coalition to save seller financing (cssf)...

COALITIONTOSAVESELLERFINANCING(CSSF)TRUTHINLENDINGACTANDREGULATIONZRULES:IMPACTONTRANSACTIONSANDSELLERS‐‐INSTALLMENTSALESOFDWELLINGS;INCLUDINGRECOMMENDATIONSFORCHANGESTOREGULATIONZ.WhitePaperInitialDraftascompletedbytheCSSFonJuly15,2014www.savesellerfinancing.org

Copyright©2014.AllRightsReserved.V.2.0

AUTHOREDBY:

ArtDavis,WashingtonDCbasedregisteredadvocatewithcontinuouspublicandprivatesectorfederalregulatoryexperiencesince1986;and

CSSFSTEERINGCOMMITTEEMEMBERS:

RicThom.

Ric Thom has been involved with realpropertyinstallmentsales(sellerfinancing)forover 30 years. He owns Security Escrow inAlbuquerque. It is the oldest and largestescrow company in NewMexico. The escrowcompany acts as a third party custodian ofdeeds and payments for private party realproperty installment sales. He has had theprivilege of working with over 60,000customers who have bought or sold realpropertyusingsellerfinancing.

Richasalsobeenarealestatebrokerfor30years.Hehasservedontheboard of directors of both the Greater Albuquerque Association of Realtors(GAAR)andTheRealtor’sAssociationofNewMexico(RANM). GAARnamedhimRealtoroftheYearin2012andearlierpresentedhimwiththeMaryAnnFisherVolunteerLeadershipAward. Theseare themostprestigiousawardsyou can receive in the NewMexico real estate industry. Thesewere givenprimarily for his work with realtors and consumers in the area of sellerfinancing. RANMalsogaveRic thePeggyComeauLeadershipaward forhiswork at the state and federal level in the area of seller financing. He iscurrently serving his third three year term as a trustee of New Mexico’sREALTORS®PoliticalActionCommittee,anonpartisanPAC.

He developed and instructs a four hour course on seller financing,“Practical Application of Real Estate Contracts”, for the New Mexico RealEstate Commission. Ric is now on the national steering committee of theCoalitiontoSaveSellerFinancing.Theirgoalistosimplifyandstreamlinethenew seller financing rules under amended TILA and make them moreconsistentwithotherinstallmentsalerulesinReg.Z.

Philip(Phil)Dryden.

Phil began his escrow career at UnilandEscrow, Inc in 1985. He ran their contractcollection(accountservicing)departmentfor3years, before being promoted to Manager.Since that time, he has changed the companynametoEvergreenNoteServicing,purchasedthe company from its founding owners, andexpandedthecompanyto7offices,inspanningfromArizona toWashington. Hehasmanagedover his career over 70,000 seller financedtransactionsforcustomersinvariousstates.

HehasservedasPresidentoftheEscrowAssociationofWashington.Heis currently the1stVicePresidentof theAmericanEscrowAssociation. PhilwasawardedtheEarl J.Barrettawardfordedicationtotheescrowindustryby the American Escrow Association in 2012. He holds both an EscrowOfficerlicenseandLimitedPracticeOfficerlicenseintheStateofWashington.In 2003 he was appointed by Governor Locke to serve as an EscrowCommissionerfortheStateofWashington.HehasservedastheChairmanforthe Washington State Escrow Commission since 2008. He holds EscrowOfficer licenses in Idaho, Arizona, Washington, Oregon, Nevada, and a RealEstateBrokerlicenseinCalifornia.

SellerFinancedInstallmentSalesofRealEstatewithDwellings;DoddFrankAmendmentsandReg.Z

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Overview—July2014:TheDodd FrankWall StreetReform andConsumer ProtectionAct (PL 111‐203) (herein referred to as both “Dodd Frank” and the “Dodd FrankAmendments”),asimplementedbytheConsumerFinancialProtectionBureau(CFPB)hasbroughtnewandlikelyharmfulconstrictingrequirements,unlesscorrected, in the use of seller‐provided extensions of credit to create homeownershipformanyAmericans.Seller financing in its standardmodelhas longprovidedanavenue tohomeownershiptoyoungcouples(amongmanyothers)withcredit issues, tofindfinancing for nonconforming propertieswhich have dwellings and for otherimportantandusefulpurposes.Thismodelhasnevercarriedwithitthetypesofconsumerabuseorsystemicrisks totheUnitedStateseconomytheDoddFrank Amendmentswere intended to address in their consumer protectionpurposes.Thelatterincludes—

(a) Isacompensatedloanoriginator(LO)utilizedtoobtaintheloan?;(b) Ifso,doestheLOpresenttheborroweraloanwiththelowest

availableinterestrateandaretherefeaturessuchasprepaymentpenalties,negativeamortizationorballoonpayments?;and

(c) Doestheloanprovidetheborrowerwiththelowestpossiblecost,takingintoaccountoriginationpoints,fees,anddiscountpoints.

In addition, Dodd Frank outlawed so‐called back‐end compensation in theformof “yieldspreadpremiums”aspartof thepricingof the loan. But thatstillleavesthequestionsoffeesandcostsinconnectionwithloanoriginationand pricing and features that can affect annual payments and therefore arefairlysubjecttoCFPBscrutinyinrulemaking.It is critical to distinguish seller financing in its standard form whichimportantlydoesnothavefeaturesabusivetoborrowers.

1. Thesellerworksdirectlywiththebuyeranddoesnotneedaloanoriginator.Itisanopenandfairtwo‐partynegotiation;

2. Theinterestrateisnegotiatedbasedonrelevantfactsandcircumstancesofthetransaction.Thoseincludetimevalueofmoneyriskandotherfactorsincluding:(1)therealitythatitistheseller’sequitywhichisservingasthesourceofthecredit;(2)thecreditworthinessoftheborrower;and(3)whetheranyother


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sourceofconventionalcreditisevenavailableforthepropertytypeandlocation;Further,balloonsareutilizedwhentheyfacilitatetheinstallmentcontractinatransparentmattertomakethetransactionbalancedbetweenthepartieswhereageandaccesstothedeferredreceiptofequitymakeamaterialdifference.

3. Theloanprovidestheborrowerwiththelowestpossiblecostbecausetherearenooriginationpoints,feesand/ordiscountpoints.

4. Amortizationis15to30yearsandballoons5to7yearsoutbutsomeballoonsare10yearsout.Thatmakessenseasitgivesthebuyerincentiveatareasonablepointintimetorefinanceintoaconventionalmortgagethusgettingthesellertheirequity.

5. Prepaymentpenaltyprovisionsaresometimesaddressedbystates;forexampletheyarenotallowedinNewMexico.

ThisWhitePaperanalyzesco‐existinglawindetail incomparisontocurrentReg. Z; it provides data on households that exist as owner‐occupied solelybecauseofsellerfinancedinstallmentsales;anditrecommendsanadditionalregulatoryexemptionmodelconsistentwiththatco‐existingandlong‐existingbody of law. Further the recommendation does not violate Congressionalintentonconsumerprotections.Indoingso,wetakeintoaccountreactionsto‐date in states. This includes a retreat by certain professionals who arelicensedintheirfield,notcompensatedasloanoriginators(orotherwiseforhelpingtoarrange—butnotnegotiatethetermsof‐‐theextensionofcredit),and have historically assisted the parties in the formalities of their mutualdealings.TheretreatisduetolegalconcernsaboutbeingclassifiedasaloanoriginatorunderCFPBregulationsand legaluncertaintyprimarilyundertheabilitytorepayrequirements.(Inspiteofnewsubsection129C(a)underTILAbeing directed solely to “creditors.”) The retreat is coupled with thoseprofessionals feeling so limited and subject to uncertain legal risk that theyrecommend that the seller seek legal advice and hire a licensed loanoriginator (if one can be found and is willing to help) which immediatelyimposes two new and unnecessary costs on the transaction. Finally thisrecommendation takes into account that Congress allowed for a flexibleapproach to regulations, banning only active YSP’s in the Dodd FrankAmendments. Thus other credit terms need to be considered in acomponentized balancedmanner and our recommendation does so. FinallyCongresshasallowedtheregulator(CFPBnow)underTILAtoexemptclasses


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oftransactionsfromTILAsinceatleast1996.ThisWhitePaperconsidersthefactorsthatgointothisanalysis.Further,astoCFPBdiscretionaryrulemakingauthorityundertheDoddFrankAmendmentsoursuggestedmodel forasafeharbor isNOTatoddswiththeCongressionaldirectiveasfollows:

DISCRETIONARYREGULATORYAUTHORITY.—‘‘(1)INGENERAL.—TheBoardshall,byregulations,prohibitorconditionterms,actsorpracticesrelatingtoresidentialmortgageloansthattheBoardfindstobeabusive,unfair,deceptive,predatory,necessaryorpropertoensurethatresponsible,affordablemortgagecreditremainsavailabletoconsumersinamannerconsistentwiththepurposesofthissectionandsection129C,necessaryorpropertoeffectuatethepurposesofthissectionandsection129C,topreventcircumventionorevasionthereof,ortofacilitatecompliancewithsuchsections,orarenotintheinterestoftheborrower…..”

BackgroundInformationandDefinitions:We see installment sales on detached single family homes, condos, townhomes,coops,mobilehomesandland,andmobilehomesnotattachedtoland.Also we see these with duplexes, triplexes, rental houses, second homes,vacation homes and apartments. Sometimes the property might have cityutilitiesormightnot.Sometimes itwillhaveawellandorseptic tankornoimprovementsatall.Somepropertieshavepublicelectricity,somearecoop,some are off the grid and use solar or wind power for electricity. We seeinstallment saleson ranchesand farmswithadwellingandyear‐roundandsummercabins.Theterm“installmentsale”isusedinthisWhitePaperbecauseitconveystheproperdescriptionofthecredittransaction.Namelythesellerextendscreditby not immediately receiving all of their equity in the property in cash orotherpropertyatthetimethetransactionisagreedtobybothparties. Thatequity is receivedover timeby regular installmentpayments as set forth inthe instruments of sale and security. Other commonly used terms such as“ownerfinancing,”contractfordeedor“sellercarryback”meanthesameforthesepurposes.


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Credit extended by a seller for the buyer’s acquisition of a dwelling is anessential need for any form of credit to be available with certainnonconformingproperties.Thisistrueinmanyjurisdictionsbutparticularlyin more remote or rural areas where other forms of credit have nothistorically beenoffered. This is also true for an entire rangeof needs andcircumstancesofmany,manyAmericanconsumers.SeeattachedAppendixAforIRSdatademonstratingthisacrossallmiddleandlowerincomelevelsaswellassomehigherincomepersons. Thusseller‐providedcreditisacriticalmainstayoftherealestatefinancesectoroftheeconomy.Statelawincludingcaselawisbothsubstantialandwell‐developedacrosstheUnitedStates.ItisnotthepurposeofthisWhitePapertoreviewvariousstateapproaches to treating the installment contract as a mortgage, or to coverrelatedrights,dutiesandremedies.ReferenceinformationisprovidedintheSectioncalledResourcesandSources.Ratherwepresumejurisdictionof thefederallawundertheTruthinLendingActandReg.Z(andotherprovisionsoffederallaw)underotherwiseapplicablecoveragerulestoinstallmentsales.Federalregulationoftherealestatetransactioninvolvingextendingcredit.Creditor:The installment seller of real estate who offers sales credit would notgenerally be covered by the Truth in Lending Act (TILA) because of thestatutory requirement of regular extension of credit. However, if thatrequirement(andothersdiscussedbelow)aremetthesellerisacreditor,thetransaction is covered, and a number of legal provisions flow therefromincludingthoseinTILA’simplementingrulescontainedinRegulationZ.TILAsection103definesacreditorasapersonwhoregularlyextendscredit(to a natural person) repayable in four ormore installments or forwhich afinancechargeismadeandisthepersontowhomthedebtispayableontheface of the instrument. The latter requirements are almost always met ininstallment sales of real estate. That leaves the question of regularity ofextendingcredit.Reg. Z offers a bright line test—“regularly extending credit” means for atransactionsecuredbyadwellingmorethanfivetimesduringthepreceding


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orcurrentcalendaryear.“Dwelling”indefinedwithinReg.Zasaresidentialstructurethatcontains1to4units,whetherornotattachedtorealproperty.Oneother setofbright line tests apply to this term. UnderTILA, a seller isregularlyextendingcreditifthepersonmakesatleasttwohigh‐rateloansasdefinedunderTILAwithina12‐monthperiodoronesuchloanina12‐monthperiodthroughamortgagebroker.Ifsothepersonisacreditorevenfornon‐high‐rateloansinthatperiod.There is also a dollar exemption brought in byDodd‐Frank amendments toTILA,$50,000tobeprice‐indexadjustedannually.Howevertheexemptionistakenaway if the credit is securedby real propertyor otherwise if it is theprincipal residence of the consumer. Hence where dwellings serve assecurity for the credit extension this exemption is only a barely marginalconsiderationunderthecoveragerules.Reg. Z only covers transactions in which credit is primarily for personal,family,orhouseholdpurposes.Thesepurposesandthiscoveragecomponentare reflected in the manner in which the term “dwelling” is defined.Accordingly a principal residence, second home, other 1‐4 unit residentialstructure providing personal enjoyment, satisfaction, or use, but alsocombinedwithaninvestmentintentforlaterre‐sale,areallequallycoveredifacquiredbyanaturalpersonforthosepurposesinthecredittransaction.Distinguishing credit transactions involving business, commercial oragricultural purposes, which are exempt under section 104(1) of TILA, isgenerally outside the scope of this White Paper. However we note theCommentary under section 1026.3b‐‐ 4 and 5 in full‐‐that importantlyaddressesoccupiedandnon‐occupiedrentalproperty.(Wherethe“deeming”specialrulesdonotapply,thereisnobrightlineruleandprecatorylanguageinvolvingfactorscomeintoplay—thus“primarilyforbusinessorcommercialpurposes”isbasedonfactsandcircumstancesincludingfactorsthat“should”beconsidered.)

NON‐OWNER‐OCCUPIED RENTAL PROPERTY. Creditextended to acquire,improve, ormaintain rental property (regardless of the number of housingunits)thatisnotowner‐occupiedisdeemedtobeforbusinesspurposes.Thisincludes,forexample,theacquisitionofawarehousethatwillbeleasedora


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single‐family house that will be rented to anotherpersonto live in. If theowner expects to occupy the property for more than 14 days during thecomingyear,thepropertycannotbeconsiderednon‐owner‐occupiedandthisspecial rulewill not apply. For example, a beach house that the ownerwilloccupyforamonthinthecomingsummerandrentouttherestoftheyearisowneroccupiedandisnotgovernedbythisspecialrule.(Seecomment3(a)‐5,however,forrulesrelatingtoowner‐occupiedrentalproperty.)

OWNER‐OCCUPIED RENTAL PROPERTY. Ifcreditis extended to acquire,improve,ormaintainrentalpropertythatisorwillbeowner‐occupiedwithinthecomingyear,differentrulesapply:

i. Creditextendedtoacquiretherentalpropertyisdeemedtobeforbusinesspurposesifitcontainsmorethan2housingunits.

ii. Creditextendedtoimproveormaintaintherentalpropertyisdeemedtobeforbusinesspurposesifitcontainsmorethan4housingunits.Sincetheamendedstatutedefinesdwellingtoinclude1to4housingunits,thisrulepreservestherightofrescissionforcreditextendedforpurposesotherthanacquisition.Neitheroftheserulesmeansthatanextensionofcreditforpropertycontainingfewerthantherequisitenumberofunitsisnecessarilyconsumercredit.Insuchcases,thedeterminationofwhetheritisbusinessorconsumercreditshouldbemadebyconsideringthefactorslistedincomment3(a)‐3.

