Homebuyer Wins Tax Credit

The federal income tax code provides for a refundable tax credit to a first-time homebuyer of a “principal residence.” In 2008, the year that Joseph took the plunge and bought his first home, the credit was 10% of the purchase price, up to $7,500. When he claimed the maximum credit on his 2008 tax return, the IRS came calling to challenge his eligibility for the credit.

First, the IRS said that Joseph did not qualify because he had acquired the home under a contract for deed, which is a type of land sale contract in which legal title initially remains with the seller but “equitable title” passes to the buyer while he makes payments on the property. The U.S. Tax Court sided with Joseph, finding that for purposes of the first-time buyer credit he “purchased” the home when he acquired equitable title under the contract.

The court also rejected a second argument by the IRS, that the credit was unavailable because during the relevant time period, the new home was not Joseph’s “principal residence.” The only reason that Joseph had not occupied the residence yet was that some renovations were not finished, and this was not sufficient to negate the principal-residence status of the property. Ironically, Joseph had been forced to suspend the renovations when he learned that the IRS had disallowed the tax credit.

Homeowner Loses Flood Insurance

When the owner of a home with a history of seasonal flooding from a nearby creek returned to the home after an extended vacation, he noticed damage to the home from flooding. Soon after that, he made an insurance claim on a policy administered by an insurance company under the National Flood Insurance Act.

The policy required the owner to promptly file a proof of loss when making a claim. As was also required by federal regulations, the proof-of-loss statement had to include the amount claimed under the policy, or, to be precise, “Specifications of damaged holdings and detailed repair estimates.”

In what was a critical mistake, the owner had not specified monetary damages but, instead, had simply listed the value of the loss as “undetermined.” When the insurance company then wrote the owner a letter rejecting his claim under the policy, that decision was upheld by the court.

The oversight or error by the property owner may seem to have caused an unduly harsh result, but the court stressed some overriding principles that distinguished the situation before it from private insurance disputes. Where federal funds are involved, as they are for insurance policies in the National Flood Insurance Program, the person seeking those funds is obliged to familiarize himself with the legal requirements for receipt of the funds. Protection of federal money requires that those in the position of the insured owner act with “scrupulous regard” for the requirements of the law.

Condemnation Award Increased Fivefold

James owned an undeveloped 29-acre tract of land, 2.6 acres of which had been condemned for use in a highway widening project. As is typical in condemnation cases, the fight in court was over the amount of compensation owed, not the government’s right to condemn the property. As is also typical, the parties’ experts were far apart in their opinion on the amount of compensation that had to be paid to James. In the end, a jury awarded James $1.2 million, which was nearly five times the amount that the state had argued for and that had been paid into court at an earlier stage of the case.

The key to the higher award was that it took into account not just the loss of the 2.6 acres but also the effect of the taking on the remainder of James’s property, which was generally suitable for development as a shopping center. The award also included damages for the temporary loss of an area taken for a construction site during the building of the highway and economic damages from the loss of a billboard on the property.

One of the points stressed by James’s attorney and contested unsuccessfully by the state was the impact that the condemnation would have on a proposed second entrance for the remaining property, which was described as critical to the viability of the shopping center development.