Congressman Dave Camp (R-Mi), Chairman of the Committee on Ways and Means, has announced that the Committee will hold the second of two hearings on how accounting rules cause different types of businesses – specifically, publicly-traded and closely-held businesses – to evaluate tax policy choices differently. Whereas a previous hearing focused on financial accounting rules and publicly-traded companies, this hearing will focus on the special challenges faced by small and closely-held businesses that are less concerned with financial accounting rules but must confront tremendous complexity in dealing with tax accounting and various choice of entity regimes.   The hearing will take place on Wednesday, March 7, 2012 in room 1100 of the Longworth House Office Building at 10:00 a.m.




    Unlike publicly-traded companies, closely-held companies often rely less on Generally Accepted Accounting Principles (“GAAP”) to report information to owners and creditors, although there are exceptions.  Instead, closely-held entities tend to focus almost exclusively on how tax policy changes affect cash flows. Closely-held companies, face their own set of challenges with regard to tax complexity and uncertainty.  These challenges range from compliance with complicated rules on inventory  accounting and cost recovery to numerous sets of tax rules governing different business forms. 

   The three major business forms from which closely-held companies must choose for federal tax purposes are C corporations, S corporations, and partnerships, although a number of other types of business entities exist to serve specific purposes.  While C corporations are subject to entity-level tax and shareholders are again subject to tax on dividends and capital gains, S corporations and partnerships are “pass-through” entities that do not pay entity-level tax – rather partners and shareholders pay tax on their share of the entity’s income on their individual tax returns (and therefore under the individual rate schedule).  Companies must choose to operate under one of these regimes, and the choice can have significant tax consequences.  Many commentators recommend modifications to the choice of entity rules to reduce the potential distortions introduced by such rules – with ideas ranging from consolidating existing pass-through rules into a “unified pass-through regime”,  making it easier for closely-held C corporations to convert to pass-through status, or even subjecting some existing pass-through entities to double taxation as C corporations.  On the other hand, tax reform proposals that create too large a spread between the top corporate rate and the top individual rate risk exacerbating these distortions rather than reducing them.

Authored by Barbara A. Assendelft

Facts and the Court’s Ruling

Plaintiffs, husband and wife, obtained a $615,000.00 loan from Washington Mutual Bank to refinance their home. and granted the bank a mortgage on their property.  The U.S. Department of Treasury closed Washington Mutual Bank and appointed the FDIC as receiver.  Defendant J P Morgan Chase Bank purchased all of Washington Mutual’s loans, includig Plaintiff’s mortgage, from the FDIC.  When plaintiffs defaulted on their loan, Chase Bank sought to foreclose by advertisement and published a Notice of Foreclosure pursuant to MCL 600.3204.  Chase Bank purchased the property at the foreclosure sale.  The plaintiffs sought to set aside the sheriff’s deed because Chase Bank had not recorded its mortgage interest prior to the sheriff’s sale as required by MCL 600.3204(3).  The Court of Appeals agreed with the plaintiffs.  The Court noted that the statute specifically states that if the foreclosing party is not the original mortgagee, a record chain of title showing its interest must be recorded prior to the foreclosure sale.  The Court of Appeals disagreed with Chase Bank’s argument that it had acquired its interest in the property by “operation of law.”  Rather, Chase Bank had acquired the interest through purchase and assignment, making MCL 600.3204(3) applicable as written.

What This Means For Banks

Banks which are not the original mortgagee and which foreclose by advertisement risk having their foreclosure purchase set aside if they have not recorded the documents by which they acquired the mortgage.  Banks must be sure they have all their i’s dotted and their t’s crossed when proceeding to foreclose by advertisement.

What This Means For Homeowners

Homeowners who are savvy and who keep apprised of the status of their mortgaged property after they default on the loan can potentially stop or set aside the foreclosure sale.