RESPADefinitionofFederalRelatedMortgageLoans“Federallyrelatedmortgageloans”underRegulationX,whichimplementstheAct referenced herein, include installment sales contracts on otherwisequalifyingresidentialpropertyifthecontractisfundedinwholeorinpartbyproceeds of a loanmade by a creditor subject to the applicable regulation.Specifically the Real Estate Settlement Procedures Act (RESPA) covers anycreditor that makes or invests in residential real estate loans aggregatingmorethan$1,000,000peryear.HenceRESPAcoverageisbasedonthemorethan5transactionscountduringthecurrentorprioryearandaggregatinginexcess of the onemilliondollar amount during any12‐month count period.Overall this reflects a consistency of federal law using the same basic


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thresholdforimposingtherules,requirementsandsanctionsofRegulationXonasellerusinganinstallmentsalescontract.“OfferorExtend”CreditandCommentonIntegratedDisclosureRule.In addition to theperson (i.e., only if a creditor) and transactional coveragerules there is also coverage based on credit being offered or extended. Wenotebrieflyhere that theCFPB’sRuleon combiningTILAandRESPA (earlyandfinal)disclosuresadoptsforcoveragepurposesthethresholdofthe5ormorerequirementtobeacreditor. ThatRuleiseffectiveAugust1,2015.Inotherwords sellers using an installment salewho are also creditorswill berequiredforloanapplicationsreceivedonorafterthe2015effectivedatetoprovidetimelytheearlydisclosure(calledtheLoanEstimate‐‐initialTruthinLendingstatementcombinedwiththeRESPAGoodFaithEstimate)aswellasthe final disclosure 3 days prior to consummation (called the ClosingDisclosure‐‐the final Truth in Lending Statement and the successor to theRESPAHUD‐1). BUTONLY IF theymeet thegreater than5 threshold. Thismayormaynotbeproblematicinpracticeforsellersindeterminingwhethertheloanapplicationrequirementismet(6factortest)andotherwise,butthekeypointhereisthattheCFPBpolicydecisionwastoaddthisresponsibilitytosellersusingan installmentpaymentarrangementONLYIF theymeet themorethan5timesthreshold.Weagreewiththatdecisiongiventheenormityof the disclosure duties and ramifications under accuracy related rules,tolerancesandotherwise. TheotherkeyistheconsistencyofthatRulewithpre‐existing thresholds for requiring credit‐related disclosures involvingresidentialmortgageloantransactions.Theyallarebasedon5ormoreinthepreviousorcurrentcalendaryear.CommentonFederalTaxLaw.In general federal tax law takes a sympathetic approach to the installmentsalessellerwhorealizesataxablegaininasalestransactioneither(a)oftheirownhome(principalresidence)throughastatutorygainexclusion;or(b)asauser/investor by allowing recognition of capital gain under the installmentmethod of section 453 of the Internal Revenue Code. In other words asrealizedgainisreceiveditisonlyrecognizedintheyearreceivedforincometaxpurposes.


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However the special exclusionanddeferralof gain rules just referencedaresubject tobeing takenaway ina re‐acquisition. InaveryrecentregularTaxCourt Opinion (Appendix B) case the Court spells out how this may occur.This is an important consideration, as the concept of forfeiture by theconsumeroftheirownpaid‐forequityandthusre‐acquisitionbytheseller)isoftenanoverstated issue.Aselleralmostalwayswillnotwish to re‐acquire(andpayincometaxes)andbesubjecttostatelawandcommonlawdecisionsaffectingtheireconomicposition.Wehavehighlightedtherelevant languageintheopinion.Itshouldalsobenotedthatthiscaseisa“TaxCourtOpinion”(rather than a “Memorandum Opinion”). The Court provides the followingguidance on the significance of this distinction): “Generally, a Tax CourtOpinion is issued inaregularcasewhentheTaxCourtbelieves it involvesasufficiently important legal issue or principle.” (https://www.ustaxcourt.gov/taxpayer_info_after.htm.)Sellerswho transact in their ownname or through an alter ego entity (e.g.,singlememberLLCorrevocabletrust)areallowedtoreportthetransactionsontheirownpersonaltaxreturn.AlsointheareaofinformationreportingonForms1099(e.g.,reportingof interest incomeonForm1099‐INT)and1098(reporting mortgage interest received from borrower) the statutoryrequirementsthatreportingdutiesonlybereportedbysomeoneinatradeorbusinessarerespected. Thus,ratherthanhavingthepartiescompletetheseburdensome informational reports and file them with IRS the Forms andInstructions for Schedule A and B, Form 1040 provide a simple means ofcompliance checking through requiringname, address and tax idnumberoftheotherparty(sellerorbuyer)tobeplacedonthoseforms. Thisisaclearand easy‐ to‐administer, non‐burdensome tax compliance provisionappropriatetotheparties.Italsoprovidesameansofmeasuringthenumberofhouseholdsutilizingthebenefitsofsellerprovidedfinancing.SeeattachedAppendixAandadditionaldiscussionwithinthisWhitePaper.SAFEActandComment.Inadditiontothecreditordefinitionalthresholdofmorethan5extensionsofcredit,theSAFEActcoveragerulesarealsoessentiallyconsistent. SAFEActcoveragedependsonhabitualnessandrepetition.AlsointhisregarditisclearthattheintentofCongresswasforregulatorstoapplydeminimisstandards.(Frank/BachusLetter,AppendixCandrelatedTexasAdministrativeBulletin.)


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AbilitytoRepayStandards.Congressalsoarticulateditsconcernsaboutconsumersobtainingaloantheycouldnotpay.Theapproachtakenisthatnocreditorcanmakearesidentialmortgage loan without first making a reasonable and good faithdeterminationthattheborrowerhastheabilitytorepaybasedon8identifiedcriteria.Thestandardsaddednewsection129CofTILAoftheDoddFrankAct.The statute makes clear this provision applies the same regularity startingpoint ofmore than 5 transactions in addressing its scope to creditors only.Section 129C(a)(1) states in part: “…no creditor may make a residentialmortgage loan unless the creditor makes a reasonable and good faithdeterminationbasedonverifiedanddocumentedinformationthat,atthetimetheloanisconsummated,theconsumerhasareasonableabilitytorepaytheloan,accordingtoitsterms…” Itisthereforeatcrosspurposeswiththeentirestatutory constructofTILAandaccompanying regulatory law to impose thesamerequirementsonsellersusinganinstallmentsalescontractandwhoarenotcreditors.LoanOriginatorCompensationRule.In Title 14 of the Dodd Frank Act the US Congress declared: “The Congressfinds that economic stabilization would be enhanced by the protection,limitation,andregulationofthetermsofresidentialmortgagecreditandthepractices related to such credit, while ensuring that responsible, affordablemortgagecreditremainsavailabletoconsumers.”InconstructingthestatuteCongressplacedconstraintsonmortgageoriginators(moregenerallyknownas loan originators) regarding direct and indirect compensation and withregardtospecificpractices.ThetermmortgageoriginatorwasdefinedinthestatuteverybroadlywithaspecificlistofexceptionsfoundbyCongresstobeappropriatebutalsowithoutexplicit limitationtothoseonly. WerecognizethatCongresshasspokenononesetofcomponentsthatjustifyanexemptionbased on the specified elements. It is contained in the definitions as newsection103(cc)(2)(e)asanexception to “mortgageoriginator.” TheBureauhas added an additional exception in section 1036 based on specifiedelementsasthe“Seller‐financersOneProperty.” Ourelementsreflectingthestandard seller installment sales contract are a logical componentizedextensionofthoseprovisions.


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Reg.Zprovidesguidancetothecurrentsetofapplicableprovisionsinsection1036. The following two pages summarize our understanding of theapplicationofthoserulestosellersusinganinstallmentsalearrangement.Thefirstpagereflectsinitialconsiderations.Thesecondpageaddressesnumericalprovisions.Both demonstrate the complete departure of this set of rules from all thefederal regulatory requirements and accommodation previously described.This is a profound departure and risks loss of access to credit and un‐necessary legal costs both at the front end and throughout the life of thetransaction for the seller, if not supplemented to reflect the standardinstallment arrangement. Some is statutorily driven, to be sure. But theessential problem is a compete departure from the thresholds in all otherareasaffectingsellerswhoextendcreditbywaitingover time toreceivethevalueoftheirequity.Weofferanalysisandoursolutionforconsistencywiththoseotherrules,whilealsotaking intoaccounttheBureau’sdirectionfromCongressinhowitsdiscretionaryregulatoryauthorityhastobeutilized.

Is there a Dwelling?

Is the Buyer a Natural Person?

Is the Natural Person Moving In?

Yes Yes Yes THE RULES APPLY

No No No

The Rules Do Not Apply The Rules Do Not Apply If:

The Rules Do Not Apply To:

•Vacant Land; Commercial and investment properties that will NOT be owner occupied, even if there’s a dwelling; land bought for agricultural purposes, even if there’s a dwelling

Dwellings purchased by a buyer other than a natural person such as an estate, trust, corporation, partnership.

Owner – occupied rental property that is a triplex or larger; a second or vacation home if the buyer intends to spend 14 or fewer days

dorim

Typewritten Text

dorim

Typewritten Text

� Is the seller a natural person, estate or trust?

They are allowed to do 3 seller financing transactions in a 12 month period. These transactions are broken into 2 categories:

If the seller is an LLC, corporation, or partnership they must use the second category.

First Category: They can only use this category once in a 12 month period. A. A balloon is ALLOWED B. Ability to Repay Determination is NOT

required C. Interest Rate Must be fixed for 5 years

Second Category: Everyone can use this category 3 times in a 12 month period. Natural person, Estate or Trust can only use it 2 times if they also use the first category once. A. A balloon is NOT allowed B. Ability to Repay determination is required

to a certain extent C. Interest must be fixed for 5 years

Yes

No

dorim

Typewritten Text


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Data.DataassummarizedonthenextpagefromIRSresearch indicatesthatmorethan1millionhouseholdsrelyonseller‐providedfinancinginanyparticularyear and potentially 3 million or more households in the future could. Asshown in that summary, the historical high since 1993 (i.e., when the needwasgreatest)wasabout2.4millionhouseholds.GiventhatUSCensusBureaudata show total US households having increased about 16% from 1995 to2010, the indication would be that an overall consumer‐driven need(factoring in the state of the economy) will return to the historic high andwould equate to close to 3 million households. That estimate also wouldreflectthepercentageoftaxreturnsfiledin1993comparedto1999.In1993atotalof32,821,464returnswerefiledaccordingtothesameIRStablesandin 2009 a total of 46,695,736. That means in 1993 7.31% of all returnsreflected seller financing. Applied to 1999 at the same percentage, thenumberwouldbeapproximately3,415,000filersutilizingsellerfinancingfortheirprincipalorsecondhome.Thismust be factored in particularlywhen the discussion is about covereddwellingsundertheloanoriginatorrules.TheIRSdataisareliableindicatorof the floor of number of households relying on seller financing. That isbecause this data is for those who (a) filed returns; (b) claimed itemizeddeductions for mortgage interest paid to the seller; and (c) followed thereportinginstructions.RelevantotherDataobtainedfromNationalAssociationofRealtor®sourcesfollows on the next following pages. This data reflects dwellings beyondprincipalresidence.Allthisdatacombinedreflectsthevalueandimportanceofthesellerprovidedextensionof credit throughan installment sales contractonanational scaleandacrossallincomelevels.

SUMMARY OF IRS STATISTICS SELLER-FINANCED TRANSACTIONS

MORTGAGE INTEREST DEDUCTIONS CLAIMED

STATISTICS OF INCOME TAX STATS, IRS PUBLICATION 1304, TABLE 2.1

FOR THE YEARS 1993-2011 (see Notes 1,2)

YEAR RETURNS DOLLAR AMOUNT (IN THOUSANDS)

2012 1,157,823 6,466,556

2011 1,141,911 6,452,530

2010 1,192,359 6,713,746

2009 1,070,248 6,358,663

2008 1,070,285 6,734,484

2007 1,153,837 6,931,592

2006 1,147,219 6,093,762

2005 1,150,666 5,265,473

2004 1,289,493 5,189,075

2003 1,645,041 6,606,877

2002 1,745,449 7,097,724

2001 1,782,605 7,253,600

2000 1,789,783 7,087,712

1999 1,880,782 7,011,537

1998 1,767,626 6,454,266

1997 1,976,158 6,609,503

1996 1,981,144 6,401,089

1995 2,102,816 6,308,069

1994 2,187,574 6,438,505

1993 2,400,634 7,357,802

Note 1. The current IRS instructions (2013 Form 1040, Schedule A) state for home mortgage interest

deductions claimed on Schedule A, Form 1040: “If you paid home mortgage interest to the person from whom you bought the home, write that person's name,

identifying number, and address on the dotted lines next to line 11. If the recipient of your home mortgage interest

payment(s) is an individual, the identifying number is his or her social security number (SSN). Otherwise, it is the

employer identification number. You must also let the recipient know your SSN. If you do not show the required

information about the recipient or let the recipient know your SSN, you may have to pay a $50 penalty.”

(Prior Year Instructions were same or similar based on applicable federal tax law of that year.)

Note 2. Based on Note 1, we believe the amounts stated reflect the floor of actual transactions in any

year involving seller-financed home mortgage arrangements and likely does not include all transactions

in which the acquisition of a dwelling (that is not a principal residence) is seller-financed. The same

instructions also state:

“A home mortgage is any loan that is secured by your main home or second home. It includes first and second mortgages, home equity loans, and refinanced mortgages.

� 19% of all homeowners own one or more additional properties according to NAR

� 24% of homeowners over 65 own one or more additional properties according to NAR

� In 2012, 11% of purchases were for 2nd homes � In 2012, 24% of purchases were for investment

properties � 60,873 seller financiers. Sampled in 2013 ,38% had

more than 1 property that they received payments on � IRS says that 1,142,00 deduct mortgage interest paid on

installment sales � 14 million rental homes. Majority owned by small

investors according to the National Multi-housing Council


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CommentonCoverageoftheLoanOriginatorRule:Thereisnothinginsection1026.36whichfurtherdefinesstatutorycoverageof the loan originator rules by type of property. (By contrast there isdefinitional specificity for servicer rules therein.) Hence we believe thatcoveragemeansforallotherwisecovereddwellings,whichinturnmeansall1‐4 unit residential structures either attached to real property or, iftechnicallypersonalproperty,thenusedasaresidence.TheNARdatareflectsall kinds of personal use dwellings including those listed in the definitionalprovisions of the term “dwelling” as defined in section 2012.2(a)(7) andofficialcommentary—vacationorsecondhome,mobilehomes,boats,trailers,individualcondominiumorcooperativeunitandrecreationalvehiclesaswellascampersbutonly ifusedasaresidence. (Bycontrast, forpurposesof theterm residentialmortgage transaction and right to rescind, coverage is onlyfor principal residences; samewith the servicer scope rules under this loanoriginatorRule;andthesamefortheindex‐adjusted$50,000exemptionifthepropertyisconsideredpersonalproperty.)CongressionalIntentandPolicyConsiderations:General:We now turn to Congress’ stated two‐fold purpose of consumer safeguards(including compensation constraints) COUPLED WITH ensuring thatresponsible, affordable mortgage credit remain available. Seller extendedcredit can readily fit intobothpurposes. But itmustbeunderstood that inaddition tononconformingdwellings (i.e., those forwhich the buyer cannotobtainotherreasonableformsofcredit)theissueofavailabilityofcreditoftenleadstoaseller‐financedinstallmentsalesarrangementastheonlychoicefora consumer due to a job change, a foreclosure or short sale in their past,divorce,bankruptcy, student loans,orevenself‐employedstatus. So federalregulationshouldalsoallowfortheessentialnatureofthisformofavailablecreditandthenregulateitinaconsistentmannerwiththeexistingregulatorylandscape and thresholds. The fact is that sellers who engage in aninstallmentsalewanttomakethattransactionworkthroughoutthelifeofthearrangement and addprovisions for return of property only as an essentialcomponentofprudentriskanalysis.(AndwiththerecentTaxCourtdecisiontheynowunderstandthetaxcostofre‐acquisition.)Sellersregularlyagreetomodificationsandworkoutsbasedonmaintainingthearrangementaslongas


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possible includingthroughcompletion.Hencetechnicaldefault isoftendealtwith in a remarkably flexible way‐‐‐ and not by re‐acquisition. The initialarrangement knowingly agreed to is rational, appropriate and balanced forthecircumstancesthepartiesface. Thismustincludeeconomicflexibilityontermssuchaballoonpaymentsinparticularfortheolderseller.ApproachtoInformationalDisclosuresasAdequate:AnadditionalconsiderationthatmustbeconnectedtosubstantiverulemakingisCongress’actionsintheDoddFrankAmendmentstoinformationprovidedto borrowers through the RESPA section 5 “Special Information Booklet.”Congress’ focuswas not to ban certain financing tools of thosewho extendcredit. Rather Congress required useful information be provided in anunderstandablewaytoconsumersonkeyfeaturesasfollows:

(1) A description and explanation of the nature and purpose of the costsincidenttoarealestatesettlementora federallyrelatedmortgageloan.Thedescription and explanation shall provide general information about themortgageprocessaswellasspecificinformationconcerning,ataminimum—

(A)balloonpayments;(B)prepaymentpenalties;(C)theadvantagesofprepayment;and(D)thetrade‐offbetweenclosingcostsandtheinterestrateoverthelifeoftheloan.

Thereisnothingintheproposedsafeharbormodelwhichfollowsthatwouldbecontrarytothisdirective.InfactthisCoalitionwillbepleasedtoworkwiththe Bureau on developing a one‐page informational sheet for all seller‐financers to use (whether a creditor or not) in connection with theirtransaction to cover these features and why they meet the needs of theparties.Inotherwordsthedocumentwouldbemadeavailableforsuggestedusewhetherornotrequired.


