[TurtleBoy]

Originally Posted by bavarianride

This is an interesting article:

https://www.jdsupra.com/legalnews/le...ng-writ-30614/

IRS Notice 2013-19 on 4/15/2013 originally says that written binding contract cannot have liquidated damages above a specified threshold.

However, a later clarification on 4/25/2013 says damages limited to at least 5% will not be treated as limiting damages to a specified amount.

My interpretation is that it is a binding contract when damage is clearly stated/written(and signed to acknowledge) as at least 5%.

I think in the context of IRA's EV binding contract, one needs to hold a contract that explicitly states that damage is at least 5%(may or may not be paid as upfront deposit) to be considered as binding.

No, this is not correct. The IRS guidance issued yesterday says a deposit is not needed in order for it to be binding.

[TurtleBoy]

Originally Posted by bavarianride

Yes, that guidance is Notice 2013-19.

Nope, yesterday’s.

[jayp98]

Originally Posted by bavarianride

Actually, another poster posted this on another thread, IRS already states the below, so all CA customers do not have binding contracts on their i4.

"For tax purposes in general, a contract provision that limits damages to an amount equal to at least 5 percent of the total contract price is not treated as limiting damages to a specified amount. For example, if a customer has made a non-refundable deposit or down payment of 5 percent of the total contract price, it is an indication of a binding contract. A contract is binding even if subject to a condition, as long as the condition is not within the control of either party. A contract will continue to be binding if the parties make insubstantial changes in its terms and conditions."

https://www.irs.gov/businesses/plug-...30-and-irc-30d

In contract law nothing is "required" it's all up for interpretation and must be defended using laws set in stone and not general statements such as the one the IRS put out. In my hypothetic, I am just saying the binding contract they require is to purchase the vehicle. If we ultimately decide to purchase the vehicle and the dealer sells it to us then you have 2 parts of the situation:

1. The deposit and communications we have with the dealer to build and purchase the vehicle.

2. The contract to actually transfer ownership and pay the dealership for the vehicle.

Once 2 occurs the original contract to order the vehicle is out the door because the official transaction has occurred (transfer of vehicle). I think it's fair to then fight that all our communication plus the deposit is sufficient to prove that both parties always intended to execute the deal pre-8/16. Binding or not the original contract that the law states is required is no longer relevant to the transaction once it occurs.

[bavarianride]

Originally Posted by TurtleBoy

Nope, yesterday’s.

https://www.irs.gov/businesses/plug-...30-and-irc-30d

Yesterday's IRS clarification is consistent with Notice 2013-2019, i.e. a written contract is not binding unless damage is at least 5% and up. The written(and signed?) contract needs to have language to specify that the damage cannot be less than 5% of contracted amount.

I expect 2022 1040 will guide the tax payer through a list of questions to walk through the requirements, so no worries.

A paid non-refundable >= 5% deposit (and signed to acknowledge) should satisfy this requirement.

If a deposit is not collected, then the contract should specify that customers needs to pay at least 5%(or in full, or 110%, etc, etc) to be considered binding.

[bavarianride]

Originally Posted by jayp98

I think it's fair to then fight that all our communication plus the deposit is sufficient to prove that both parties always intended to execute the deal pre-8/16. Binding or not the original contract that the law states is required is no longer relevant to the transaction once it occurs.

Correct, and IRA does not question any completed transaction pre-8/16,

However, without getting pre-8/16 written and signed contract that specifies 5% or more of contracted amount as damage likely may not be good enough to navigate to a "yes on 7500 credit" on the 2022 1040 form.

[TurtleBoy]

Originally Posted by bavarianride

https://www.irs.gov/businesses/plug-...30-and-irc-30d

Yesterday's IRS clarification is consistent with Notice 2013-2019, i.e. a written contract is not binding unless damage is at least 5% and up. The written(and signed?) contract needs to have language to specify that the damage cannot be less than 5% of contracted amount.

I expect 2022 1040 will guide the tax payer through a list of questions to walk through the requirements, so no worries.

A paid non-refundable >= 5% deposit (and signed to acknowledge) should satisfy this requirement.

If a deposit is not collected, then the contract should specify that customers needs to pay at least 5%(or in full, or 110%, etc, etc) to be considered binding.

Nope, you are misreading it. A deposit of at least 5% is required when the written contract limits damages.

[bavarianride]

Originally Posted by TurtleBoy

No, this is not correct. The IRS guidance issued yesterday says a deposit is not needed in order for it to be binding.

No, the IRS guidance issued yesterday only repeats the language in Notice 2013-19's 4/25/2013 clarification, namely, a binding written contract cannot have limiting damage, but at least 5% deposit is not considered as limiting.

