Tuesday, March 12, 2019

The potential impact of relief of indebtedness income on settlement agreements

Shenwick & Associates is happy to announce that we have just settled another taxi medallion debt with a favorable result for the client. In resolving this case, IRC (Internal Revenue Code) § 108 was raised in the settlement negotiations, and the purpose of this blog post is to discuss IRC § 108, the structure of the settlement agreement and the impact of IRC § 108 on the settlement.
IRC § 108 provides that if an individual or an entity is relieved of indebtedness, then that indebtedness is deemed to be ordinary income to the debtor or taxpayer, and they must report that income on their tax return. There are two exceptions to this rule; first, if the taxpayer/debtor files for bankruptcy protection, then the relief of indebtedness income is not picked up; and second, on a balance sheet basis, if the individual’s liabilities exceed their assets and they are insolvent, then they do not have to pick up the income.
In many of our taxi medallion workouts, we engage in the workout to avoid a personal bankruptcy filing by the taxi medallion owner, so the bankruptcy filing exception to IRC § 108 does not apply.
An example of the application of IRC § 108 will help to explain the above. Let’s assume that an individual owes a financial institution $1,000,000.  The individual is unable to pay the $1,000,000, so the parties enter into a workout (an out of court settlement) in which the individual repays the financial institution $500,000. According to IRC § 108, the taxpayer must pick up the $500,000 differential between what he or she owed and paid as ordinary income. Many clients assume that the $500,000 of differential would be deemed to be capital gains, but it is ordinary income.
The second question raised by clients is how does the IRS find out about this relief of indebtedness income? The answer is that the institution is required to file a Form 1099-C with the IRS reporting the relief of indebtedness income for more than $600 of forgiven debt.
So now let’s look at our recent taxi medallion settlement and how IRC § 108 impacted the settlement. The facts of the case were as follows: a bank was owed $650,000 for a taxi medallion owned by a mini fleet and the loan was guaranteed by an individual. The owner of the mini fleet and guarantor of the taxi medallion loan was not earning enough money from driving or leasing out the medallion to repay the $650,000 and she didn’t want to file for personal bankruptcy. We negotiated with the bank, and the settlement that was ultimately reached was as follows: (1). the mini fleet would surrender the medallion to the bank; (2) the guarantor would pay the bank $150,000 as part of the settlement; and (3) the parties would enter into a settlement agreement with mutual releases to document the settlement.
The bank drafted the settlement agreement, which provided that the bank would file a 1099-C in an amount to be determined for relief of indebtedness income to the guarantor. We raised this issue with the guarantor, who sought advice from her CPA.  Her CPA indicated that they could not give her clear guidance and that this area of the tax law was murky, but that if the 1099-C was issued to the guarantor, she would pick up a significant amount of taxable ordinary income.
  1. We indicated that the settlement agreement should be revised to indicate the amount of the release of indebtedness income. The formula is the amount of the medallion loan, less the amount of money paid by the guarantor, less the value of the taxi medallion; in this case, $650,000-$150,000-$200,000=$300,000.
  2. The wild card issue here was what was the value of the medallion when it was surrendered? We track the TLC’s monthly medallion transfer reports, and we advised the guarantor as to what we believed the value of the medallion was. We've also noted that many clients have imputed value for medallions for their internal books and records of $200,000 to $225,000.
  3. We also advised the client that it would be better to have the relief of indebtedness income reported the corporation instead of the individual guarantor, and that if the corporation elected to convert from a S corporation to a C corporation, the income would be reported as payable by the corporation instead of the individual guarantor.
  4. We’re not tax lawyers, but we are familiar with the IRC and James Shenwick has an LLM in Taxation from the NYU School of Law. We will raise potential tax issues in these workouts for clients, which need to be addressed by their tax advisers or CPAs.
The client acknowledged the tax risk and moved ahead with the settlement agreement, but she indicated that she had losses from other assets which she could offset against the taxi medallion relief of indebtedness income and was thrilled to surrender the taxi medallion and compromise the related loan. We were thrilled to be part of another successful taxi medallion workout!  Clients who own “under water” taxi medallions are encouraged to consult with James Shenwick to discuss their optimal strategy with respect to their taxi medallion loans. Jim

WPIX: Cabbies protest congestion pricing fee they now have to charge; it’s killing business, and drivers, they say

MIDTOWN, Manhattan -- It's a proposal that would affect almost every driver in New York City starting in 2021, if it passes the state legislature this year.