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SuggestedModelforSafeHarborConsideration:In consideration of the balancing of access to credit, safeguards for theconsumer (“installment salespurchaser”) and reasonablenesswith a carefuleyeonadministrabilityfortheoccasionalseller‐financerweofferamodifiedexception under section 1026.36. This exception carves out all sellerfinancerswhoextendonlynon‐highcostloansinanyyearanddoesnotmeetthegreater than5 threshold,alongwithother importantelementswhichdonot raise the question of borrower abuse. If the first component is notmetthen thespecialnumerical rulesalreadycontained in the regulationapplies.Thisclearlyoffersaruleofreasonablenessandcanbepresumedonitsfacetohave adequate consumer protection especially if combined with ourrecommended best practices of (a) title examination; (b) recording of thesecurityinstrument;(c)useofaproperthird‐partyescrowarrangement(i.e.,neutraltobothsellerandbuyer);and(d)compliancewithtaxlaws.ElementsofInstallmentSalesContractSafeHarbor:(proposedchangestoregulatorytextsec.1026.36asaddedException6andasfollows:

Seller‐FinancerStandardInstallmentSalesContractWithDoddFrankConditions.A seller financer who extends only (a) non‐ high cost extensions ofcredit(“highcost”meaningsameasTILAcoveredhighcostmortgages)contained in installment sales contracts; (b) fewer than 6 suchextensionsofcredit inany12‐monthmeasuringperiod;and(c)meetsthefollowingconditions:

1. Nooriginationfeeorpoints.2. Noothercompensationrelatingtoextensionofcredit.3. Seller financer may only be a natural person, their estate or

trust, their individualaccountretirementvehicle,or thesamein individually controlled entity ownership forms as well aslimitedcombinationsofthesewithotherpersonsand/ortheirentities.

4. Attribution rules for ownership apply to avoid abuse (seebelow).


19

5. Seller has not constructed or acted as a contractor for theconstruction of a residence on the property in the ordinarycourseofitsbusiness(i.e,isadealer).

6. Nonegativeamortization.7. Other than the exception set forth in this paragraph 7, the

financing has a fixed rate or an adjustable rate that isadjustable after five or more years, subject to reasonableannualandlifetimelimitationsoninterestrateincreases.Ifthefinancing agreement has an adjustable rate, the rate isdeterminedbytheadditionofamargintoanindexrateandissubject to reasonable rate adjustment limitations. The indextheadjustablerateisbasedonisawidelyavailableindexsuchasindicesforU.S.TreasurysecuritiesorLIBOR.Theexceptiontothisgeneralruleisforfinancing inwhichapriorobligation(fromanysourceofcreditextended)withanadjustablerateisbeing assumed or wrapped. Thus, if the interest rate on theprior obligation should increase the rate on the installmentsale contract may increase by the same amount and at thesametimeunderthisexception.

(No restrictions on balloons with recommendation special informationbookletcontentonballoonpaymentsbeprovided.)(Noseparateabilitytorepaydetermination—presumedunderthesafeharborandasbuiltintothecontractnegotiation.)(Examples of allowed entities would include self‐directed IRA account orsimilar with 401(k) individual retirement account, closely held privatecorporations (including tax‐defined “S” and “C” corporations), LLCs andPartnershipsdesignedforfamilyplanningpurposes,andlimitedcombinationsof the same with friends and relatives as a joint venture (i.e, owned andoperatedasamutual investment for incomeandappreciationpurposesandnotasaperpetualoperatingbusinessentity.)(Attribution rules adapted or adopted from similar tax law rules—morebelow.)AsseparatecommentarywealsobelievetheCFPBcanworkwith the IRStoenhancereportingonSchedulesAandB,Form1040toincludethereportingof transactional numbers applicable to these rules. Finally we note in thepreambletotheloanoriginatorrulethefollowingconcernandreaction:


20

“In particular, the Bureau has received reports that personsmay be recruitingmultipleindividualsorcreatingmultipleentitiestoextendcreditforfiveorfewersuchtransactionseachandthenacquiringthemortgagesshortlyaftertheyhavebeenconsummated.SuchconductmaybedesignedtoevadetherequirementsofRegulation Z. In these circumstances, however, the person may in fact beextending credit for multiple transactions secured by a dwelling through anintermediary,andthusbesubjecttoapplicablerequirementsforcreditorsand/orloanoriginatorsunderRegulationZ.”

Webelievethatattributionrulessimilartothoseutilizedintaxregulationstolimit certain tax favorable results including installment sale treatment (e.g.,relatedpartresalerules)canbeemployedhereaswelltoavoidthisproblemofabuseofcarveouts.SeeAppendixDforarestatementofthoserules.AnalysisofSafeHarborModelUnderTILAExemptionAuthority.Dating from the 1990’s and preserved post‐Dodd Frank Amendments, theBureauhas theexplicitstatutoryauthority toexemptclassesof transactionsasfollows:TILASection105(f).

(f)EXEMPTIONAUTHORITY.—(1)INGENERAL.—TheBureaumayexempt,byregulation,fromallorpartofthistitlealloranyclassoftransactions,otherthantransactionsinvolvinganymortgagedescribedinsection103(aa),forwhich,inthedeterminationoftheBureau,coverageunderallorpartofthistitledoesnotprovideameaningfulbenefittoconsumersintheformofusefulinformationorprotection.(2)FACTORSFORCONSIDERATION.—Indeterminingwhichclassesoftransactionstoexemptinwholeorinpartunderparagraph(1),theBureaushallconsiderthefollowingfactorsandpublishitsrationaleatthetimeaproposedexemptionispublishedforcomment:(A)Theamountoftheloanandwhetherthedisclosures,rightofrescission,andotherprovisionsprovideabenefittotheconsumerswhoarepartiestosuchtransactions,asdeterminedbytheBureau.(B)Theextenttowhichtherequirementsofthistitlecomplicate,hinder,ormakemoreexpensivethecreditprocessfortheclassoftransactions.(C)Thestatusoftheborrower,including—(i)anyrelatedfinancialarrangementsoftheborrower,asdeterminedbytheBureau;(ii)thefinancialsophisticationoftheborrowerrelative


21

tothetypeoftransaction;and(iii)theimportancetotheborrowerofthecredit,relatedsupportingproperty,andcoverageunderthistitle,asdeterminedbytheBureau;

(D)whethertheloanissecuredbytheprincipalresidenceoftheconsumer;and(E)whetherthegoalofconsumerprotectionwouldbeunderminedbysuchanexemption.

DiscussionofExemptionFactors:Factor2(A). The amount of the loanwill vary fromvery smallwith a usedmobile home for example tomuch higher depending on a variety of factorsalready covered including if the local is rural or otherwise and considerednonconforming to standardbank loanavailability.Thequestionofbenefit isonlyrelevantifthereisariskofconsumerabuseinthecaseoftheborrower.The suggested safe harbor model, by objective measure, avoids that. Inaddition it must be remembered that the basic transaction (contract) isbetween a natural person (or their entity alter‐ego) and another naturalperson(theborrowerconsumer). Theentityalteregoislimitedtostandardforms including single/family member entities, their individual accountretirementvehicles,orgroupinvestmentsthatworkasjointventures(i.e.,notoperatingentities).TheselimitationscanandshouldbepreservedbyBureauaction inthewayofownershipattributionrulescommonly foundelsewheresuchasinInternalRevenueStatutesandRegulations.Factor2(B):Withoutdoubtthisfactorfullysupportsanexemptionforpointsalready covered Will the current Rule “complicate, hinder, or make moreexpensive the credit process?” The answer is a resounding YES!! The twoadditional upfront cost layers—cost of loan originator and legal vetting toavoid later risk of lawsuit costs and losses will make the process moreexpensive, complicate (for those in the know) and hinder (effectively as arestraintonalienation).Therelatedpointisthatforthoseseller‐financersnot“intheknow”ofthenewrulesthecomplicationandmakingitmoreexpensivefactors will be legal exposure to lawsuit after the consummation of thetransaction. The safe harbor model avoids that for the standard markettransaction.


22

Factor 2(C): Simply stated the extension of credit by the seller in aninstallment sale is the available form of credit to the borrower and so thecreditiscriticaltotheborrowertobecomeanownerofadwellingasopposedtobeingarenterorlivingwithparentsorothers.Inparticulariftheborrowerisalreadyconnectedtothesellerunderaleasearrangementitmakesnosenseto override the transaction by forcing it to be TILA limited rather thanfocusingonthebalanceofconsiderations.Factor2(D):Samepointsasfor2(C).Factor 2(E): There is absolutely positively no undermining of the goal ofconsumer protection by this safe harbor model for exemption. In fact itobjectivelysupportsbothcreditavailabilityandconsumerprotectionequallyandsimultaneously.Summary: All 5 factors fully support an exemption based on the proposedsafeharbormodelcontainedinthisWhitePaper.Section129ExemptionAuthorityThemortgagerelatedrulesundersection129ofTILAalsocontainexemptionauthorityasfollows.

(p)DISCRETIONARYREGULATORYAUTHORITYOFBOARD.—(1)EXEMPTIONS.—TheBureaumay,byregulationororder,exemptspecificmortgageproductsorcategoriesofmortgagesfromanyoralloftheprohibitionsspecifiedinsubsections(c)through(i),iftheBureaufindsthattheexemption—

(A)isintheinterestoftheborrowingpublic;and(B)willapplyonlytoproductsthatmaintainandstrengthenhomeownershipandequityprotection.

_______________________________________________________c‐iincludes

(c)NOPREPAYMENTPENALTY.—(d)LIMITATIONSAFTERDEFAULT(e)NOBALLOONPAYMENTS.—(f)NONEGATIVEAMORTIZATION.—(g)NOPREPAIDPAYMENTS.—


23

(h)PROHIBITIONONEXTENDINGCREDITWITHOUTREGARDTOPAYMENTABILITYOFCONSUMER.—(i)REQUIREMENTSFORPAYMENTSUNDERHOMEIMPROVEMENTCONTRACTS.—

Very simply and honestly put, Seller financing maintains and strengthenshomeownershipandcreatesequityforbuyers(throughtheuseoftheseller’sequity). It is inthe interestoftheborrowingpublicasameansofobtaininghomeownership for many who otherwise would be shut out. Thus theexemptionauthoritybothpertainsandmakessenseonallpolicyarguments.SafeHarborisnotinconflictwithStatute.The Dodd Frank Amendments clearly expanded the notion of who isconsidered a loan originator, but they also retained all the exemptionauthority described herein. The Seller Financer exemption in the statute(sometimescalledthe3transactionexception)isinthedefinitionssectionofthe loan originator piece of TILA and applies to a wide range of creditextension possibilities. This could include compensation of one or moreparties for arranging credit. Importantly, ashasbeendemonstratedherein,the standard seller financing model does not include compensation forarranging the credit; rather the amount paid by the buyer is for the use ofmoneyaccordingtoacontract.Furtherinthestandardmodelscenariothereisnorealriskoftheconsumerbeingsteeredagainsttheirinterest.Thereverylikelyisnoalternativepathtoownership.SotherangeofrisksandconcernsintheDoddFrankAmendmentsdonotpresentthemselvesinthesafeharborproposal.StandardFormsComment:Somestateshavestatutoryforms(Minnesota’s isattached as Appendix E) and in many jurisdictions standardized forms ofconveniencehavebeendevelopedbyRealtorAssociations,StateBarsorotheracceptedOrganizations.Theseare,simplyput“fillintheblankforms”forkeyterms.Historically,laypersons(non‐attorneys)haveworkedwithsellersandbuyers to facilitate completion of the documents based on terms alreadyagreed on. These individuals should be carved out of the definition ofmortgage originator as mere scriveners. A recommended approach is alsopresentedintheSectiononrecommendedchangestosection1026.36.


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CommentsonCFPBRequestforInformation—“Creditor”DefinitioninTILA:RESERVED.ApplicationofLoanEstimate,SpecialInformationBookletandClosingDisclosurestarting8/1/15toSellerFinancing.RESERVED.


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Summary:SellerFinancinginitsstandardmodeldescribedhereinhaslongbeenthesolesourceofachievingownershipoftheirowndwellingbymillionsofAmericans.Inthecontextoffederalregulationofmortgagelendingtheextensionofcreditby sellers through their own equity in the property in the form of aninstallmentsalescontractmeritscloserandmorecarefulexemptionattentionby the CFPB than has been made to date. The exemption authority issubstantial, clear and appropriate and can swiftly be applied while doingjustice to the applicable Dodd Frank Amendments intended to safeguardconsumers . A safe harbor model has been laid out in thisWhite Paper tofinallyachievethecorrectbalancebetweenvalueof the installmentcontractto the consumer and appropriate level of federal regulation. Without thatbalance federal regulation is punitive to both persons, seller and buyer, bycontractingtheavailabilityofsellerequityandpushmanyofthesesellerstobe landlords and sell to others, when the time comes, rather than extendcredittotheirtenant.SotheultimateriskofcurrentfederalRulesisharmtohome ownership. The corrections offered herein through a safe harborexemptionwill strengthen homeownership and benefit all parties includingtheconsumerbuyer.

§ 1026.36 Prohibited acts or practices and certain requirements for credit secured by a dwelling.

a. Definitions.

1. LOAN ORIGINATOR.

i. For purposes of this section, the term “loan originator” means a person who, in expectation of direct or indirect compensation or other monetary gain or for direct or indirect compensation or other monetary gain, performs any of the following activities: takes an application, offers, arranges, assists a consumer in obtaining or applying to obtain, negotiates, or otherwise obtains or makes an extension of consumer credit for another person; or through advertising or other means of communication represents to the public that such person can or will perform any of these activities. However the foregoing activities do not include the filling in, by anyone who is authorized by the consumer to do so, but who is also not a creditor, of blanks on pre-printed forms approved and accepted for use in the consumer credit transaction. The term “loan originator” includes an employee, agent, or contractor of the creditor or loan originator organization if the employee, agent, or contractor meets this definition. The term “loan originator” includes a creditor that engages in loan origination activities if the creditor does not finance the transaction at consummation out of the creditor's own resources, including by drawing on a bona fide warehouse line of credit or out of deposits held by the creditor. All creditors that engage in any of the foregoing loan origination activities are loan originators for purposes of paragraphs (f) and (g) of this section. The term does not include:

A. A person who does not take a consumer credit application or offer or negotiate creditterms available from a creditor to that consumer selected based on the consumer's financial characteristics, but who performs purely administrative or clerical tasks on behalf of a person who does engage in such activities.

B. An employee of a manufactured home retailer who does not take a consumer credit application, offer or negotiate credit terms, or advise a consumer on credit terms.

OFFICIAL INTERPRETATION TO 36(a)(1)(i)(B)

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C. A person that performs only real estate brokerage activities and is licensed or registered in accordance with applicable State law, unless such person is compensated by a creditor or loan originator or by any agent of such creditor or loan originator for a particular consumer credit transaction subject to this section.

C.

D. A seller financer that meets the criteria in paragraph (a)(4) or (a)(5) or (a)(6)of this section, as applicable.

E. A servicer or servicer's employees, agents, and contractors who offer or negotiate terms for purposes of renegotiating, modifying, replacing, or subordinating principal of existing mortgages where consumers are behind in their payments, in default, or have a reasonable likelihood of defaulting or falling behind. This exception does not apply, however, to a servicer or servicer's employees, agents, and contractors who offer or negotiate a transaction that constitutes a refinancing under § 1026.20(a) or obligates a different consumer on the existing debt.

ii. An “individual loan originator” is a natural person who meets the definition of “loanoriginator” in paragraph (a)(1)(i) of this section.

iii. A “loan originator organization” is any loan originator, as defined in paragraph (a)(1)(i) of this section, that is not an individual loan originator.

2. MORTGAGE BROKER.For purposes of this section, a mortgage broker with respect to a particular transaction is any loan originator that is not an employee of the creditor.

3. COMPENSATION.The term “compensation” includes salaries, commissions, and any financial or similar incentive.

4. SELLER FINANCERS; THREE PROPERTIES.A person (as defined in § 1026.2(a)(22)) that meets all of the following criteria is not a loan originator under paragraph (a)(1) of this section:

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i. The person provides seller financing for the sale of three or fewer properties in any 12-month period to purchasers of such properties, each of which is owned by theperson and serves as security for the financing.

ii. The person has not constructed, or acted as a contractor for the construction of, a residence on the property in the ordinary course of business of the person.

iii. The person provides seller financing that meets the following requirements:

A. The financing is fully amortizing.

B. The financing is one that the person determines in good faith the consumer has a reasonable ability to repay.

C. The financing has a fixed rate or an adjustable rate that is adjustable after five or more years, subject to reasonable annual and lifetime limitations on interest rate increases. If the financing agreement has an adjustable rate, the rate is determined by the addition of a margin to an index rate and is subject to reasonable rate adjustment limitations. The index the adjustable rate is based on is a widely available index such as indices for U.S. Treasury securities or LIBOR.

