This article is reproduced with permission from Spidell Publishing, Inc.
Taxpayers were liable for additional tax after the California Franchise Tax Board (FTB) adjusted the reported basis in the home they sold in 2007. The taxpayers increased their basis in the home by factoring in the furnishings but did not then report the part of the sale allocated to the furnishings.
The taxpayers sold their house and its contents for $7,150,000. One of the sale’s documents set aside $400,000 from the purchase price and specified that sales commissions were not to be paid on that amount. The $400,000 was listed as “paid for furniture.” However, when calculating their gain on the sale of the residence, the taxpayers used a selling price of $6,750,000 and had factored in the basis of their personal property, which deflated the gain reported. The taxpayers’ many arguments all fell flat: They argued the FTB undervalued the personal property and, as support, presented several home sales in their area. However, these were sales of homes that did not include furnishings. They also argued that because of the quick turnaround on the sale, they did not have time to create an inventory or attribute value to the items. The FTB’s argument was that the taxpayers had isolated the real property when reporting gain realized, but combined the basis of the real property and personal property when reporting their basis. The FTB looked at the way the sale was reported and noted that the taxpayers had reported a sale price of $6,750,000 listed on their Schedule D and on their 1099-S, neither of which is used to report sales of personal property, only real property. The FTB concluded that its recomputation of basis excluding the personal property basis was correct.
The backstory is the real story
After reading a case document, most of the time the very next thing to do is an online search of the taxpayer. This is where we find out things like the taxpayer is a famous actor using his given name on the case document (Giovanni Ribisi) or that the perpetrator of a stolen tax refund is a second-level LinkedIn connection (Stephen McDow).
Once again, the internet did not disappoint. When we searched the taxpayers’ names, the second hit was a story about their purchase of the Los Tiempos mansion, formerly owned by iconic Los Angeles Times publisher Norman Chandler. To buy Los Tiempos, the taxpayers had sold their more modest mansion in the 2007 whirlwind deal that included their furnishings, at the height of the housing bubble. The buyers? Britney Spears and Kevin Federline.
In making their arguments to the Board regarding the valuation of their 2007 sale, the taxpayers questioned the FTB’s motive in going after them, saying they were unable to pay the extra tax and alluding to a fraud scheme that wiped out their finances. That fraud scheme was the purchase of Los Tiempos. It allegedly had been restored by the previous owner, an interior designer, but upon moving in, the taxpayers discovered black mold, faulty electrical wiring, and sewage leaks under the house. They sued the sellers, their brokers, and the contractors who had done work on the house.
They then spent almost $3 million on repairs, necessitating selling off family heirlooms and raiding their son’s trust fund. At one point, the taxpayers hooked up with the reality show “Flipping Out” to do some of the repair work, and in true reality TV style, that relationship ended spectacularly when the taxpayer-wife got into a screaming match with the show host. You know what they say: May you live in interesting tiempos.
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