Seth Breidbart wrote:

- quote -

If my income is business income, not interest, are my
gains and losses ordinary, not capital? If I'm doing
this in corporate form, which has no schedule C to
"convert" my interest income to business income, do I
report it on Form 1120/1120S as business income, not
interest? I sure wouldn't want the IRS claiming it should
have been reported as interest.

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- quote -

I buy paper because I reasonably expect NOT to have to force
the debtor to pay.

- quote -

No, the interest already paid remains interest. I'd say
that further payments are also interest; but if the default
accelerates the payment obligation and you collect early,
the excess is more likely to be UBTI.

- quote -

I think so: collecting on delinquent paper is generally a
business.

- quote -

Buying a security with the intent to sell it later at a
higher price doesn't make it inventory (if you aren't
specifically a dealer in it).

- quote -

It depends on the circumstances.

If somebody wins a judgment against an insurance company,
which is required to pay him $100,000 annually for 20 years,
and you buy that, discounted at (say) a 10% rate, I'd say
you're getting interest income. If you buy a random
judgment against somebody where in order to collect you're
going to have to find his assets (if any), attach them,
etc., then I'd say you're engaging in a business.

So I'd say the issue is the amount of work you're reasonably
expected to have to do to collect. If none, then there's
interest income. If lots, then it's a business.

There is, of course, no guarantee that the IRS will agree
with me.

Seth

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Dick Adams wrote:

- quote -

You can't buy paper for the production of income (definition
of capital asset) if you intend to force the debtor to pay?
Why would anybody buy paper then?

So if my IRA buys a mortgage and the payor stops paying,
when I demand payment all my interest income gets converted
to UBTI? Or worse, if it buys delinquent paper it's UBTI to
begin with?

- quote -

The auditor might be better off arguing the sale was
intended all along, thus categorizing your paper as
inventory, and sales of inventory are ipso facto business
transactions.

- quote -

My judgment example was for the tax result, not the business
result. I agree that judgments should be purchases at 10% or
less of face value. I get the sense that the risks are
reversed, as judgment holders have far-reaching collection
authority factors (mere unsecured business creditors) don't
have, and it's a lot harder to be defrauded buying a
judgment (the facts of which are on file with the court)
than buying an invoice.

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Seth Breidbart wrote:
- quote -

Depends on if the factor has recourse to the receivable's
seller. If not, usury doesn't apply. So you're saying it's
business income (SE income if sole proprietor), not
interest?

- quote -

Ok. That's what the publication said for treating retirement
or redemption of discounted debt instruments, but I wasn't
sure if a judgment is a debt instrument for tax purposes.
The same publication said that if you're taking periodic
payments over time, the discount is treated as interest as
you accrue it (easiest way is to figure it as a promissory
note with principal equal to your basis, and run an
amortization schedule e.g. constant yield). Is that how
you'd do it? If you bought the judgment at a sane price
(*not* what I gave in this example) yields are astronomical.

- quote -

How about the judgment, then? Short-term cap gain isn't
UBTI, and it's not inventory since it wasn't purchased for
resale. Sounds like a capital asset.

<< ================================================== ===== > << The foregoing is intended for educational purposes only > << and does NOT constitute legal OR professional advice. > << > << The Charter and the Guidelines for submitting > << messages to this newsgroup are at www.asktax.org. > << Copyright (2006) - All rights reserved. > << ================================================== ===== >

Dick Adams wrote:

- quote -

You can't buy paper for the production of income (definition
of capital asset) if you intend to force the debtor to pay?
Why would anybody buy paper then?

So if my IRA buys a mortgage and the payor stops paying,
when I demand payment all my interest income gets converted
to UBTI? Or worse, if it buys delinquent paper it's UBTI to
begin with?

- quote -

The auditor might be better off arguing the sale was
intended all along, thus categorizing your paper as
inventory, and sales of inventory are ipso facto business
transactions.

- quote -

My judgment example was for the tax result, not the business
result. I agree that judgments should be purchases at 10% or
less of face value. I get the sense that the risks are
reversed, as judgment holders have far-reaching collection
authority factors (mere unsecured business creditors) don't
have, and it's a lot harder to be defrauded buying a
judgment (the facts of which are on file with the court)
than buying an invoice.

<< ================================================== ===== > << The foregoing is intended for educational purposes only > << and does NOT constitute legal OR professional advice. > << > << The Charter and the Guidelines for submitting > << messages to this newsgroup are at www.asktax.org. > << Copyright (2006) - All rights reserved. > << ================================================== ===== >

Seth Breidbart wrote:
- quote -

Depends on if the factor has recourse to the receivable's
seller. If not, usury doesn't apply. So you're saying it's
business income (SE income if sole proprietor), not
interest?

- quote -

Ok. That's what the publication said for treating retirement
or redemption of discounted debt instruments, but I wasn't
sure if a judgment is a debt instrument for tax purposes.
The same publication said that if you're taking periodic
payments over time, the discount is treated as interest as
you accrue it (easiest way is to figure it as a promissory
note with principal equal to your basis, and run an
amortization schedule e.g. constant yield). Is that how
you'd do it? If you bought the judgment at a sane price
(*not* what I gave in this example) yields are astronomical.

- quote -

How about the judgment, then? Short-term cap gain isn't
UBTI, and it's not inventory since it wasn't purchased for
resale. Sounds like a capital asset.

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Bob <bob[at]nospam.com> wrote:

- quote -

I don't think it's interest; that might well be an illegal
rate if it is.

- quote -

I'm sure that's not interest. I'll call it short-term
capital gain.

- quote -

Factoring is a business, so I disagree.

(Now let's see what the knowledgeable people say.)

Seth

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Bob <bob[at]nospam.com> wrote:

- quote -

As a general rule, you are wrong, but IT DEPENDS

The issue comes down to whether or not you are in a business
and what you do with your unpaid collectables.

The moment you contact a debtor in an effort to collect
(other than to provide them with notice that you are now
their creditor), you are in a business and you are into
ordinary income for all the paper you are holding.

Now if you make no individual effort to collect and you sell
say 180 day old paper to "an unrelated third party", you may
not be in a business. But as an auditor, I would that third
party though a grinder before I let you off the hook.

My belief is that factoring is a low risk endeavor and
judgements are a high risk endeavor. The former may be
interst income (if you don't screw it up) and the latter is
a crap shot and not worth more than 10 cents on the dollar.
But all my best to you.

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Is this the correct tax treatment for factors and judgments?

Factoring: I buy a $100 receivable for $80. The customer
pays off in full. I book $20 interest income.

Judgment: I buy a $100 judgment for $50. The debtor agrees
to (and does) pay $75 as payment in full. I book $25
interest income.

Both are considered capital assets, so losses are booked as
short-term capital loss (assuming, generally, you write them
off within a year of acquisition).

As the profits are interest, and assets capital, an IRA may
purchase them without incurring UBIT on its profits.

<< ================================================== ===== > << The foregoing is intended for educational purposes only > << and does NOT constitute legal OR professional advice. > << > << The Charter and the Guidelines for submitting > << messages to this newsgroup are at www.asktax.org. > << Copyright (2006) - All rights reserved. > << ================================================== ===== >