OFFICIAL INTERPRETATION TO 36(a)(4)

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5. SELLER FINANCERS; ONE PROPERTY.A natural person, estate, or trust that meets all of the following criteria is not a loan originator under paragraph (a)(1) of this section:

i. The natural person, estate, or trust provides seller financing for the sale of only one property in any 12-month period to purchasers of such property, which is owned by the natural person, estate, or trust and serves as security for the financing.

ii. The natural person, estate, or trust has not constructed, or acted as a contractor for the construction of, a residence on the property in the ordinary course of business of the person.

iii. The natural person, estate, or trust provides seller financing that meets the following requirements:

A. The financing has a repayment schedule that does not result in negative amortization.

B. The financing has a fixed rate or an adjustable rate that is adjustable after five or more years, subject to reasonable annual and lifetime limitations on interest rate increases. If the financing agreement has an adjustable rate, the rate is determined by the addition of a margin to an index rate and is subject to reasonable rate adjustment limitations. The index the adjustable rate is based on is a widely available index such as indices for U.S. Treasury securities or LIBOR.

OFFICIAL INTERPRETATION TO 36(a)(5)

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6.7. CREDIT TERMS.For purposes of this section, the term “credit terms”includes rates, fees, and other costs. Credit terms are selected based on the consumer's financial characteristics when those terms are selected based on any factors that may influence a credit decision, such as debts, income, assets, or credit history.

OFFICIAL INTERPRETATION TO 36(a)

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b. Scope.Paragraphs (c)(1) and (2) of this section apply to closed-end consumer

credit transactions secured by a consumer's principal dwelling. Paragraph (c)(3) of this section applies to aconsumer credit transaction secured by a dwelling. Paragraphs (d) through (i) of this section apply to closed-end consumer credit transactions secured by a dwelling. This section does not apply to a home equity line of credit subject to § 1026.40, except that paragraphs (h) and (i) of this section apply to such credit when secured by the consumer's principal dwelling and paragraph (c)(3) applies to such credit when secured by a dwelling.

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SOURCES AND RESOURCES:

Truth in Lending Act (TILA): http://www.law.cornell.edu/uscode/text/15/1601 Regulation Z: e-Regulations 12 CFR Part 1026 http://www.consumerfinance.gov/eregulations/1026 (using 8/1/2015 effective date for the regulation) IRS Data: SOI Tax Stats - Individual Income Tax Returns Publication 1304 (Complete Report) extracted for all years available--1993-2011

Tax Court Decision: US Tax Court https://www.ustaxcourt.gov/InOpHistoric/DeBoughDiv.Nega.TC.WPD.pdf Minnesota Contract for Deed State Form: https://www.cards.commerce.state.mn.us/CARDS/security/search.do?method=showPoup&documentId={E9A9E4E2-294F-4D8C-B77F-5149D00606A9}&documentTitle=45543&documentType=7 Treatise coverage including state law issues involving installment sales: 15 POWELL ON REAL PROPERTY § 84D.01[1] (Michael Allan Wolf ed. 2009). GRANT S. NELSON & DALE A. WHITMAN, REAL ESTATE FINANCE LAW § 3.38 (6th ed. 2014). Coverage of federal mortgage lending rules: PAUL BARRON AND DAN ROSIN, FEDERAL REGULATION OF REAL ESTATE AND MORTGAGE LENDING, CHAPTER 10 TRUTH-IN-LENDING ACT (FOURTH EDITION).

Table 2.1 Returns with Itemized Deductions: Sources of Income, Adjustments, Itemized Deductions by Type, Exemptions, and Tax Items, by Size of Adjusted Gross Income, Tax Year 2012 (*All figures are estimates based on samples—money amounts are in thousands of dollars)

(88) (89)

All returns, total 1,157,823 6,466,556

Under $5,000 * 4,372 * 7,572

$5,000 under $10,000 11,898 52,042

$10,000 under $15,000 9,456 50,877

$15,000 under $20,000 16,268 90,283

$20,000 under $25,000 23,441 107,820

$25,000 under $30,000 20,268 129,746

$30,000 under $35,000 27,880 105,378

$35,000 under $40,000 33,965 199,948

$40,000 under $45,000 32,310 227,397

$45,000 under $50,000 31,121 169,333

$50,000 under $55,000 30,965 153,581

$55,000 under $60,000 37,535 238,677

$60,000 under $75,000 96,583 428,955

$75,000 under $100,000 203,060 968,001

$100,000 under $200,000 421,799 2,127,588

$200,000 under $250,000 52,842 333,999

$250,000 under $500,000 72,127 598,769

$500,000 under $1,000,000 20,261 272,003

$1,000,000 under $1,500,000 5,377 82,915

$1,500,000 under $2,000,000 2,209 39,823

$2,000,000 under $5,000,000 2,958 56,464

$5,000,000 under $10,000,000 705 14,255

$10,000,000 or more 423 11,129

Taxable returns, total 1,041,101 5,652,802

Nontaxable returns, total 116,722 813,755

NOTE: Detail may not add to totals because of rounding.

Table 2.1 Returns with Itemized Deductions: Sources of Income, Adjustments, Itemized Deductions by Type, Exemptions, and Tax Items, by Size of Adjusted Gross Income, Tax Year 2011 (All figures are estimates based on samples—money amounts are in thousands of dollars)

Size of adjusted gross income

Home mortgage interest

Paid to individuals

Number of returns

Amount

(88) (89)


Under $5,000 7,365 41,857

$5,000 under $10,000 7,552 40,405

$10,000 under $15,000 12,050 60,336

$15,000 under $20,000 18,926 103,030

$20,000 under $25,000 27,821 206,246

$25,000 under $30,000 28,005 119,140

$30,000 under $35,000 24,209 148,680

$35,000 under $40,000 35,096 187,018

$40,000 under $45,000 38,994 170,048

$45,000 under $50,000 31,285 164,606

$50,000 under $55,000 34,873 175,770

$55,000 under $60,000 37,817 185,371

$60,000 under $75,000 111,752 534,312

$75,000 under $100,000 235,604 1,156,893

$100,000 under $200,000 355,292 1,822,783

$200,000 under $250,000 45,791 323,304

$250,000 under $500,000 63,507 594,579

$500,000 under $1,000,000 17,077 232,786

$1,000,000 under $1,500,000 4,000 76,852

$1,500,000 under $2,000,000 1,698 35,448

$2,000,000 under $5,000,000 2,393 53,684

$5,000,000 under $10,000,000 512 12,241

$10,000,000 or more 293 7,142


Nontaxable returns, total 112,503 774,240 NOTE: Detail may not add to totals because of rounding.

Source: IRS, Statistics of Income Division, July 2013




Paid to individuals

Number of returns

Amount

(90) (91)


Under $5,000 6,121 20,821

$5,000 under $10,000 12,857 44,046

$10,000 under $15,000 9,884 33,986

$15,000 under $20,000 18,500 86,290

$20,000 under $25,000 20,561 121,430

$25,000 under $30,000 28,543 139,732

$30,000 under $35,000 29,068 172,159

$35,000 under $40,000 41,520 226,206

$40,000 under $45,000 33,823 183,115

$45,000 under $50,000 48,725 259,439

$50,000 under $55,000 43,257 239,489

$55,000 under $60,000 39,734 206,586

$60,000 under $75,000 148,394 711,011

$75,000 under $100,000 219,805 1,033,515

$100,000 under $200,000 374,250 1,948,403

$200,000 under $250,000 36,657 328,411

$250,000 under $500,000 56,188 537,947

$500,000 under $1,000,000 16,563 258,664

$1,000,000 under $1,500,000 3,311 52,827

$1,500,000 under $2,000,000 1,487 32,475

$2,000,000 under $5,000,000 2,379 58,118

$5,000,000 under $10,000,000 426 10,450

$10,000,000 or more 308 8,626


Nontaxable returns, total 175,854 1,120,199 NOTE: Detail may not add to totals because of rounding. Source: IRS, Statistics of Income Division, July 2012




Paid to individuals

Number of returns

Amount

(82) (83)


Under $5,000 9,396 31,645

$5,000 under $10,000 7,526 52,971

$10,000 under $15,000 12,068 134,464

$15,000 under $20,000 13,925 75,045

$20,000 under $25,000 27,973 127,610

$25,000 under $30,000 27,953 164,621

$30,000 under $35,000 31,408 158,912

$35,000 under $40,000 37,562 241,369

$40,000 under $45,000 37,290 223,365

$45,000 under $50,000 40,093 242,940

$50,000 under $55,000 36,141 136,690

$55,000 under $60,000 27,810 143,754

$60,000 under $75,000 128,197 660,234

$75,000 under $100,000 191,078 990,728

$100,000 under $200,000 340,606 1,859,579

$200,000 under $500,000 78,716 687,466

$500,000 under $1,000,000 15,451 255,600

$1,000,000 under $1,500,000 2,978 71,038

$1,500,000 under $2,000,000 1,474 32,755

$2,000,000 under $5,000,000 1,964 48,124

$5,000,000 under $10,000,000 400 12,533

$10,000,000 or more 239 7,221

Taxable returns, total 874,443 5,039,991

Nontaxable returns, total 195,805 1,318,672 NOTE: Detail may not add to totals because of rounding.





Paid to individuals

Number of returns

Amount

(78) (79)


Under $5,000 7,313 75,335

$5,000 under $10,000 8,136 39,557

$10,000 under $15,000 13,443 65,393

$15,000 under $20,000 14,121 81,431

$20,000 under $25,000 25,900 161,038

$25,000 under $30,000 34,803 190,385

$30,000 under $35,000 30,119 158,230

$35,000 under $40,000 30,033 166,756

$40,000 under $45,000 37,308 258,092

$45,000 under $50,000 41,754 232,533

$50,000 under $55,000 41,226 305,898

$55,000 under $60,000 39,441 215,181

$60,000 under $75,000 130,149 622,068

$75,000 under $100,000 195,380 1,041,825

$100,000 under $200,000 298,418 1,709,272

$200,000 under $500,000 92,972 860,762

$500,000 under $1,000,000 19,112 293,339

$1,000,000 under $1,500,000 4,989 104,097

$1,500,000 under $2,000,000 1,851 46,479

$2,000,000 under $5,000,000 2,708 71,382

$5,000,000 under $10,000,000 695 20,925

$10,000,000 or more 414 14,506

Taxable returns, total 925,623 5,516,207






Paid to individuals

Number of returns

Amount

(78) (79)


Under $5,000 6,272 49,009

$5,000 under $10,000 9,785 56,058

$10,000 under $15,000 14,183 89,237

$15,000 under $20,000 16,632 85,370

$20,000 under $25,000 28,943 139,042

$25,000 under $30,000 23,287 138,778

$30,000 under $35,000 35,746 155,746

$35,000 under $40,000 36,738 222,721

$40,000 under $45,000 52,217 293,881

$45,000 under $50,000 41,173 169,711

$50,000 under $55,000 52,735 199,006

$55,000 under $60,000 40,663 259,902

$60,000 under $75,000 147,693 792,916

$75,000 under $100,000 209,501 1,031,269

$100,000 under $200,000 310,674 1,760,192

$200,000 under $500,000 94,168 879,005

$500,000 under $1,000,000 20,455 307,305

$1,000,000 under $1,500,000 6,088 126,182

$1,500,000 under $2,000,000 2,153 48,044

$2,000,000 under $5,000,000 3,391 87,930

$5,000,000 under $10,000,000 855 24,351

$10,000,000 or more 486 15,938


Nontaxable returns, total 142,103 1,202,881 [1] The total number of returns does not include the returns filed by individuals to only receive the economic stimulus payment and who had no other reason to file. NOTE: Detail may not add to totals because of rounding.


Revised January 2010

Table 2.1--Returns with Itemized Deductions: Sources of Income, Adjustments, Itemized Deductions by Type, Exemptions, and Tax Items, by Size of Adjusted Gross Income, Tax Year 2006 (All figures are estimates based on samples--money amounts are in thousands of dollars)

Size of adjusted Home mortgage interest

gross income Paid to individuals

Number of Amount

returns

(78) (79)


Under $5,000 5,460 36,425

$5,000 under $10,000 16,509 87,460

$10,000 under $15,000 13,740 92,763

$15,000 under $20,000 21,642 116,724

$20,000 under $25,000 31,552 115,833

$25,000 under $30,000 27,759 130,685

$30,000 under $35,000 27,555 141,734

$35,000 under $40,000 50,487 274,527

$40,000 under $45,000 49,472 273,794

$45,000 under $50,000 53,585 284,733

$50,000 under $55,000 47,638 167,499

$55,000 under $60,000 47,218 294,196

$60,000 under $75,000 143,282 664,974

$75,000 under $100,000 202,679 878,344

$100,000 under $200,000 289,522 1,315,066

$200,000 under $500,000 86,687 700,186

$500,000 under $1,000,000 21,039 281,635

$1,000,000 under $1,500,000 5,232 90,360

$1,500,000 under $2,000,000 2,000 39,808

$2,000,000 under $5,000,000 2,993 73,678

$5,000,000 under $10,000,000 742 19,846

$10,000,000 or more 428 13,493




Table 2.1--Returns with Itemized Deductions: Sources of Income, Adjustments, Itemized Deductions by Type, Exemptions, and Tax Items, by Size of Adjusted Gross Income, Tax Year 2005(All f igures are estimates based on samples--money amounts are in thousands of dollars)

Size of adjustedgross income

Number of Amountreturns

(78) (79)

All returns, total.................................................................................................................. 1,150,666 5,265,473

Under $5,000...................................................................................................................... 6,767 22,453

$5,000 under $10,000........................................................................................................ 10,710 81,641

$10,000 under $15,000...................................................................................................... 15,772 102,600

$15,000 under $20,000...................................................................................................... 32,715 189,342

$20,000 under $25,000...................................................................................................... 27,223 141,585

$25,000 under $30,000...................................................................................................... 35,966 133,267

$30,000 under $35,000...................................................................................................... 34,391 173,823

$35,000 under $40,000...................................................................................................... 42,523 157,961

$40,000 under $45,000...................................................................................................... 45,848 182,128

$45,000 under $50,000...................................................................................................... 47,907 168,539

$50,000 under $55,000...................................................................................................... 44,503 162,240

$55,000 under $60,000...................................................................................................... 50,376 187,237

$60,000 under $75,000...................................................................................................... 142,094 640,510

$75,000 under $100,000.................................................................................................... 219,057 688,305

$100,000 under $200,000.................................................................................................. 285,841 1,282,975

$200,000 under $500,000.................................................................................................. 82,163 561,886

$500,000 under $1,000,000............................................................................................... 17,450 204,152

$1,000,000 under $1,500,000............................................................................................ 4,233 72,691

$1,500,000 under $2,000,000............................................................................................ 1,638 29,325

$2,000,000 under $5,000,000............................................................................................ 2,528 56,611

$5,000,000 under $10,000,000.......................................................................................... 588 16,114

$10,000,000 or more.......................................................................................................... 374 10,088

Taxable returns, total......................................................................................................... 1,009,493 4,380,802

Nontaxable returns, total................................................................................................... 141,173 884,671 NOTE: Detail may not add to totals because of rounding.

Source: IRS, Stat ist ics of Income Division, July 2007

Paid to individuals


Table 2.1--Individual Income Tax Returns with Itemized Deductions: Sources of Income, Adjustments, Itemized Deductions by Type, Exemptions, and Tax Items, by Size of Adjusted Gross Income, Tax Year 2004(All f igures are est imates based on samples--money amounts are in thousands of dollars)



(78) (79)

All returns, total.............................................................................................................. 1,289,493 5,189,075

Under $5,000.................................................................................................................. 3,092 16,162

$5,000 under $10,000.................................................................................................... 10,024 55,326

$10,000 under $15,000.................................................................................................. 10,695 54,839

$15,000 under $20,000.................................................................................................. 27,563 113,933

$20,000 under $25,000.................................................................................................. 32,783 131,980

$25,000 under $30,000.................................................................................................. 46,698 196,153

$30,000 under $35,000.................................................................................................. 43,325 161,103

$35,000 under $40,000.................................................................................................. 50,409 142,885

$40,000 under $45,000.................................................................................................. 52,929 198,539

$45,000 under $50,000.................................................................................................. 48,763 127,021

$50,000 under $55,000.................................................................................................. 72,439 235,581

$55,000 under $60,000.................................................................................................. 56,185 203,083

$60,000 under $75,000.................................................................................................. 182,344 572,804

$75,000 under $100,000................................................................................................ 247,832 751,177

$100,000 under $200,000.............................................................................................. 304,804 1,316,667

$200,000 under $500,000.............................................................................................. 75,023 592,756

$500,000 under $1,000,000........................................................................................... 17,168 187,600

$1,000,000 under $1,500,000........................................................................................ 3,267 52,710

$1,500,000 under $2,000,000........................................................................................ 1,330 21,752

$2,000,000 under $5,000,000........................................................................................ 2,103 40,244

$5,000,000 under $10,000,000...................................................................................... 437 10,039

$10,000,000 or more...................................................................................................... 279 6,719

Taxable returns, total..................................................................................................... 1,164,328 4,584,439

Nontaxable returns, total............................................................................................... 125,165 604,636NOTE: Detail may not add to totals because of rounding.