However, congestion pricing -- the plan that would charge drivers for driving in the southern third of Manhattan's streets -- has already been in effect for yellow and green cab drivers since February 2.
Many of the drivers say that the added cost is ruining their business. On Wednesday, dozens of cab drivers held a mobile, and very loud, protest against the surcharge outside of Gov. Andrew Cuomo's office.

A few dozen cabs taped protest signs to their vehicles, and drove around city blocks near the governor's office on Third Avenue and 41st Street on Thursday afternoon. As they passed, they honked their horns incessantly, and chanted anti-surcharge slogans along with other protesters, who were on the sidewalk.

They all said that the $2.50 surcharge, which is charged to passengers in addition to other base charges at the beginning of each ride, is killing business, and killing them, literally.

"One of my brothers, he bought a medallion [for] $700,000, [that] he couldn't pay to the bank," said cab driver Richard Chow, about his deceased brother, Yu Mein "Kenny" Chow. "He committed suicide in May."

A medallion is a metal plate displayed on the hood of a cab to show that it has city approval to operate. Each medallion costs six figures, but as recently as 10 years ago, they sold for $1 million a piece. There are now so many for-hire cars, such as Uber and Lyft, on New York City streets that medallions have significantly lost their value. Some drivers are able to get one for as low as $175,000.

Drivers also said that the congestion surcharge, which is designed to raise money for public transit improvements, is reducing the number of customers the taxis can attract.

"In rush hour, I pick up only one fare, two fares, that's it," said one driver who only gave his last name, Tong. "I lose a lot of business."

He was among the dozens honking their horns and yelling slogans outside of the governor's office.

They said that they want their voices heard in Albany by the legislature, as well as by Gov. Cuomo.

"We wanted to remind our governor," said Bharavi Desai, president of the Taxi Drivers' Alliance, an advocacy group, "that behind each wheel is a person that is struggling, and we need an exemption" to the surcharge.

Her organization is endorsing a hike in taxes on higher income sources that it says are untaxed or under taxed. Desai said that taxes on hedge fund managers' incomes could raise $3 billion yearly for public transport, for example.

Wednesday's protest is the first of a series. Two more are planned for later this month.

Copyright 2019 WPIX.  All rights reserved.

Wednesday, February 20, 2019

January 2019 TLC medallion sales

The January 2019 New York City Taxi & Limousine Commission (TLC) sales results have been released to the public. And as is our practice, provided below are Jim Shenwick’s comments about those sales results.

1. The volume of transfers fell from December. In January, there were 94 unrestricted taxi medallion sales.

2. 79 of the 94 sales were foreclosure sales (84%), which means that the medallion owner defaulted on the bank loan and the banks were foreclosing to obtain possession of the medallion. One sale was an estate sale. We disregard these transfers in our analysis of the data, because we believe that they are outliers and not indicative of the true value of the medallion, which is a sale between a buyer and a seller under no pressure to sell (fair market value).

3. The large volume of foreclosure sales (approximately 84%) is in our opinion evidence of the continued weakness in the taxi medallion market.

4. The 14 regular sales for consideration ranged from a low of $135,000 (one medallion) to $175,000 (one medallion), $210,000 (one medallion), $228,000 (one medallion), $340,000 (two medallions), $350,000 (six medallions) and a high of $373,337.02 (two medallions) for a median value of $350,000, a 106% increase from December’s median value of $170,000. 

5.  The fact that 84% of all transfers in January 2019 were foreclosure sales shows continued weakness in the taxi medallion market and no sign of a correction.

6. At Shenwick & Associates we believe that the value of a medallion is approximately $162,000+ and dropping.

Please continue to read our blog to see what happens to medallion pricing in the future. Any individuals or businesses with questions about taxi medallion valuations or workouts should contact Jim Shenwick at (212) 541-6224 or via email at jshenwick@gmail.com.

