims any liability to any person for any loss or damage caused by errors or omissions herein.

Arizona Business Magazine March/April 2012

Income Tax Traps

Short Sales And Foreclosures: Income Tax Traps For The Unwary Homeowner

Short Sales and Foreclosures: Income Tax Traps for the Unwary Homeowner

by Stuart Pack, J.D. and Kelly C. Mooney, J.D., L.L.M.

When considering a short sale, foreclosure or other strategic default under the terms of a mortgage or deed of trust, most homeowners and many professionals focus on the immediate concern of whether the transaction will result in personal liability for any debt deficiency resulting from the short sale or foreclosure.

However, the income tax consequences of a short sale or foreclosure should also be given serious consideration, as, in many cases, the possibility of negative income tax consequences could outweigh any potential benefits of a decision to short sell or walk away from the property.

For federal income tax purposes, a short sale of real property or a foreclosure upon real property (whether via a judicial foreclosure or a trustee’s sale) can trigger two distinct types of income tax consequences, depending on whether the debt at issue is “recourse” or “non-recourse” for federal tax purposes. These income tax consequences and the differences between recourse and non-recourse debt are discussed below.

1. Tax Consequences of a Short Sale or Foreclosure With Respect to Recourse Debt

If the debt in question is recourse debt for federal tax purposes, any short sale or foreclosure that involves the forgiveness or cancellation of all or a portion of the debt typically triggers the recognition of (a) cancellation of indebtedness (“COD”) income to extent that the amount of the forgiven debt exceeds the fair market value of the foreclosed upon or short sold property; and (b) gain or loss from a “deemed” sale or exchange of the foreclosed upon or short sold property (i.e., the taxpayer is treated as though he or she sold the property for federal income tax purposes). Consequently, the federal income tax consequences of a short sale or foreclosure with respect to recourse debt are bifurcated between the recognition of COD income on the one hand and the recognition of gain or loss on a deemed sale or exchange of the property on the other.

(a) The COD Income Component

COD income is the term tax professionals use to describe the kind of income that arises for tax purposes when debt is cancelled or forgiven for less than its full face or principal amount.  COD income is specifically included in a taxpayer’s gross income under Section 61(a)(12) of the Internal Revenue Code.  Importantly, COD income is always treated as “ordinary” income for federal tax purposes, such that the tax rates applicable to ordinary income (which can be as high as 35% for individuals) apply to COD income.

(b) The Sale or Exchange Component

Like any sale or exchange of real property, the “deemed” sale or exchange of the short sold or foreclosed upon property that occurs upon the cancellation of recourse debt can trigger the recognition of gain or loss.  The amount of gain or loss is determined by comparing the fair market value of the property at the time of the short sale or foreclosure to the taxpayer’s adjusted tax basis in the property.

Most often, due to the current economic situation, short sales or foreclosures result in a loss because the taxpayer’s basis in the property exceeds the property’s fair market value.  In the event that the taxpayer held the property as a capital asset for a sufficient period of time, the gain or loss recognized on the deemed sale will be treated as capital gain or capital loss for federal income tax purposes.

While the recognition of capital gain can be beneficial, due to the lower (i.e., 15%) tax rate on capital gain, the recognition of capital loss may not be as helpful.  In general, capital losses can only be used to offset capital gain and cannot be used to offset ordinary income (like COD income), although individuals can use up to $3,000 in capital losses each year to offset ordinary income.

2. Tax Consequences of a Short Sale or Foreclosure With Respect to Non-Recourse Debt

If the debt in question is non-recourse debt, any short sale or foreclosure that involves the forgiveness or cancellation of all of a portion of the debt will only trigger the recognition of gain or loss on a “deemed” sale or exchange of property.  The forgiveness of non-recourse debt, in cases involving a short sale or foreclosure on real property, does not trigger the recognition of COD income.  In cases involving non-recourse debt, the amount of the gain or loss is determined by comparing the outstanding amount of the debt to the taxpayer’s adjusted tax basis in the property.  Again, the character of the gain or loss depends on whether the taxpayer held the property as a capital asset.

3. Distinguishing Recourse from Non-Recourse Debt

Often, the most difficult component in determining the likely tax consequences of a short sale or foreclosure is ascertaining whether the debt at issue is recourse or non-recourse for federal tax purposes.  In essence, “recourse” debt is debt for which the borrower is personally liable and “non-recourse” debt is debt for which the borrower is not personally liable, but which is usually secured by other assets, such as real estate.  That being said, a number of factors go into determining whether a particular debt is recourse or non-recourse, such as the language of the debt instrument, the applicability of any State anti-deficiency statutes (for example, Arizona’s anti-deficiency statutes may be viewed as turning an otherwise recourse debt into a non-recourse debt in cases in which the debt is purchase money and the other statutory requirements are satisfied), and, in some cases, the manner in which the debt is foreclosed upon.  Given the complexities that can arise, it is recommended that a tax or real estate professional be contacted for appropriate advice.