Source: IRS, Stat ist ics of Income, Individual Complete Report 2004, Publicat ion 1304, September 2006.

Paid to individuals


Table 2.1--2003, Individual Income Tax Returns with Itemized Deductions: Sources of Income, Adjustments, Itemized Deductions by Type, Exemptions, and Tax Items, by Size of Adjusted Gross Income--Continued (All figures are estimates based on samples--money amounts are in thousands of dollars)

Size of adjusted Home mortgage interest

gross income Paid to individuals

Number of Amount

returns

(74) (75)

All returns, total........................... 1,645,041 6,606,877 Under $5,000............................. 7,473 31,918

$5,000 under $10,000................. 11,820 31,403

$10,000 under $15,000............... 23,081 74,205

$15,000 under $20,000............... 29,624 80,251

$20,000 under $25,000............... 31,630 101,567

$25,000 under $30,000............... 44,839 243,118

$30,000 under $35,000............... 69,469 313,950

$35,000 under $40,000............... 52,435 247,022

$40,000 under $45,000............... 95,312 401,147

$45,000 under $50,000............... 86,861 312,599

$50,000 under $55,000............... 73,521 245,052

$55,000 under $60,000............... 82,146 294,846

$60,000 under $75,000............... 246,218 751,266

$75,000 under $100,000............. 308,453 888,614

$100,000 under $200,000........... 373,924 1,761,843

$200,000 under $500,000........... 86,903 554,503

$500,000 under $1,000,000......... 15,181 163,610

$1,000,000 under $1,500,000...... 2,893 46,388

$1,500,000 under $2,000,000...... 1,198 19,015

$2,000,000 under $5,000,000...... 1,601 34,156

$5,000,000 under $10,000,000.... 303 6,765

$10,000,000 or more.................. 156 3,639

Taxable returns, total.................. 1,509,740 5,921,734 Nontaxable returns, total............. 135,301 685,143


Source: IRS, Statistics of Income, Individual Complete Report 2003, Publication 1304, October 2005.

Footnotes at end of table.Table 2.1--2002, Individual Income Tax Returns with Itemized Deductions:Sources of Income, Adjustments, Itemized Deductions by Type, Exemptions, and Tax Items, by Size of Adjusted Gross Income--Continued(All figures are estimates based on samples--money amounts are in thousands of dollars)

Size of adjusted Home mortgage interestgross income Paid to individuals


(72) (73)All returns, total..................................... 1,745,449 7,097,724 Under $5,000....................................... 4,601 8,981 $5,000 under $10,000......................... 13,824 60,064 $10,000 under $15,000....................... 19,028 97,196 $15,000 under $20,000....................... 42,271 146,653 $20,000 under $25,000....................... 44,823 203,589 $25,000 under $30,000....................... 55,503 190,771 $30,000 under $35,000....................... 81,045 342,781 $35,000 under $40,000....................... 72,601 228,729 $40,000 under $45,000....................... 96,140 404,492 $45,000 under $50,000....................... 77,543 247,502 $50,000 under $55,000....................... 95,811 409,302 $55,000 under $60,000....................... 71,695 222,935 $60,000 under $75,000....................... 254,758 819,576 $75,000 under $100,000..................... 354,463 1,237,553 $100,000 under $200,000................... 348,921 1,577,031 $200,000 under $500,000................... 92,021 621,370 $500,000 under $1,000,000................ 14,211 164,466 $1,000,000 under $1,500,000............. 2,822 48,252 $1,500,000 under $2,000,000............. 1,260 23,805 $2,000,000 under $5,000,000............. 1,680 32,411 $5,000,000 under $10,000,000........... 271 6,118 $10,000,000 or more........................... 158 4,147 Taxable returns, total........................... 1,597,881 6,317,097 Nontaxable returns, total..................... 147,568 780,627 NOTE: Detail may not add to totals because of rounding.Source: IRS, Statistics of Income, Individual Complete Report 2002, Publication 1304, Febuary 2005.

Footnotes at end of table.Table 2.1--2001 Individual Income Tax Returns with Itemized Deductions: Sources of Income, Adjustments, Itemized Deductions by Type, Exemptions, and Tax Items, by Size of Adjusted Gross Income--Continued(All figures are estimates based on samples--money amounts are in thousands of dollars)



(72) (73)All returns, total................................. 1,782,605 7,253,600 Under $5,000................................... 10,253 88,701 $5,000 under $10,000...................... 7,729 42,201 $10,000 under $15,000.................... 24,264 72,115 $15,000 under $20,000.................... 37,299 181,815 $20,000 under $25,000.................... 46,697 196,936 $25,000 under $30,000.................... 59,225 260,054 $30,000 under $35,000.................... 57,614 220,526 $35,000 under $40,000.................... 74,440 298,526 $40,000 under $45,000.................... 75,959 210,731 $45,000 under $50,000.................... 90,886 313,643 $50,000 under $55,000.................... 99,082 282,914 $55,000 under $60,000.................... 80,941 207,993 $60,000 under $75,000.................... 275,490 1,070,469 $75,000 under $100,000.................. 335,569 1,110,506 $100,000 under $200,000................ 383,068 1,670,311 $200,000 under $500,000................ 100,238 706,490 $500,000 under $1,000,000............. 16,641 173,831 $1,000,000 under $1,500,000.......... 3,221 59,364 $1,500,000 under $2,000,000.......... 1,385 26,082 $2,000,000 under $5,000,000.......... 1,960 42,602 $5,000,000 under $10,000,000........ 433 11,277 $10,000,000 or more....................... 209 6,513 Taxable returns, total....................... 1,664,229 6,574,502 Nontaxable returns, total................. 118,376 679,098

NOTE: Detail may not add to totals because of rounding.Source: IRS, Statistics of Income, Individual Complete Report 2001, Publication 1304, March 2004.

Footnotes at end of table.Individual Income Tax Returns, Tax Year 2000Sources of Income, Adjustments, Itemized Deductions by Type, Exemptions, and Tax Items, by Size ofTable 2.1--Returns with Itemized Deductions: Adjusted Gross Income--Continued(All figures are estimates based on samples--money amounts are in thousands of dollars)



(72) (73)All returns, total............................... 1,789,783 7,087,712 Under $5,000................................. 6,716 36,772 $5,000 under $10,000.................... 9,401 24,535 $10,000 under $15,000.................. 17,758 63,655 $15,000 under $20,000.................. 33,799 128,074 $20,000 under $25,000.................. 70,141 296,936 $25,000 under $30,000.................. 43,184 131,144 $30,000 under $35,000.................. 54,793 173,323 $35,000 under $40,000.................. 87,289 313,435 $40,000 under $45,000.................. 78,586 261,814 $45,000 under $50,000.................. 74,592 277,487 $50,000 under $55,000.................. 79,467 295,694 $55,000 under $60,000.................. 102,315 307,278 $60,000 under $75,000.................. 277,851 972,970 $75,000 under $100,000................ 337,284 1,205,900 $100,000 under $200,000.............. 384,643 1,585,161 $200,000 under $500,000.............. 105,003 674,882 $500,000 under $1,000,000........... 18,182 184,803 $1,000,000 under $1,500,000........ 3,575 51,484 $1,500,000 under $2,000,000........ 1,841 31,470 $2,000,000 under $5,000,000........ 2,458 49,658 $5,000,000 under $10,000,000...... 572 12,883 $10,000,000 or more..................... 333 8,354 Taxable returns, total..................... 1,687,177 6,503,095 Nontaxable returns, total............... 102,606 584,618 NOTE: Detail may not add to totals because of rounding.SOURCE: IRS, Statistics of Income, Individual Income Tax Returns 2000, Publication 1304 (Rev. 04-2003).

Footnotes at end of table.Table 2.1--1999, Individual Income Tax Returns with Itemized Deductions: ofSources of Income, Adjustments, Itemized Deductions by Type, Exemptions, and Tax Items, by Size Adjusted Gross Income--Continued(All figures are estimates based on samples--money amounts are in thousands of dollars)

Size of adjusted Paid to individualsgross income Number of Amount

returns(72) (73)

All returns, total........................ 1,880,786 7,011,537 Under $5,000.......................... 6,727 34,716 $5,000 under $10,000............. 9,799 41,593 $10,000 under $15,000........... 29,373 80,854 $15,000 under $20,000........... 48,451 146,286 $20,000 under $25,000........... 51,981 165,274 $25,000 under $30,000........... 70,234 172,316 $30,000 under $35,000........... 59,273 201,365 $35,000 under $40,000........... 94,011 307,509 $40,000 under $45,000........... 77,638 298,878 $45,000 under $50,000........... 74,288 220,317 $50,000 under $55,000........... 95,785 362,852 $55,000 under $60,000........... 97,091 287,600 $60,000 under $75,000........... 321,365 1,116,615 $75,000 under $100,000......... 348,216 1,213,887 $100,000 under $200,000....... 365,370 1,463,984 $200,000 under $500,000....... 105,489 607,492 $500,000 under $1,000,000.... 17,499 158,100 $1,000,000 or more................ 8,197 131,898 Taxable returns, total.............. 1,773,875 6,498,347 Nontaxable returns, total........ 106,910 513,189 NOTE: Detail may not add to totals because of rounding.SOURCE: IRS, Statistics of Income, Individual Income Tax Returns 1999, Publication 1304 (Rev. 10-2001).

Footnotes at end of tableTable 2.1--1998 Individual Income Tax Returns with Itemized Deductions: Sources of Income, Adjustments, Itemized Deductions by Type, Exemptions, and Tax Items, by Size ofAdjusted Gross Income--Continued

(All figures are estimates based on samples--money amounts are in thousands of dollars)


returns(72) (73)

All returns, total.................. 1,767,626 6,454,266 Under $5,000.................... *1,948 *943 $5,000 under $10,000........ 10,033 30,165 $10,000 under $15,000...... 32,014 105,562 $15,000 under $20,000...... 49,830 171,952 $20,000 under $25,000...... 51,633 154,921 $25,000 under $30,000...... 60,152 209,942 $30,000 under $35,000...... 75,327 255,045 $35,000 under $40,000...... 91,489 311,816 $40,000 under $45,000...... 83,668 393,797 $45,000 under $50,000...... 109,687 283,470 $50,000 under $55,000...... 110,638 352,582 $55,000 under $60,000...... 94,050 324,953 $60,000 under $75,000...... 270,524 977,404 $75,000 under $100,000.... 292,175 939,208 $100,000 under $200,000... 324,624 1,145,441 $200,000 under $500,000... 87,815 524,372 $500,000 under $1,000,000 14,540 150,470 $1,000,000 or more........... 7,478 122,222 Taxable returns, total......... 1,653,583 5,878,657 Nontaxable returns, total.... 114,042 575,609

NOTE: Detail may not add to totals because of rounding.SOURCE: IRS, Statistics of Income, Individual Income Tax Returns 1998, Publication 1304 (Rev. 4-2001).

Footnotes at end of tableINDIVIDUAL INCOME TAX RETURNS, 1997

Table 2.1--Returns with Itemized Deductions: Sources of Income, Adjustments, Itemized Deductions by Type, Exemptions, and Tax Items, by Size ofAdjusted Gross Income--Continued(All figures are estimates based on samples--money amounts are in thousands of dollars)



(72) (73)All returns, total.................. 1,976,158 6,609,503 Under $5,000.................... 4,536 25,479 $5,000 under $10,000........ 17,038 79,471 $10,000 under $15,000...... 27,761 53,601 $15,000 under $20,000...... 38,395 164,743 $20,000 under $25,000...... 63,370 252,142 $25,000 under $30,000...... 62,977 203,747 $30,000 under $35,000...... 79,270 190,382 $35,000 under $40,000...... 96,323 269,815 $40,000 under $45,000...... 116,453 436,121 $45,000 under $50,000...... 141,717 426,220 $50,000 under $55,000...... 98,378 269,773 $55,000 under $60,000...... 140,486 520,709 $60,000 under $75,000...... 342,289 1,029,414 $75,000 under $100,000..... 334,525 810,766 $100,000 under $200,000... 294,677 985,987 $200,000 under $500,000... 96,317 616,626 $500,000 under $1,000,000 15,224 169,264 $1,000,000 or more........... 6,421 105,244 Taxable returns, total......... 1,889,993 6,138,800 Nontaxable returns, total.... 86,165 470,703

NOTE: Detail may not add to totals because of rounding.SOURCE: IRS, Statistics of Income, Individual Income Tax Returns 1997, Publication 1304 (Rev. 4-2000).

Paid to individuals

Table 2.1--1996, Individual Income Tax Returns with Itemized Deductions: Sources of IncomeAdjustments, Itemized Deductions by Type, Exemptions, and Tax Items, by Size ofAdjusted Gross Income--Continued(All figures are estimates based on samples--money amounts are in thousands of dollars)

Size of adjusted Paid to Individualsgross income


(72) (73)

All returns, total............................ 1,981,144 6,401,089 Under $5,000.............................. 9,189 35,988

$5,000 under $10,000................ 9,106 38,801

$10,000 under $15,000.............. 16,966 44,320

$15,000 under $20,000.............. 54,257 202,604

$20,000 under $25,000.............. 62,367 194,798

$25,000 under $30,000.............. 88,269 258,259

$30,000 under $35,000.............. 97,673 243,287

$35,000 under $40,000.............. 131,148 345,160

$40,000 under $45,000.............. 103,569 274,361

$45,000 under $50,000.............. 143,018 435,966

$50,000 under $55,000.............. 116,466 400,231

$55,000 under $60,000.............. 141,648 316,574

$60,000 under $75,000.............. 305,118 851,939

$75,000 under $100,000............ 323,090 843,002

$100,000 under $200,000.......... 280,561 1,165,895

$200,000 under $500,000.......... 79,612 497,524

$500,000 under $1,000,000....... 13,868 157,070

$1,000,000 or more.................... 5,219 95,310 Taxable returns, total.................. 1,901,850 5,984,177 Nontaxable returns, total............ 79,295 416,912 NOTE: Detail may not add to totals because of rounding.

SOURCE: IRS, Statistics of Income, 1996 Individual Tax Returns, Publication 1304 (Rev. 3 - 99).

Footnotes at end of table.Table 2.1--1995, Individual Income Tax Returns, Returns with Itemized Deductions: Sources of Income, Adjustments, Itemized Deductions by Type, Exemptions, and Tax Items, by Size of Adjusted Gross Income--Continued(All figures are estimates based on samples--money amounts are in thousands of dollars)

Size of adjustedgross income Paid to individuals


(72) (73)

All returns, total.................. 2,102,816 6,308,069 Under $5,000.................... 8,003 11,004 $5,000 under $10,000........ 18,590 43,538 $10,000 under $15,000...... 37,658 109,421 $15,000 under $20,000...... 61,287 207,123 $20,000 under $25,000...... 87,447 252,017 $25,000 under $30,000...... 89,545 271,600 $30,000 under $35,000...... 99,032 225,348 $35,000 under $40,000...... 126,654 404,712 $40,000 under $45,000...... 150,959 429,844 $45,000 under $50,000...... 140,812 359,778 $50,000 under $55,000...... 138,688 294,816 $55,000 under $60,000...... 149,402 318,150 $60,000 under $75,000...... 318,364 790,631 $75,000 under $100,000..... 322,456 994,142 $100,000 under $200,000... 265,832 1,025,219 $200,000 under $500,000... 73,183 385,939 $500,000 under $1,000,000 10,593 108,292 $1,000,000 or more........... 4,308 76,492 Taxable returns, total......... 1,996,639 5,814,874 Nontaxable returns, total.... 106,176 493,196 NOTE: Detail may not add to totals because of rounding.SOURCE: IRS, Statistics of Income, Individual Income Tax Returns 1995, Publication 1304 (Rev. 3-98).