Monday, February 18, 2019

The Verge: Uber sues to overturn New York City’s cap on new ride-hail drivers


Uber filed a lawsuit on Friday to overturn New York City’s first-in-the-nation law capping the number of ride-hail drivers that operate on its streets. The law, which went into effect last August, paused the issuance of new licenses to drivers for 12 months. But Uber wants the law overturned for fear that the city will ultimately make the cap permanent.

The law was part of a sweeping legislative package passed by the New York City Council last summer to give regulators more control over e-hail companies. In addition to the cap, the city council also approved a minimum pay standard among drivers, with the goal of reducing how much time empty cars spend on the road.

Rather than rely on alternatives supported by transportation experts and economists, the City chose to significantly restrict service, growth and competition by the for-hire vehicle industry, which will have a disproportionate impact on residents outside of Manhattan who have long been underserved by yellow taxis and mass transit. The City made this choice in the absence of any evidence that doing so would meaningfully impact congestion, the problem the City was ostensibly acting to solve.
While wildly popular among riders, Uber and Lyft have been a source of almost constant grief for policymakers, disability advocates, taxi medallion holders, and driver groups. Critics complain that Uber and Lyft have been allowed to dominate the market without having to follow many of the same rules that apply to taxis. This has led to a glut of drivers that has outstripped demand, driving down wages and increasing traffic congestion. At the time, New York City’s law capping the number of drivers was held up as a potential model for other cities that want to rein in the ride-hail industry.

For NYC mayor Bill de Blasio, the cap was also an opportunity for a do-over. He first proposed to limit the number of new Uber and Lyft vehicles in 2015, but ultimately dropped it after a bruising public relations battle with the app companies. Finding success his second time around, de Blasio has said publicly he’s inclined to keep the cap in place after the 12-month period expires.

“We’re going to put ongoing caps in place on the for-hire vehicles and we’re going to work to increase the wages and benefits [of] the drivers,” he said in a recent radio interview. Uber says this amounts to a “‘post hoc rationalization’ of a remedy the City appears to have already selected,” according to the suit.

A spokesperson for de Blasio did not immediately respond to a request for comment. A spokesperson for the city’s Law Department declined to comment until the lawsuit had been filed.

An Uber spokesperson said the cap blocks new drivers from receiving the benefits from the wage hike. “The City Council’s new law guarantees a living wage for drivers, and the administration should not have blocked New Yorkers from taking advantage of it by imposing a cap,” the spokesperson said. “We agree that fighting congestion is a priority, which is why we support the state’s vision for congestion pricing, the only evidence-based plan to reduce traffic and fund mass transit.”

The number of new app-based vehicles in New York City has surged in the past few years, growing from 63,000 in 2015 to over 100,000 today. These new vehicles have added an unprecedented number of new miles driven in New York City, according to a recent analysis by traffic analyst Bruce Schaller. Trip volumes have tripled in the last year and a half, and 600 million driving miles were added citywide. In addition, Schaller found evidence that ridership was shifting from public transportation to ride-hailing apps.

Meanwhile, taxi medallion owners have seen the value of their licenses drop steadily since Uber’s arrival. Saddled with debt, some taxis drivers have committed suicide — six in as many months.

“Uber thinks it is above the law,” said Bhairavi Desai, the executive director of the New York Taxi Workers Alliance. “The company wants the right to add more and more cars to our streets without limit. But there is a very human cost to Uber’s business practices.”

Uber’s lawsuit came a day after Amazon stunned the city by pulling out of its deal to build a second headquarters in the borough of Queens. Julie Samuels, executive director of Tech:NYC, a nonprofit that helps grow tech companies in the city, said she’s concerned that these combined events will send the message that New York’s elected officials are “putting a target on tech’s back.”

“I’m not worried about Uber,” Samuels said. “I’m worried about the next company that will think twice before coming here.” 

© 2019 Vox Media, Inc. All Rights Reserved. 

Thursday, February 07, 2019

New York Times: Your Taxi or Uber Ride in Manhattan Will Soon Cost More

By Winnie Hu

It is not enough that a subway fare increase could soon make traveling underground in New York City more expensive. The cost of getting around above ground is going up, too.