4. Exceptions and Exclusions

In cases in which a foreclosure or short sale is likely to trigger the recognition of taxable income, whether the income is COD income or capital gain, all may not be lost.  The Internal Revenue Code provides a number of exceptions and exclusions to the recognition of these types of income, one or more of which might apply.  Again, in cases in which the recognition of COD income is likely, a tax professional should be consulted to determine if any exceptions or exclusions are likely to apply.

(a) COD Income

Section 108 of the Internal Revenue Code provides a number of exclusions and exceptions to the recognition of COD income.  In cases involving a short sale or foreclosure, the most commonly applicable exclusions include:

i. Mortgage Forgiveness Debt Relief Act

Codified as Section 108(a)(1)(E) of the Internal Revenue Code, this Act enables taxpayers to exclude up to $2 Million of COD income, so long as the cancelled debt was secured by the taxpayer’s principal residence and was incurred in the purchase, construction, or substantial improvement of the principal residence.  However, this exclusion is only in effect through December 31, 2012.

ii. Insolvency

When a taxpayer is “insolvent” for federal income tax purposes immediately before the event triggering the recognition of COD income, the COD income can be excluded from federal income tax to the extent of the taxpayer’s insolvency.

iii. Bankruptcy

If a bankruptcy petition is filed prior to the short sale or foreclosure, the taxpayer will not be required to recognize COD income by reason of the discharge.  However, if the bankruptcy petition is filed after the short sale or foreclosure then, unless some other exclusion applies, COD income would be recognized.

(b) Capital Gain

Under Section 121 of the Internal Revenue Code, any capital gain recognized on a “deemed” sale or exchange of a principal residence can be excluded from taxable income to the extent of $500,000 for married persons filing joint tax returns or $250,000 for unmarried persons.

Taxpayer (T), a confirmed bachelor, buys a one family house in 1990 for $100,000 and finances it, in part, with a $50,000, 15-year mortgage loan.  In 2005, immediately after the mortgage loan is paid off in full, T decides to take advantage of the skyrocketing increase in real estate prices by taking out a new interest only mortgage loan in the amount of $300,000.  As part of the mortgage process, T’s house was appraised by his mortgage lender at $400,000.  T uses $250,000 of the new mortgage loan to buy a vintage DeLorean automobile and pay off his credit card debt and uses the other $50,000 to substantially improve the house.  In 2010, T comes to the unhappy realization that the fair market value of his house has plummeted to $200,000 and decides to short-sale the house.  T finds a buyer for $200,000 and T’s lender agrees to accept the $200,000 short sale proceeds to release the house from the lender’s deed of trust (and, in writing, the lender also agrees to release T from personal liability for the $100,000 deficiency).  What are the likely federal income tax consequences to T?

1. Capital Gain from the “Deemed” Sale of House

Since T bought the house in 1990 for $100,000 and made $50,000 of substantial improvements to the house, T’s adjusted tax basis in the house is $150,000.  Since T was deemed to have sold the house as part of the short sale in 2010 for $200,000, T will recognize $50,000 of capital gain (even thought T’s lender and not T, will receive all of the proceeds from the short sale).  If the house is T’s primary residence and other requirements of Internal Revenue Code Section 121 are satisfied, the $50,000 capital gain can be excluded from T’s taxable income because of the $250,000 exclusion right.  If the house was not T’s primary residence, then the $250,000 exclusion does not apply and T will be required to recognize the $50,000 of capital gain.

2. Cancellation of Debt Income

Assuming the new mortgage loan is recourse debt for federal tax purposes (because the debt is non-purchase money, the debt may not be treated as non-recourse under an applicable anti-deficiency statute in the case of a short sale), T would also recognize $100,000 of COD income.  If the house was T’s primary residence, then the Mortgage Forgiveness Debt Relief Act would enable T to exclude up to $50,000 of the $100,000 of COD income (because $50,000 of the $300,000 loan was used to substantially improve the house, it would be considered “qualified principal residence indebtedness”).  However, because the other $50,000 of the $100,000 deficiency was used to purchase the DeLorean and pay off T’s credit card debt, the other $50,000 would be taxable as ordinary COD income, unless T can establish he was insolvent at the time of the short sale or one of the other exclusions to the recognition of COD income applies.  If the house was not T’s primary residence, then the Mortgage Forgiveness Debt Relief Act would not apply and the entire $100,000 deficiency would be treated as taxable COD income, unless T can establish he was insolvent at the time of the short sale or one of the other exclusions to the recognition of COD income applies.

Of course, as each individual homeowner’s situation may vary, it is vital in considering any short sale or foreclosure to discuss your individual income tax situation with a tax professional.