Footnotes at end of table.Table 2.1--1994, Individual Income Tax Returns, Returns with Itemized Deductions: Sources of Income, Adjustments, Itemized Deductions by Type, Exemptions, and Tax Items, by Size of Adjusted Gross Income--Continued(All figures are estimates based on samples--money amounts are in thousands of dollars)



(72) (73)

All returns, total............................ 2,187,574 6,438,505 Under $5,000.............................. 4,470 16,160 $5,000 under $10,000.................. 28,011 61,911 $10,000 under $15,000................ 26,697 73,675 $15,000 under $20,000................ 59,263 140,897 $20,000 under $25,000................ 86,564 253,024 $25,000 under $30,000................ 113,160 256,924 $30,000 under $35,000................ 127,653 471,578 $35,000 under $40,000................ 123,261 334,565 $40,000 under $45,000................ 150,716 407,792 $45,000 under $50,000................ 172,461 335,478 $50,000 under $55,000................ 141,264 309,897 $55,000 under $60,000................ 140,477 310,492 $60,000 under $75,000................ 377,938 985,427 $75,000 under $100,000.............. 296,041 940,199 $100,000 under $200,000............ 257,725 972,124 $200,000 under $500,000............ 69,440 431,871 $500,000 under $1,000,000.......... 9,105 84,450 $1,000,000 or more..................... 3,328 52,041 Taxable returns, total................... 2,088,917 6,040,262 Nontaxable returns, total.............. 98,657 398,243

Table 2.1--1993, Individual Income Tax Returns, Returns with Itemized Deductions: Sources of Income, Adjustments, Itemized Deductions by Type, Exemptions and Tax Items, by Size of Adjusted Gross Income--Continued

(All figures are estimates based on samples--money amounts are in thousands o



returns

(72) (73)

All returns, total....................... 2,400,634 7,357,802 Under $5,000......................... 8,277 53,833

$5,000 under $10,000............. 19,972 48,252

$10,000 under $15,000........... 29,695 62,261

$15,000 under $20,000........... 72,794 268,602

$20,000 under $25,000........... 117,352 288,675

$25,000 under $30,000........... 131,079 374,219

$30,000 under $35,000........... 122,508 486,423

$35,000 under $40,000........... 129,062 366,303

$40,000 under $45,000........... 160,099 376,610

$45,000 under $50,000........... 158,847 328,727

$50,000 under $55,000........... 167,577 463,122

$55,000 under $60,000........... 143,093 391,652

$60,000 under $75,000........... 428,635 1,138,398

$75,000 under $100,000......... 366,596 1,019,854

$100,000 under $200,000....... 268,918 1,196,916

$200,000 under $500,000....... 63,743 353,396

$500,000 under $1,000,000..... 9,155 89,594

$1,000,000 or more................ 3,231 50,965

Taxable returns, total.............. 2,298,055 6,810,814 Nontaxable returns, total......... 102,579 546,988


SOURCE: Internal Revenue Service, Statistics of Income - 1993, Individual Income Tax Returns, Publication 1304, P

142 T.C. No. 17

UNITED STATES TAX COURT

MARVIN E. DEBOUGH, Petitioner v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 22894-12. Filed May 19, 2014.

P sold his primary residence in 2006 pursuant to an installment

sale agreement. The buyers’ indebtedness was secured by the

residence. Pursuant to I.R.C. sec. 121, P excluded $500,000 in gain

on the sale. In 2009 the buyers defaulted on the deed and P

reacquired the property. In a notice of deficiency to P, R determined

that P was required to recognize long-term capital gain on the

reacquisition of the property, including the $500,000 that P had

previously excluded from gain.

Held: P is required to recognize long-term capital gain on the

reacquisition of the property, pursuant to I.R.C. sec. 1038, including

gain previously excluded under I.R.C. sec. 121.

Matthew L. Fling, for petitioner.

John Schmittdiel and Randall L. Eager, for respondent.

- 2 -

OPINION

NEGA, Judge: Respondent determined a deficiency in petitioner’s Federal

income tax under section 1038(b) of $58,893 for taxable year 2009. The sole1

issue in this case is whether petitioner underreported his long-term capital gains as

a result of his failure to recognize gain pursuant to section 1038 on the

reacquisition of property where gain had been previously excluded under section

121.

Background

All of the facts in this case, which the parties submitted under Rule 122,

have been stipulated by the parties and are so found except as stated below.

Petitioner resided in Delano, Minnesota, at the time he filed his petition.

Petitioner purchased his personal residence and the surrounding 80 acres of

mixed-use land (property) in 1966 for $25,000. On July 11, 2006, petitioner2

agreed to sell the property to the Stonehawk Corp. and Catherine Constantine

All section references are to the Internal Revenue Code (Code) in effect for1

the year at issue. All Rule references are to the Tax Court Rules of Practice and

Procedure.

Petitioner’s purchase cost is listed in various filings with the Court as either2

$24,000 or $25,000. The parties’ joint stipulation of facts uses $25,000 as his cost

basis, and we use this number in our calculation of petitioner’s adjusted basis.

- 3 -

Properties, Inc. (buyers), on a contract for deed of $1,400,000. The contract

included the following terms:

(a) Purchaser shall pay to Seller, at his direction, the sum of One

Million Four Hundred Thousand and no/100 (1,400,000.00), as and

for the purchase price (Purchase Price) for the Property, payable as

follows: $250,000.00 in hand paid receipt of which is hereby

acknowledged. Interest shall accrue on July 11, 2006.

The balance of $1,150,000.00 shall be paid as follows:

The sum of $250,000.00 is due on July 12, 2007 plus interest at the

rate of five (5%) percent per annum.

The balance of $900,000.00 shall be paid as follows:

The sum of $25,000.00 which includes interest at the rate of five (5%)

percent per annum shall be made on the 11th day of January 2008 and

the 11th day of July 2008 and a like sum on the same two days of

each year thereafter until July 11, 2014, when the entire balance shall

become due and payable.

Petitioner originally reported an adjusted basis in the property of $742,204.

Petitioner calculated his basis in the property by adding (i) half of $25,000--the

original cost of the home, (ii) half of $50,000--capital improvements before sale,

(iii) $700,000--stepped-up basis from his deceased spouse, and (iv) $4,704--

commissions and other expenses of sale. In the parties’ joint stipulation of facts,

respondent and petitioner stipulated a basis of $779,704. Using his originally3

We are unsure how petitioner and respondent arrived at this number. 3

(continued...)

- 4 -

calculated basis of $742,204, petitioner reported gain on the sale of the property of

$657,796, the difference between the gross sales price of $1,400,000 and the

adjusted basis of $742,204.

After his wife’s death petitioner received a $250,000 payment related to the

sale of the property during the 2006 taxable year. Petitioner and his deceased

spouse reported this income on Form 6252, Installment Sale Income, attached to

their Form 1040, U.S. Individual Income Tax Return, for the 2006 taxable year.

Petitioner and his deceased spouse calculated their reportable gain for tax year

2006 by (i) excluding $500,000 of gain pursuant to section 121, (ii) calculating

their gross profit percentage by dividing the $157,796 in remaining gain

($657,796�$500,000 = $157,796) by the $1,400,000 sale price exclusive of

commissions and other costs of sale, and (iii) multiplying the gross profit

percentage by the amount of money received in 2006. Petitioner reported

installment sale gain for 2006 of $28,178 on the basis of these calculations.

Petitioner received another $250,000 payment related to the property during

2007, which he reported on his 2007 Form 1040. Using the same gross profit

percentage as he used for 2006, petitioner reported $28,178 in taxable gain on his

(...continued)3

However, stipulations are generally treated as conclusive admissions. Rule 91(e).

We therefore accept the parties’ stipulated basis.

- 5 -

2007 return. Petitioner received a $5,000 payment related to the property during

2008, which he reported on his 2008 Form 1040. Again using the same gross

profit percentage as he had used for 2006 and 2007, petitioner reported gain of

$564 for 2008. In total, petitioner reported $56,920 in gain over the course of tax

years 2006, 2007, and 2008.

Subsequently, the buyers failed to comply with the terms of the contract for

deed. On May 29, 2009, petitioner’s agent served the buyers with a notice of

cancellation of contract for deed. The buyers failed to cure the default or to

respond to the notice of cancellation of contract for deed. As a result, petitioner

reacquired the property on or about July 29, 2009. Petitioner incurred $3,723 in

costs related to repossession of the property.

Petitioner treated his reacquisition of the property in 2009 as a reacquisition

of property in full satisfaction of indebtedness under section 1038. Petitioner

recognized $97,153 in the form of long-term capital gains related to the

reacquisition of the property on his 2009 Form 1040. Petitioner subsequently filed

a Amended Form 1040A, U.S. Individual Income Tax Return, for 2009 that

removed the $97,153 in long-term capital gains. However, the parties have

stipulated and agreed that petitioner was, at a minimum, obligated to report

- 6 -

$97,153 in long-term capital gains related to the sale and reacquisition of the

property for the 2009 taxable year.

Respondent mailed petitioner a notice of deficiency (notice) dated June 18,

2012, prepared by the St. Paul Office of the Internal Revenue Service (IRS) with

respect to tax year 2009. In the notice respondent determined that petitioner was

required to recognize $443,644 in long-term capital gains related to the sale and

reacquisition of the property. Respondent later recalculated this amount to be

$448,080 because of the omission of the $5,000 payment petitioner received in

taxable year 2008 and respondent’s failure to account for the tax attributable to

this payment that petitioner had previously reported under the installment sale

method. Respondent calculated the $448,080 in long-term capital gains by

subtracting the $56,920 petitioner had reported for tax years 2006, 2007, and 2008

from the total $505,000 in cash petitioner had received over those same years.

Petitioner timely filed a petition with the Court seeking redetermination of the

deficiency set forth in the notice.

Discussion

I. Burden of Proof

Generally, the Commissioner’s determinations are presumed correct, and the

taxpayer bears the burden of proving otherwise. Rule 142(a); see Welch v.

- 7 -

Helvering, 290 U.S. 111, 115 (1933). The Commissioner typically bears the

burden of proof with respect to any increase in deficiency. Rule 142(a). However,

because our conclusions are based on the preponderance of evidence, we need not

decide whether petitioner or respondent bears the burden of proof. See Knudsen

v. Commissioner, 131 T.C. 185, 189 (2008).

II. Interplay of Sections 121 and 1038

The sole issue for decision in this case involves the interplay between

sections 121 and 1038. Section 121 allows electing taxpayers to exclude gain

resulting from the sale or exchange of property if the property has been owned and

used as their principal residence for periods aggregating two or more years over

the five-year period before sale. Section 121(b) applies certain limitations on the

amount of gain that can be excluded. Unmarried taxpayers may exclude up to

$250,000 in gain from the sale of a qualifying residence. Sec. 121(b)(1). Married

taxpayers meeting certain requirements and filing a joint return can exclude up to

$500,000 in gain from the sale of a qualifying principal residence. Sec.

121(b)(2)(A). Taxpayers may exclude gain from the sale of a principal residence

under section 121 only once every two years. Sec. 121(b)(3).

Congress added section 1038 to the Code by the Act of September 2, 1964,

Pub. L. No. 88-570, sec. 2, 78 Stat. at 854. Before the enactment of section 1038,

- 8 -

reacquisition of real property was treated as a taxable exchange under section 453.

S. Rept. No. 88-1361, at 5 (1964), 1964-2 C.B. 828, 831. If, as in this case, the

initial sale of the property was reported as an installment sale, gain or loss on

reacquisition of the property was treated as the difference between the fair market

value of the property at the time of reacquisition, including improvements thereon,

and the basis of the purchaser’s obligations which were discharged by the

repossession of the property. Sec. 1.453-5(b)(2), Income Tax Regs. Congress

added section 1038 to remedy situations where taxpayers were forced to recognize

gain upon repossession of property by reference to the fair market value at the

time of repossession. S. Rept. No. 88-1361, supra at 1-3, 1964-2 C.B. at 828-829.

Congress believed measuring gain in this manner was inappropriate “because (1)

the taxpayer was actually in no better position than he was before he made the

sale; (2) valuation at the time of repossession was difficult; (3) to tax the initial

seller on gain at the time of repossession was to tax him on gain not yet realized;

and (4) because the taxpayer had not received a monetary return with respect to

the property, funds to pay the taxes may be unavailable.” Conners v.

Commissioner, 88 T.C. 541, 544-545 (1987) (citing S. Rept. 1361, supra, 1964-2

C.B. at 828).

- 9 -

Section 1038 provides rules for computing gain when a seller repossesses

real property in satisfaction of a debt secured by that real property. Generally,

section 1038 restores the seller to his position before the sale of the property by

ignoring gain or loss upon repossession. However, if the seller has received

“money and * * * other property” as payments before the repossession, section

1038 taxes the seller on gain attributable to these payments “to the extent that

these amounts have not previously been reported as income.” Sec. 1038(b)(1); S.

Rept. No. 88-1361, supra at 6, 1964-2 C.B. at 832; see also Greene v.

Commissioner, 76 T.C. 1018, 1025 (1981) (“Congress intended that the gain

which a taxpayer would be responsible for reporting upon repossession should not

exceed the payments he actually had received prior to that time.”). Specifically,

section 1038(a) and (b) provides:

SEC. 1038. CERTAIN REACQUISITIONS OF REAL PROPERTY.

(a) General Rule.--If--

(1) a sale of real property gives rise to indebtedness to

the seller which is secured by the real property sold, and

(2) the seller of such property reacquires such property in

partial or full satisfaction of such indebtedness,

then, except as provided in subsections (b) and (d), no gain or

loss shall result to the seller from such reacquisition, and no

- 10 -

debt shall become worthless or partially worthless as a result of

such reacquisition.

(b) Amount of Gain Resulting.--

(1) In general.--In the case of a reacquisition of real

property to which subsection (a) applies, gain shall result from

such reacquisition to the extent that--

(A) the amount of money and the fair market value

of other property (other than obligations of the

purchaser) received, prior to such reacquisition, with

respect to the sale of such property, exceeds

(B) the amount of the gain on the sale of such

property returned as income for periods prior to such

reacquisition.

(2) Limitation.--The amount of gain determined under

paragraph (1) resulting from a reacquisition during any taxable

year beginning after the date of the enactment of this section

shall not exceed the amount by which the price at which the

real property was sold exceeded its adjusted basis, reduced by

the sum of--

(A) the amount of the gain on the sale of such

property returned as income for periods prior to the

reacquisition of such property, and

(B) the amount of money and the fair market value

of other property (other than obligations of the purchaser

received with respect to the sale of such property) paid or

transferred by the seller in connection with the

reacquisition of such property.

For purposes of this paragraph, the price at which real property

is sold is the gross sales price reduced by the selling

- 11 -

commissions, legal fees, and other expenses incident to the sale

of such property which are properly taken into account in

determining gain or loss on such sale.

(3) Gain recognized.--Except as provided in this section,

the gain determined under this subsection resulting from a

reacquisition to which subsection (a) applies shall be

recognized, notwithstanding any other provision of this

subtitle.

A seller who reacquires section 1038 property adjusts his basis in the

property in accordance with section 1038(c), which provides:

SEC. 1038(c). Basis of Reacquired Real Property.--If

subsection (a) applies to the reacquisition of any real property, the

basis of such property upon such reacquisition shall be the adjusted

basis of the indebtedness to the seller secured by such property

(determined as of the date of reacquisition), increased by the sum of--

(1) the amount of the gain determined under subsection

(b) resulting from such reacquisition, and

(2) the amount described in subsection (b)(2)(B).

If any indebtedness to the seller secured by such property is not

discharged upon the reacquisition of such property, the basis of such

indebtedness shall be zero.

Congress contemplated the potential interaction between section 1038 and

section 121 by including section 1038(e), which provides:

SEC. 1038(e). Principal Residences.--If--

(1) subsection (a) applies to a reacquisition of real

property with respect to the sale of which gain was not

- 12 -

recognized under section 121 (relating to gain on sale of

principal residence); and

(2) within 1 year after the date of the reacquisition of

such property by the seller, such property is resold by him,

then, under regulations prescribed by the Secretary, subsections (b),

(c), and (d) of this section shall not apply to the reacquisition of such

property and, for purposes of applying section 121, the resale of such

property shall be treated as a part of the transaction constituting the

original sale of such property.

Section 1038(e) provides taxpayers with a “special rule” that “in effect ignores the

repossession * * * where the residence is again sold in a reasonable time.” S.

Rept. No. 88-1361, supra at 7, 1964-2 C.B. at 832.

Petitioner and respondent agree that section 1038(e) does not govern the

instant case since petitioner did not resell the property within one year of

repossession. However, they disagree about the import of section 1038(e).

Respondent argues that section 1038(e) confirms that Congress was aware of the

interplay between sections 1038 and 121 and drafted section 1038(e) as a limited

response thereto; the absence of a “more generous provision” regarding the

overlap of sections 1038 and 121 confirms that Congress intended for taxpayers in

petitioner’s situation to be treated under the general rules of section 1038.

