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
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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.