For more information about income tax traps:

Stuart Pack, J.D. is a partner with the law firm of Nagle Law Group, P.C. in Scottsdale, Ariz. He concentrates his practice in the area of commercial and residential real estate law. He can be reached at Stuart.Pack@naglelaw.com or 602-595-6951 (x122).

Kelly C. Mooney, J.D., L.L.M. (Taxation) is a shareholder with the law firm of Gallagher & Kennedy, P.A. in Phoenix, Ariz. She practices in the area of federal tax law, with an emphasis on the taxation of individuals, corporations, partnerships, tax-exempt entities, and civil tax controversy matters. She can be reached at kcm@gknet.com or 602-530-8075.

The "B" Word 2008

The “B” Word-Bankruptcy isn’t always a bad thing

The word “bankruptcy” sends chills down the spines of many business owners and executives as they envision certain financial demise.

b_word 2008

But bankruptcy is no longer the frightening phenomenon it once may have been, particularly in the business realm. Chapter 11 bankruptcy has become an extremely useful business tool for a company to reorganize its operations, accomplish a sale of assets, obtain new financing or achieve a capital restructure.

The following are examples of challenges a business often faces:

  • A new business has not quite met revenue expectations.
  • The equity structure is outdated or unworkable.
  • The business owns excess real property it wants to sell or the business wants to acquire additional property.
  • The business has been threatened with litigation.
  • The business wants to refinance, but the lender has expressed concern about financial or other issues.
  • The owners of the business want to merge with another entity.

The most common use of the Chapter 11 bankruptcy process is one designed to restructure the company’s balance sheet. A company that wants to extend or refinance onerous debt, eliminate burdensome contracts or leases, and/or bring in new capital can generally accomplish these goals by a Chapter 11 filing that provides these opportunities and a temporary safe haven.

But Chapter 11 isn’t just for severely financially distressed entities. There are myriad other business reasons for filing a bankruptcy. For example, bankruptcy may be a good alternative for a client who owns some troubled properties and other healthy ones. Structuring a “roll up” and then using the bankruptcy process to propose a long-term solution can provide the necessary and ultimate protection for the distressed properties. Other common business transactions such as sales, mergers and acquisitions may be accomplished in a more beneficial fashion for all parties under the protective umbrella of Chapter 11.

A general knowledge of bankruptcy and the benefits it can provide will arm business owners, management and their advisors with a repertoire of creative solutions to meet business challenges and attain the companies’ ultimate goals.

An overview
The purpose of a Chapter 11 bankruptcy is to reorganize. It may include restructuring debt, altering operations, eliminating equity, selling assets or any combination of these things. The reorganization is accomplished through a document called a “plan of reorganization” in which the debtor describes how it intends to pay creditors or treat equity interests. Creditors and equity interests have the opportunity to vote in favor of or against the plan. The aim is to have the plan confirmed by the bankruptcy court, at which time it becomes a binding contract on all affected parties.

A Chapter 11 proceeding is commenced quite easily by filing a simple two-page “petition” with the bankruptcy court. At the time of the filing, an “estate” is created and all assets owned by the debtor prior to the filing are considered to be property of that estate. The debtor is referred to as the “debtor in possession” (DIP). Filing of the case triggers an immediate imposition of an injunction called an “automatic stay.” The stay prevents creditors from proceeding with any action against the DIP, and entitles the DIP some “breathing room” while assets are marshaled or while a reorganization is being developed.

In many respects, the general operations of a business continue in Chapter 11 as they did prior to the filing. The DIP can continue to buy inventory, produce products and sell merchandise as long as the transactions are in the ordinary course and scope of business. Nevertheless, certain actions such as the payment of pre-petition debt, the use of cash proceeds that may be subject to a lien, and the sale of major assets are prohibited unless the bankruptcy court approves them.

The plan of reorganization sets forth the means for payments to the company’s creditors. The general rule is that all claimants on the same level must be treated equally and must be paid in full before the next level can receive payment. Other provisions include financing arrangements or capital contributions and the composition of the company’s management.


The final step is plan “confirmation” by the bankruptcy court. In order for the DIP to confirm a plan, it must obtainthe affirmative vote of all the classes of creditors it has proposed. However, the bankruptcy code permits the DIP to confirm a plan even if it doesn’t have all the needed votes, as long as the plan complies with certain specific sections of the code. Once the plan is confirmed, a bindingcontractbetween the debtor and its creditors is created and the debtor emerges from bankruptcy. All previous obligations to and claims by creditors are discharged and are replaced by therepayment orother obligations created by the plan. The “reorganized” debtor can have a fresh start.

Of course, there are many specifics and nuances to each bankruptcy case. For a comprehensive read on bankruptcy, you can download this guide at www.jsslaw.com/publications.aspx.

Carolyn Johnsen is a member of Jennings Strouss & Salmon. She can be reached at 602-262-5906 or cjohnsen@jsslaw.com