An extra $2.50 fee will be tacked onto any yellow taxi rides in Manhattan that begin, end or pass through south of 96th street, and an extra $2.75 fee will be added for other for-hire vehicles, including Ubers and Lyfts — all before the car even starts.

The new ride fees were supposed to start Jan. 1, and are intended to raise more than $1 million a day to help fix the city’s broken subway system. New York is following a growing number of states and cities, including Chicago and Seattle, that have adopted similar per-ride fees in recent years to pay for public transportation and other services.

In New York, the new ride fees had been temporarily blocked at the last minute by a lawsuit filed by a coalition of taxi owners and drivers who called it a “suicide surcharge” that would drive away customers and devastate an industry already crumbling under financial pressures.

Judge Lynn R. Kotler of State Supreme Court disagreed, ruling Thursday that the new ride fees could proceed, noting that the taxi coalition had not “demonstrated irreparable injury.” But she did deny a motion from the state to dismiss the lawsuit, saying that the coalition’s arguments merited moving the case forward.

The $2.50 fee will raise the minimum taxi fare to $5.80 in Manhattan.

Governor Andrew M. Cuomo’s office would not say when the fees would start.

The new ride fees are seen as the first step in passing a comprehensive congestion pricing plan for Manhattan that would charge all vehicles a fee to drive in the busiest neighborhoods and help reduce gridlock. The fees were approved last year by the State Legislature and also included a 75-cents fee for shared car-pool services.

The taxi coalition argued in its lawsuit that the fees would “drive the final nail in the proverbial coffin by making medallion taxicab rides so financially unattractive to consumers that the industry is sure to collapse in its entirety.”

But lawyers for the state attorney general’s office countered that the lawsuit hurt city transit riders, and that every day the new fees went uncollected meant less money for the Metropolitan Transportation Authority, which operates the subways.
Patrick Muncie, a spokesman for Mr. Cuomo, said the decision was “a positive step in our efforts to find a dedicated revenue stream for our subways and buses, as well as easing congestion in Manhattan’s central business district.”

But taxi owners and drivers criticized the judge’s decision, saying it would only add to their problems. Many are already struggling with enormous debt as the value of their taxi medallions — the aluminum plate that once sold for more than $1 million — has plummeted. Three taxi owners and five other professional drivers have committed suicide over the last year.

“It’s a big problem — that means people will not ride in taxis anymore,” said Mahmud Hossain, 54, a yellow taxi owner and driver from Astoria, Queens. “It’s very hard.”

Mr. Hossain said that he typically takes home $70 or less after a 12-hour shift, or about half of what he used to make five years ago before ride-hailing apps started taking away customers. He worries that he will take home even less now.

Bhairavi Desai, the executive director of the New York Taxi Workers Alliance, said taxi drivers would feel the effect right away from the new fee. “Their income will drop immediately and force them to delay decisions over food and medicine,” she said.

Ms. Desai called on the governor to hold off collecting the new fee while the lawsuit continues and said her group would lobby state legislators to pass an exemption for taxis from the new fee.
“Implementing the surcharge while the lawsuit continues could put the industry in the predicament of figuring out how to refund passengers, even those who paid with cash, should the drivers ultimately win the case,” she said.
With the new $2.75 fee, the cost for Uber, which has an $8 base fare in Manhattan, will also rise to a minimum of $10.75. But Uber and two other ride-app services, Lyft and Via, have supported the fees 
as a step toward addressing congestion and transit challenges in the city.

The taxi lawsuit had argued that taxis should not be charged a “congestion tax” because their number has been capped by city law at 13,587 “to prevent an overabundance of cars and congestion,” even as Uber and other ride-app services were allowed to expand exponentially. In August, the city declared a one-year moratorium on new vehicle licenses for Uber, Lyft and other ride-app services.

Mayor Bill de Blasio has supported the new taxi fee, but Meera Joshi, the commissioner of the New York City Taxi and Limousine Commission, has said it would be “potentially devastating” for the taxi industry.

David Graves, 60, a taxi driver for almost two decades, said he was frustrated that the city had created the congestion problem and was now trying to address it by turning taxis into “unpaid tax collectors for the M.T.A.”

“This is my future, this is the future of the New York City taxi,” he added.

Copyright 2019 The New York Times Company.  All rights reserved.