TAX RESEARCH MEMORANDUM

TAX RESEARCH MEMORANDUM Rex “Tumbleweed” Banyon was a big western movie star back in the 1950s and 1960s. Now in his late 80s and not in the best of health, Rex has not been a working actor for many years. Rex has also fallen into some financial difficulties. He and his third wife live in a beautiful ranch home near Santa Barbara, California that he purchased about ten years ago when he was in better financial and physical condition. Rex is presently several months behind in his mortgage payments (he owes about $3.6 million on the outstanding loan) and the bank has started foreclosure proceedings. A sympathetic loan officer alerted the media to old Tumbleweed’s plight and several stories about Rex’s problems have run in the national press and on television. One person moved by the story is Dot Matrix, a very successful and wealthy software designer. Dot fondly remembers going to Saturday Matinees as a child and watching Tumbleweed put an end to the evil doings of assorted varmints and bad-apples. She decides to help Rex out in his time of need by purchasing his ranch home from the lender (appraised value of $3.4 million – the bank agrees to “write off” the $200,000 excess of debt over value) and lease the home to Rex and his wife for $1.00 per month. Dot figures the Santa Barbara property is a good long-term investment – and the value of the media coverage of her act of kindness to old Tumbleweed (Dot is certain she and her software company will get plenty of favorable publicity) ain’t too shabby either. On August 1, Rex and his wife execute a Deed in lieu of Foreclosure, conveying the ACC 430 – Tax Research Cases Spring 2016 Page 6 of 6 house to the lender in exchange for being released from the debt. Simultaneously, Dot purchases the home from the lender for its appraised value and a grateful Rex and his wife execute a renewable five-year lease on the home at $1.00 per month. A comparable rental in Rex's neighborhood is presently running about $6,000 per month.