Eminent Domain of Mortgages-A Federal Income Tax Perspective

摘要

Any plan, including the Hockett plan or the City of Richmond plan to take underwater mortgage contracts through eminent domain may face a slew of political backlash, and also practical legal and/or accounting obstacles. Legally, the taking of the contracts may not satisfy the public use clause of the Constitution and may violate the Contracts Clause, the Commerce Clause, or both. The financial loss on the difference between the balances remaining on the original notes and the revised principal balance must be borne by someone, and that party may prefer the risk of default over the sure loss of principal today. Further, refinancing may require an infusion of cash on the part of the Homeowner. Not all Homeowners will have that cash available. Homeowners are further financially limited because, to the extent they are solvent, they may owe tax on the cancellation of principal debt at ordinary income tax rates, perhaps with an additional net investment income tax. This, of course, presumes that the excludability of this type of gain is not extended past December 31, 2013. Further, other alternatives like the HAMP program already in place may be more advantageous to some borrowers. These issues are not meant to quash any such plans, but rather to extend the discussion of the practical applications of using eminent domain to reform contracts for underwater mortgages.