Petitioner argues that if Congress had intended to completely nullify the section

- 13 -

121 exclusion upon reacquisition of a taxpayer’s principal residence, it would

have drafted a provision explicitly so stating.

Respondent further argues that because petitioner does not meet the

requirements for special treatment under section 1038(e), he is governed by the

general rule under section 1038(b) requiring him to recognize gain upon

repossession of the property to the extent of money and other property received

before repossession. For the reasons enumerated below, we agree with

respondent.

A. Section 1038 Applies to Sale and Reacquisition of the Property.

The general rule of section 1038(a) is that if a sale of real property gives rise

to indebtedness to the seller which is secured by the sold property and the seller

reacquires such property in partial or full satisfaction of such indebtedness the

seller does not recognize gain or loss upon the reacquisition. Conners v.

Commissioner, 88 T.C. at 543. Section 1038(b) requires the seller to recognize

gain if he has received “money” or “other property” to the extent these amounts

exceed the amount of gain on the sale returned as income before reacquisition.

By its terms, petitioner’s sale of his principal residence and subsequent

reacquisition in satisfaction of indebtedness secured by the property falls within

the ambit of section 1038. Petitioner sold the property to the buyers in exchange

- 14 -

for the contract for deed, which evidenced the buyers’ indebtedness and

petitioner’s security interest in the property. After the buyers defaulted on the

contract for deed, petitioner reacquired his former residence in full satisfaction of

the indebtedness secured by the property. Stated simply, section 1038 applies

squarely to the facts at issue. The only remaining inquiry, then, is whether

petitioner must recognize gain previously excluded by reason of the section 121

exclusion.

B. Petitioner Must Recognize Gain Previously Excluded Under Section

121.

Since section 1038 applies to the reacquisition of the property, we proceed

to determine whether petitioner must recognize gain previously excluded under

section 121. A reading of the statute leads to two important conclusions: (i)

section 1038(e) expressly contemplates the sale and subsequent reacquisition of a

seller’s principal residence and (ii) other than section 1038(e), section 1038 does

not contain any provision that would allow a taxpayer to exclude section 121 gain

resulting from a sale and subsequent reacquisition of a principal residence.

As previously discussed, section 1038(e) contains a special rule for when

the property sold is the taxpayer’s principal residence and the taxpayer resells the

residence within one year of reacquisition. In fact, section 1038(e) is titled

B. Petitioner Must Recogng ize Gain Previously Ey xcluded Under Section

121.

Since section 1038 applies to the reacquisition of the property, we proceed

to determine whether petitioner musmm t recognize gain previously excluded under

section 121. A reading of the statute leads to two impomm rtant conclusions: (i)

section 1038(e) expressly coy ntemplmm ates the sale and subsequent reacquisition of a

seller’s principal residence and (ii) other than section 1038(e), section 1038 does

not contain any provision that would allow a taxpayer to exclude section 121 gain

resulting from a sam le and subsequent reacquisition of a principal residence.

- 15 -

“Principal residences”, indicating that Congress foresaw the potential interaction

of sections 1038 and 121. Section 1038(e) thus operates as an exception to the

general rule of section 1038 when the subject property is the seller’s principal

residence. Sellers fulfilling the requirements of section 1038(e) are essentially

allowed to collapse the initial sale and subsequent resale into one transaction. The

legislative history behind the section 1038(e) exception is unclear as to why

Congress limited the exception to sellers who resell property within one year of

reacquisition. Whatever the reasoning behind the exception, the relief offered by

section 1038(e) is clearly limited to those sellers who resell their principal

residences within one year of reacquisition. Since petitioner did not resell the

property within one year of reacquisition, he is ineligible for the section 1038(e)

exception and must recognize gain in accordance with the general rules of section

1038.

Petitioner argues that “[t]he statute is devoid of any language indicating that

the [s]ection 121 exclusion would be disallowed on a reacquisition”. Petitioner

also argues that we should interpret the absence of any specific provision in

section 1038 mandating recognition of previously excluded section 121 gain to

mean that section 1038 does not apply to recapture section 121 gain under any

circumstances. To the contrary, the flush language of section 1038(e) specifically

- 16 -

provides that section 1038(b), (c), and (d) shall not apply to the reacquisition of a

principal residence, but only if the seller resells the residence within one year of

reacquisition. Petitioner is understandably confused since the special rule of

section 1038(e) is stated in the negative: sellers who reacquire a principal

residence but then resell it within one year do not have to recognize gain under

section 1038(b). However, the positive rule can be stated thusly: sellers who

reacquire a principal residence but do not resell it within one year must recognize

any gain under section 1038(b) because, unless section 1038(e) applies, section

1038 overrides the exclusion under section 121.

Additionally, the special rule in section 1038(e) calls to mind the statutory

canon of construction “expressio unius est exclusio alterius”, meaning that if a

statute provides specific exceptions to a general rule, we may infer that Congress

intended to exclude any further exceptions “‘in the absence of evidence of a

contrary legislative intent.’” United States v. Smith, 499 U.S. 160, 167 (1991)

(quoting Andrus v. Glover Constr. Co., 446 U.S. 608, 616-617 (1980)); Catterall

v. Commissioner, 68 T.C. 413, 421 (1977), aff’d sub nom. Vorbleski v.

Commissioner, 589 F.2d 123 (3d Cir. 1978). Here, section 1038(e) is the only

exception to the general rule of section 1038 requiring recognition of gain to the

extent a seller receives money and other property before reacquisition. We are

- 17 -

disinclined to carve out other exceptions to section 1038 where Congress has not

expressly done so.

C. Recognition of Gain Conforms With the Intent of Section 1038 and

the Economics of the Transaction.

Congress enacted section 1038 to remedy the hardship worked on sellers

forced to recognize gain or loss purely on account of fluctuations in fair market

value where upon repossession the sellers are in a position substantially similar to

the position they were in before the sale. However, Congress limited the

nonrecognition of gain only to any change in the value of the underlying property,

not to cash or other property received by the seller before reacquisition. Sec.

1038(b); S. Rept. No. 88-1361, supra at 5, 1964-2 C.B. at 831 (“Your committee

believes that it is inappropriate to measure gain upon repossession by reference to

the fair market value of the repossessed property. * * * Apart from any payments

he may have received, he actually is in no better position than he was before he

made the sale.” (Emphasis added.)). Section 1038(b) requires recognition of gain

where a seller receives “money” or “other property” before reacquisition and

therefore occupies an improved position after reacquisition.

Petitioner received $505,000 in cash before the reacquisition of his former

principal residence. Petitioner has received “money” as defined within section

Congress enacted section 1038 to remedy thy e hardship worked on sellers

forced to recognize gain or loss purely ony account of fluctuations in fair market

value where upon repossession the sellers are in a position substantially siy milar to

the position they were iy n before the sale. However, Congress limited the

nonrecognition of gain only to any chy ange in the value of the underlying property,

not to cash or other property recey ived by the seller before reacquisition.

- 18 -

1038(b) that exceeds gain previously returned as income on the sale of the

property during periods before the reacquisition. We see nothing unfair in the

Code’s taxing petitioner on receipt of this income, as he is actually in a better

position than he was before the sale by virtue of having ownership over both the

property and $505,000. See also Hovhannissian v. Commissioner, T.C. Memo.

1997-444, 74 T.C.M. (CCH) 752, 757 (“Section 1038(b) ensures that all receipts

of cash and other property by the seller prior to reacquisition are taxed as income

to return the seller to as close to status quo ante with respect to the reacquired

property as circumstances will permit.”). The section 1038(b) requirement of

recognition of gain is “mandatory and does not excuse any taxpayer from

recognizing gain and paying taxes thereon”. Greene v. Commissioner, 76 T.C. at

1025; see also Kregear v. Commissioner, T.C. Memo. 1987-258, 53 T.C.M.

(CCH) 869, 872 (“The language of section 1038, however, is mandatory. We may

not disregard the plain language of the statute.”).

Our decision ensures that tax treatment of the transactions matches the

underlying economic reality. Petitioner received $505,000 in income and is taxed

on that income absent any applicable exclusion or deduction.

- 19 -

D. Our Interpretation of Section 1038 Accords With Basic Federal

Income Tax Principles.

Respondent contends and we agree that application of section 1038 to the

case at hand is consistent with the fundamental tenets of Federal tax law. Gross

income has long been defined to include any accession to wealth, clearly realized,

and over which the taxpayer has complete dominion. Commissioner v. Glenshaw

Glass Co., 348 U.S. 426, 431 (1955). Petitioner attempts to counter this basic

principle of tax law by arguing that “every exclusion or deduction provided by

Congress creates an exception to the taxation of wealth ascended to, and it is not

reasonable to assume that by remaining silent on the question, Congress intended

to nullify a tax benefit it has created.” As noted, section 1038 is not silent on the

taxation of gain previously excluded under section 121 since section 1038(e)

provides a special rule for sellers who resell a principal residence within one year

of reacquisition. Further, petitioner’s argument acknowledges that it is Congress

who must create exclusions and deductions in order for taxpayers not to be taxed

on the receipt of income, and Congress has not created any exclusion or deduction

applicable to petitioner. Petitioner’s $505,000 is clearly an accession to wealth,

and we agree with respondent that section 1038, in the absence of any statutory

exceptions, mandates inclusion of that amount in petitioner’s gross income.

Respondent contends and we agree that application of section 1038 to the

case at hand is consistent with the fundamental tenets of Federal tax law. Gross

income has long been defined to include any accey ssion to wealth, clearly realy ized,

and over which the taxpayer has complmm ete dominion.

- 20 -

In reaching our holding, we have considered all arguments made, and, to the

extent not mentioned above, we conclude they are moot, irrelevant, or without

merit.

To reflect the foregoing,

Decision will be entered for

respondent.

2601 North Lamar, Suite 201 Austin, Texas 78705 (512) 475-1352FAX (512) 475-1505 EMAIL: [email protected] WEBSITE: www.sml.state.tx.us

&

WRITTEN NOTICE FROM THE COMMISSIONER PURSUANT TO SECTION 156.404 OF THE TEXAS FINANCE CODE

Re: Seller Financing de minimis exemption to individuals licensed under Chapter 156

Texas, in 156.202 (a) (3) of the Finance Code (the “Code”), has had a statutory de minimis exemption from licensure under Chapter 156 for “an owner of real property who in any 12-consecutive-month period makes no more than five mortgage loans to purchasers of the property for all or part of the purchase price of the real estate against which the mortgage is secured” since 2007. The Department has received no consumer complaints regarding this exemption.

In the 81st legislative session, HB 10 was passed and enacted as Chapter 180 of the Code. This Chapter, the Texas Safe and Fair Enforcement of Mortgage Licensing Act (“TX SAFE Act”), does not contain the de minimis exemption and, therefore, could be considered to be in conflict with Chapter 156. However, House Bill 2774, which amended § 156.202, but which left §156.202 (a) (3) intact, was the last bill passed by the 81st legislative session, and therefore, if in conflict with House Bill 10, House Bill 2774 prevails as provided for in Government Code §311.025.

Further Rule 80.1 (6)(B) (ii), provided for the de minimis exemption until it was repealed by the Finance Commission at the department’s request in response to strict HUD interpretations on other issues provided in January, 2010. Subsequently, HUD has verbally indicated that states should enforce their specific state statutes even if in variance with the model SAFE act language, if the state takes a reasonable approach and can justify the variance. Additionally, Rep. Barney Frank, Chair of the House Committee on Financial Services and Rep. Spencer Bachus, Ranking Member on the same committee, who were the primary authors of the federal SAFE Act, issued a letter July 22, 2010 stating they “think it is permissible for States to consider a de minimis standard for registration and licensing requirements under the Act……”.

The Department has spoken with numerous citizens directly and staff members from the offices of thirteen legislators whose constituents are economically impacted by the loss of a de minimis exemption from licensure. Seller financing in part or in whole has historically been an important part of facilitating real estate sales transactions. To depart from long standing Texas de minimis tradition in the midst of the current credit restrictions and a market where sellers are having difficulty selling homes would run counter to the efforts of stabilizing the housing market and reviving the economy.

HUD’s final rules have not been published and with the passing of the Dodd Frank Wall Street Reform and Consumer Protection Act, could be delayed longer than originally expected due to the creation and transfer of oversight authority to the Financial Consumer Protection Bureau.

Therefore, and pursuant to the authority granted to the Commissioner in § 156.404, written notice is hereby given, that the Department will continue to allow the exemption found in § 156.202(a) (3), until or unless there is a subsequent statutory amendment or a rule adopted under this chapter, in which case said amendment or rule will supersede. Further, should HUD or its successor determine that no de minimis is appropriate under the SAFE Act, this written notice will have no effect.

__________________________ August 12, 2010Douglas B. FosterCommissioner

In connection with the above notice concerning the de minimis exemption for seller financed transactions issued on August 12, 2010, this notice is issued to clarify questions which have risen concerning compliance with federal regulations.

The position expressed in the notice is that an individual who engages in no more than five mortgage loans in a rolling twelve month period is exempt from the Department’s licensing requirements. The Department holds the position that exemption from licensing does not relieve that individual from complying with all applicable laws and rules pertaining to disclosures required by RESPA, new GFE, TILA, APR, new HOEPA, High Priced Loans, etc and the timing of each disclosure and rules.

__________________________ August 17, 2010Douglas B. FosterCommissioner

Installment Sales Section 453 of the Internal Revenue Code Attribution Rules for “related person.” (1) Related person Except for purposes of subsections (g) and (h), the term ‘‘related person’’ means— (A) a person whose stock would be attributed under section 318(a) (other than paragraph (4) thereof) to the person first disposing of the property, or (B) a person who bears a relationship described in section 267(b) to the person first disposing of the property.

318(a)

§ 318. Constructive ownership of stock (a) General rule For purposes of those provisions of this subchapter to which the rules contained in this section are expressly made applicable— (1) Members of family (A) In general An individual shall be considered as owning the stock owned, directly or indirectly, by or for— (i) his spouse (other than a spouse who is legally separated from the individual under a decree of divorce or separate maintenance), and (ii) his children, grandchildren, and parents. (B) Effect of adoption For purposes of subparagraph (A)(ii), a legally adopted child of an individual shall be treated as a child of such individual by blood. (2) Attribution from partnerships, estates, trusts, and corporations (A) From partnerships and estates Stock owned, directly or indirectly, by or for a partnership or estate shall be considered as owned proportionately by its partners or beneficiaries. (B) From trusts (i) Stock owned, directly or indirectly, by or for a trust (other than an employees’ trust described in section 401(a) which is exempt from tax under section 501(a)) shall be considered as owned by its beneficiaries in proportion to the actuarial interest of such beneficiaries in such trust. (ii) Stock owned, directly or indirectly, by or for any portion of a trust of which a person is considered the owner under subpart E of part I of subchapter J (relating to grantors and others treated as substantial owners) shall be considered as owned by such person. (C) From corporations If 50 percent or more in value of the stock in a corporation is owned, directly or indirectly, by or for any person, such person shall be considered as owning the stock owned, directly or indirectly, by or for such corporation, in that proportion which the value of the stock which such person so owns bears to the value of all the stock in such corporation. (3) Attribution to partnerships, estates, trusts, and corporations

(A) To partnerships and estates Stock owned, directly or indirectly, by or for a partner or a beneficiary of an estate shall be considered as owned by the partnership or estate. (B) To trusts (i) Stock owned, directly or indirectly, by or for a beneficiary of a trust (other than an employees’ trust described in section 401(a) which is exempt from tax under section 501(a)) shall be considered as owned by the trust, unless such beneficiary’s interest in the trust is a remote contingent interest. For purposes of this clause, a contingent interest of a beneficiary in a trust shall be considered remote if, under the maximum exercise of discretion by the trustee in favor of such beneficiary, the value of such interest, computed actuarially, is 5 percent or less of the value of the trust property. (ii) Stock owned, directly or indirectly, by or for a person who is considered the owner of any portion of a trust under subpart E of part I of subchapter J (relating to grantors and others treated as substantial owners), shall be considered as owned by the trust. (C) To corporations If 50 percent or more in value of the stock in a corporation is owned, directly or indirectly, by or for any person, such corporation shall be considered as owning the stock owned, directly or indirectly, by or for such person. (4) Options If any person has an option to acquire stock, such stock shall be considered as owned by such person. For purposes of this paragraph, an option to acquire such an option, and each one of a series of such options, shall be considered as an option to acquire such stock. (5) Operating rules (A) In general Except as provided in subparagraphs (B) and (C), stock constructively owned by a person by reason of the application of paragraph (1), (2), (3), or (4), shall, for purposes of applying paragraphs (1), (2), (3), and (4), be considered as actually owned by such person. (B) Members of family Stock constructively owned by an individual by reason of the application of paragraph (1) shall not be considered as owned by him for purposes of again applying paragraph (1) in order to make another the constructive owner of such stock. (C) Partnerships, estates, trusts, and corporations Stock constructively owned by a partnership, estate, trust, or corporation by reason of the application of paragraph (3) shall not be considered as owned by it for purposes of applying paragraph (2) in order to make another the constructive owner of such stock. (D) Option rule in lieu of family rule For purposes of this paragraph, if stock may be considered as owned by an individual under paragraph (1) or (4), it shall be considered as owned by him under paragraph (4). (E) S corporation treated as partnership

For purposes of this subsection— (i) an S corporation shall be treated as a partnership, and (ii) any shareholder of the S corporation shall be treated as a partner of such partnership. The preceding sentence shall not apply for purposes of determining whether stock in the S corporation is constructively owned by any person.

267(b)

(b) Relationships The persons referred to in subsection (a) are: (1) Members of a family, as defined in subsection (c)(4); (2) An individual and a corporation more than 50 percent in value of the outstanding stock of which is owned, directly or indirectly, by or for such individual; (3) Two corporations which are members of the same controlled group (as defined in subsection (f)); (4) A grantor and a fiduciary of any trust; (5) A fiduciary of a trust and a fiduciary of another trust, if the same person is a grantor of both trusts; (6) A fiduciary of a trust and a beneficiary of such trust; (7) A fiduciary of a trust and a beneficiary of another trust, if the same person is a grantor of both trusts; (8) A fiduciary of a trust and a corporation more than 50 percent in value of the outstanding stock of which is owned, directly or indirectly, by or for the trust or by or for a person who is a grantor of the trust; (9) A person and an organization to which section 501 (relating to certain educational and charitable organizations which are exempt from tax) applies and which is controlled directly or indirectly by such person or (if such person is an individual) by members of the family of such individual; (10) A corporation and a partnership if the same persons own— (A) more than 50 percent in value of the outstanding stock of the corporation, and (B) more than 50 percent of the capital interest, or the profits interest, in the partnership; (11) An S corporation and another S corporation if the same persons own more than 50 percent in value of the outstanding stock of each corporation; (12) An S corporation and a C corporation, if the same persons own more than 50 percent in value of the outstanding stock of each corporation; or (13) Except in the case of a sale or exchange in satisfaction of a pecuniary bequest, an executor of an estate and a beneficiary of such estate.

(Top 3 inches reserved for recording data)

Page 1 of 6

CONTRACT FOR DEED by Individual(s)

Minnesota Uniform Conveyancing Blanks Form 30.1.1 (2011)

DATE: (month/day/year)

THIS CONTRACT FOR DEED (the “Contract”) is made on the above date by (insert name and marital status of each Seller)

and

(“Seller”),

(insert name of each Purchaser)

(“Purchaser”). (Check box if joint tenancy.)

Seller and Purchaser agree to the following terms:

1. Property Description. Seller hereby sells and Purchaser hereby buys real property in

County, Minnesota, described as follows:

Check here if all or part of the described real property is Registered (Torrens) together with all hereditaments and appurtenances belonging thereto (the “Property”). Unless otherwise specified, Seller hereby delivers possession of the Property to Purchaser on the date hereof. Check applicable box:

The Seller certifies that the Seller does not know of any wells on the described real property.

A well disclosure certificate accompanies this document or has been electronically filed. (If electronically filed, insert WDC number:

I am familiar with the property described in this instrument and I certify that the status and number of wells on the described real property have not changed since the last previously filed well disclosure certificate.

.)

of 6 Minnesota Uniform Conveyancing Blanks Form 30.1.1

2. Title. Seller warrants that title to the Property is, on the date of this Contract, subject only to the following exceptions: (a) Covenants, conditions, restrictions (without effective forfeiture provisions) and declarations of record, if any; (b) Reservation of minerals or mineral rights by the State of Minnesota, if any; (c) Utility and drainage easements which do not interfere with present improvements; (d) Applicable laws, ordinances, and regulations; (e) The lien of real estate taxes and installments of special assessments which are payable by Purchaser pursuant to

paragraph 6 of this Contract; and (f) The following liens or encumbrances:

3. Delivery of Deed and Evidence of Title. Upon Purchaser’s full performance of this Contract, Seller shall: (a) Execute, acknowledge, and deliver to Purchaser a Deed, in recordable form,

conveying marketable title to the Property to Purchaser, subject only to the following exceptions: (i) Those exceptions referred to in paragraph 2(a), (b), (c), (d), and (e) of this Contract; (ii) Liens, encumbrances, adverse claims or other matters which Purchaser has created, suffered or permitted to accrue

after the date of this Contract; and (iii) The following liens or encumbrances:

(b) Deliver to Purchaser the abstract of title to the Property, without further extension, to the extent required by the purchase agreement (if any) between Seller and Purchaser.

4. Purchase Price. Purchaser shall pay to Seller at

the sum of Dollars ($ ), as and for the purchase price (the “Purchase Price”) for the Property, payable as follows:

5. Prepayment. Unless otherwise provided in this Contract, Purchaser shall have the right to fully or partially prepay this Contract at any time without penalty. Any partial prepayment shall be applied first to payment of amounts then due under this Contract, including unpaid accrued interest, and the balance shall be applied to the principal installments to be paid in the inverse order of their maturity. Partial prepayment shall not postpone the due date of the installments to be paid pursuant to this Contract or change the amount of such installments.


6. Real Estate Taxes and Assessments. Real estate taxes and installments of special assessments which are due and payable in

the year in which this Contract is dated shall be paid as follows: Purchaser shall pay, before penalty accrues, all real estate taxes and installments of special assessments assessed against the Property which are due and payable in all subsequent years. Seller warrants that the real estate taxes and installments of special assessments which were due and payable in the years preceding the year in which this Contract is dated are paid in full. If the Property is subject to a recorded declaration providing for assessments to be levied against the Property by any owners’ association, Purchaser shall promptly pay, when due, all assessments imposed by the owners’ association or other governing body as required by the provisions of the declaration or other related documents.

7. Property Insurance. (a) Insured Risks and Amounts. Purchaser shall keep all buildings, improvements, and fixtures now or later located on or a part

of the Property insured against loss by fire, lightning and such other perils as are included in a standard “all-risk” endorsement, and against loss or damage by all other risks and hazards covered by a standard extended coverage insurance policy, including, without limitation, vandalism, malicious mischief, burglary, theft and, if applicable, steam boiler explosion. Such insurance shall be in an amount no less than the full replacement cost of the buildings, improvements, and fixtures, without deduction for physical depreciation. If any of the buildings, improvements, or fixtures are located in a federally designated flood prone area, and if flood insurance is available for that area, Purchaser shall procure and maintain flood insurance in amounts reasonably satisfactory to Seller.

(b) Other Terms. The insurance policy shall contain a loss payable clause in favor of Seller which provides that Seller’s right to recover under the insurance shall not be impaired by any acts or omissions of Purchaser or Seller, and that Seller shall otherwise be afforded all rights and privileges customarily provided a mortgagee under the so-called standard mortgage clause.

(c) Notice of Damage. In the event of damage to the Property by fire or other casualty, Purchaser shall promptly give notice of such damage to Seller and the insurance company.

8. Damage to the Property.

(a) Application of Insurance Proceeds. If the Property is damaged by fire or other casualty, the insurance proceeds paid on account of such damage shall be applied to payment of the amounts payable by Purchaser under this Contract, even if such amounts are not then due to be paid, unless Purchaser makes a permitted election described in the next paragraph. Such amounts shall be first applied to unpaid accrued interest and next to the installments to be paid as provided in this Contract in the inverse order of their maturity. Such payment shall not postpone the due date of the installments to be paid pursuant to this Contract or change the amount of such installments. The balance of insurance proceeds, if any, shall be the property of Purchaser.

(b) Purchaser’s Election to Rebuild. If Purchaser is not in default under this Contract, or after curing any such default, and if the mortgagees in any prior mortgages and sellers in any prior contracts for deed do not require otherwise, Purchaser may elect to have that portion of such insurance proceeds necessary to repair, replace, or restore the damaged Property (the “Repairs”) deposited in escrow with a bank or title insurance company qualified to do business in the State of Minnesota, or such other party as may be mutually agreeable to Seller and Purchaser. The election may only be made by written notice to Seller within sixty (60) days after the damage occurs. Also, the election will only be permitted if the plans and specifications and contracts for the Repairs are approved by Seller, which approval Seller shall not unreasonably withhold or delay. If such a permitted election is made by Purchaser, Seller and Purchaser shall jointly deposit, when paid, such insurance proceeds into such escrow. If such insurance proceeds are insufficient for the Repairs, Purchaser shall, before the commencement of the Repairs, deposit into such escrow sufficient additional money to insure the full payment for the Repairs. Even if the insurance proceeds are unavailable or are insufficient to pay the cost of the Repairs, Purchaser shall at all times be responsible to pay the full cost of the Repairs. All escrowed funds shall be disbursed by the


escrowee in accordance with generally accepted sound construction disbursement procedures. The costs incurred or to be incurred on account of such escrow shall be deposited by Purchaser into such escrow before the commencement of the Repairs. Purchaser shall complete the Repairs as soon as reasonably possible and in a good and workmanlike manner, and in any event the Repairs shall be completed by Purchaser within one (1) year after the damage occurs. If, following the completion of and payment for the Repairs, there remains any undisbursed escrow funds, such funds shall be applied to payment of the amounts payable by Purchaser under this Contract in accordance with paragraph 8(a) above.

(c) Owners’ Association. If the Property is subject to a recorded declaration, so long as the owners’ association maintains a master or blanket policy of insurance against fire, extended coverage perils and such other hazards and in such amount as are required by this Contract, then: (i) Purchaser’s obligation in the Contract to maintain hazard insurance coverage on the Property is satisfied; (ii) the provisions of paragraph 8(a) of this Contract regarding application of insurance proceeds shall be superseded by the provisions of the declaration or other related documents; and (iii) in the event of a distribution of insurance proceeds in lieu of restoration or repair following an insured casualty loss to the Property, any such proceeds payable to Purchaser are hereby assigned and shall be paid to Seller for application to the sum secured by this Contract, with the excess, if any, paid to Purchaser.

9. Injury or Damage Occurring on the Property.

(a) Liability. Seller shall be free from liability and claims for damages by reason of injuries occurring on or after the date of this Contract to any person or persons or property while on or about the Property. Purchaser shall defend and indemnify Seller from all liability, loss, cost, and obligations, including reasonable attorneys’ fees, on account of or arising out of any such injuries. However, Purchaser shall have no liability or obligation to Seller for such injuries which are caused by the negligence or intentional wrongful acts or omissions of Seller.

(b) Liability Insurance. Purchaser shall, at Purchaser’s own expense, procure and maintain liability insurance against claims for bodily injury, death and property damage occurring on or about the Property in amounts reasonably satisfactory to Seller and naming Seller as an additional insured.

10. Insurance Generally. The insurance which Purchaser is required to procure and maintain pursuant to paragraphs 7 and 9 of this

Contract shall be issued by an insurance company or companies licensed to do business in the State of Minnesota and acceptable to Seller. The insurance shall be maintained by Purchaser at all times while any amount remains unpaid under this Contract. The insurance policies shall provide for not less than ten (10) days written notice to Seller before cancellation, non-renewal, termination or change in coverage, and Purchaser shall deliver to Seller a duplicate original or certificate of such insurance policy or policies.

11. Condemnation. If all or any part of the Property is taken in condemnation proceedings instituted under power of eminent domain or is conveyed in lieu thereof under threat of condemnation, the money paid pursuant to such condemnation or conveyance in lieu thereof shall be applied to payment of the amounts payable by Purchaser under this Contract, even if such amounts are not then due to be paid. Such amounts shall be applied in the same manner as a prepayment as provided in paragraph 5 of this Contract. Such payments shall not postpone the due date of the installments to be paid pursuant to this Contract or change the amount of such installments. The balance, if any, shall be the property of Purchaser.

12. Waste, Repair, and Liens. Purchaser shall not remove or demolish any buildings, improvements, or fixtures now or later located on or a part of the Property, nor shall Purchaser commit or allow waste of the Property. Purchaser shall maintain the Property in good condition and repair. Purchaser shall not create or permit to accrue liens or adverse claims against the Property which constitute a lien or claim against Seller’s interest in the Property. Purchaser shall pay to Seller all amounts, costs and expenses, including reasonable attorneys’ fees, incurred by Seller to remove any such liens or adverse claims.

13. Compliance with Laws. Except for matters which Seller has created, suffered, or permitted to exist prior to the date of this Contract, Purchaser shall comply or cause compliance with all laws and regulations of any governmental authority which affect the Property or the manner of using or operating the same, and with all restrictive covenants, if any, affecting title to the Property or the use thereof.


14. Recording of Contract; Deed Tax. Purchaser shall, at Purchaser’s expense, record this Contract in the Office of the County Recorder or Registrar of Titles in the county in which the Property is located within four (4) months after the date hereof. Purchaser shall pay any penalty imposed under Minn. Stat. 507.235 for failure to timely record the Contract. Seller shall, upon Purchaser’s full performance of this Contract, pay the deed tax due upon the recording of the deed to be delivered by Seller.

15. Notice of Assignment. If either Seller or Purchaser assigns its interest in the Property, the assigning party shall promptly furnish a copy of such assignment to the non-assigning party.

16. Protection of Interests. If Purchaser fails to pay any sum of money required under the terms of this Contract or fails to perform any of the Purchaser’s obligations as set forth in this Contract, Seller may, at Seller’s option, pay the same or cause the same to be performed, or both, and the amounts so paid by Seller and the cost of such performance shall be payable at once, with interest at the rate stated in paragraph 4 of this Contract, as an additional amount due Seller under this Contract. If there now exists, or if Seller hereafter creates, suffers or permits to accrue, any mortgage, contract for deed, lien or encumbrance against the Property which is not herein expressly assumed by Purchaser, and provided Purchaser is not in default under this Contract, Seller shall timely pay all amounts due thereon, and if Seller fails to do so, Purchaser may, at Purchaser’s option, pay any such delinquent amounts or take any actions reasonably necessary to cure defaults thereunder and deduct the amounts so paid together with interest at the rate provided in this Contract from the payments next coming due under this Contract.

17. Defaults and Remedies. The time of performance by Purchaser of the terms of this Contract is an essential part of this Contract. If Purchaser fails to timely perform any term of this Contract, Seller may, at Seller’s option, elect to declare this Contract cancelled and terminated by notice to Purchaser in accordance with applicable law or elect any other remedy available at law or in equity. If Seller elects to terminate this Contract, all right, title, and interest acquired under this Contract by Purchaser shall then cease and terminate, and all improvements made upon the Property and all payments made by Purchaser pursuant to this Contract (including escrow payments, if any) shall belong to Seller as liquidated damages for breach of this Contract. Neither the extension of the time for payment of any sum of money to be paid hereunder nor any waiver by Seller of Seller’s rights to declare this Contract forfeited by reason of any breach shall in any manner affect Seller’s right to cancel this Contract because of defaults subsequently occurring, and no extension of time shall be valid unless agreed to in writing. After service of notice of default and failure to cure such default within the period allowed by law, Purchaser shall, upon demand, surrender possession of the Property to Seller, but Purchaser shall be entitled to possession of the Property until the expiration of such period. Failure by Seller to exercise one or more remedies available under this paragraph 17 shall not constitute a waiver of the right to exercise such remedy or remedies thereafter.

18. Binding Effect. The terms of this Contract shall run with the land and bind the parties hereto and the successors in interest.

19. Headings. Headings of the paragraphs of this Contract are for convenience only and do not define, limit, or construe the contents of such paragraphs.

20. Additional Terms: Check here if an addendum to this Contract containing additional terms and conditions is attached hereto. Seller (signature)

(signature)

Purchaser (signature)

(signature)


State of Minnesota, County of This instrument was acknowledged before me on , by (month/day/year)

(insert name and marital status of each Seller)

.

(Stamp) (signature of notarial officer) Title (and Rank): My commission expires: (month/day/year)

State of Minnesota, County of This instrument was acknowledged before me on , by (month/day/year)

(insert name and marital status of each Purchaser)

.

(Stamp) (signature of notarial officer) Title (and Rank): My commission expires: (month/day/year)

THIS INSTRUMENT WAS DRAFTED BY: (insert name and address)

TAX STATEMENTS FOR THE REAL PROPERTY DESCRIBED IN THIS INSTRUMENT SHOULD BE SENT TO: (insert legal name and residential or business address of Grantee)

Note: Failure to record this contract for deed may give other parties priority over Purchaser’s interest in the property.

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