[TurtleBoy]

Originally Posted by bavarianride

No, the IRS guidance issued yesterday only repeats the language in Notice 2013-19's 4/25/2013 clarification, namely, a binding written contract cannot have limiting damage, but at least 5% deposit is not considered as limiting.

Nice try, maybe that repeat what all other posters have said and people may think you were correct to begin with.

[scLA]

Originally Posted by TurtleBoy

Nice try, maybe that repeat what all other posters have said and people may think you were correct to begin with.

FWIW, I really appreciate all of the debates on here, but we need tax attorneys to weigh in.

[JM71]

Originally Posted by TurtleBoy

Nope, you are misreading it. A deposit of at least 5% is required when the written contract limits damages.

Correct. Per guidance: "For example, if a customer has made a non-refundable deposit or down payment of 5 percent of the total contract price, it is an indication of a binding contract."

So, 5% is the minimum non-refundable deposit that will get you across their threshold. At 80k loaded, that is at least 4k. Doubt may people put down that much.

[bavarianride]

Originally Posted by JM71

Correct. Per guidance: "For example, if a customer has made a non-refundable deposit or down payment of 5 percent of the total contract price, it is an indication of a binding contract."

So, 5% is the minimum non-refundable deposit that will get you across their threshold. At 80k loaded, that is at least 4k. Doubt may people put down that much.

Correct, hence my comment of "it is a binding contract when damage is clearly stated/written(and signed to acknowledge) as at least 5%." in post#63.

[TurtleBoy]

Originally Posted by bavarianride

Correct, hence my comment of "it is a binding contract when damage is clearly stated/written(and signed to acknowledge) as at least 5%." in post#63.

But a deposit is not required to have it considered binding as was previously stated nor damages specified of at least 5%.

[jgunnz]

Originally Posted by JM71

Correct. Per guidance: "For example, if a customer has made a non-refundable deposit or down payment of 5 percent of the total contract price, it is an indication of a binding contract."

So, 5% is the minimum non-refundable deposit that will get you across their threshold. At 80k loaded, that is at least 4k. Doubt may people put down that much.

[lawyer]

This just means that the fact of a 5% deposit creates a presumption of a binding contract. It does *not* mean the inverse, that the absence of a 5% deposit means there is no binding contract.

In most cases, as with all contract questions and disputes, it comes down to the language of the agreement itself.

[/lawyer] (this is not legal advice, just commentary)

[bavarianride]

Originally Posted by jgunnz

[lawyer]

This just means that the fact of a 5% deposit creates a presumption of a binding contract. It does *not* mean the inverse, that the absence of a 5% deposit means there is no binding contract.

In most cases, as with all contract questions and disputes, it comes down to the language of the agreement itself.

[/lawyer] (this is not legal advice, just commentary)

Per IRS notice 2013-29(which is 4/25/2013 clarification of 2013-19), IRS says this.

"(1) Binding written contract. A contract is binding only if it is enforceable under
local law against the taxpayer or a predecessor and does not limit damages to a
specified amount (for example, by use of a liquidated damages provision). For this
purpose, a contractual provision that limits damages to an amount equal to at least five
percent of the total contract price will not be treated as limiting damages to a specified
amount. For additional guidance regarding the definition of a binding contract, see
§ 1.168(k)-1(b)(4)(ii)(A)-(D). "

My interpretation of this is that the 2nd sentence overrides the first sentence, making at least 5% deposit a requirement of binding contract.

I read that 2013-29 was issued to align with Dept. of the Treasury section 1603, which deals with clean energy credits. My layman understanding of 1603 is that one needs to pay up at least 5% of the project cost before clean energy credits can be claimed.

So effectively IRA(and IRS's latest update on this) is consistent with 2013-29/1603 w.r.t. clean energy credits, namely, if u pay up at least 5% pre-8/16, u are good to go on $7500 credit.

https://www.irs.gov/pub/irs-drop/n-13-29.pdf

[TurtleBoy]

Originally Posted by bavarianride

Per IRS notice 2013-29(which is 4/25/2013 clarification of 2013-19), IRS says this.

"(1) Binding written contract. A contract is binding only if it is enforceable under
local law against the taxpayer or a predecessor and does not limit damages to a
specified amount (for example, by use of a liquidated damages provision). For this
purpose, a contractual provision that limits damages to an amount equal to at least five
percent of the total contract price will not be treated as limiting damages to a specified
amount. For additional guidance regarding the definition of a binding contract, see
§ 1.168(k)-1(b)(4)(ii)(A)-(D). "

My interpretation of this is that the 2nd sentence overrides the first sentence, making at least 5% deposit a requirement of binding contract.

I read that 2013-29 was issued to align with Dept. of the Treasury section 1603, which deals with clean energy credits. My layman understanding of 1603 is that one needs to pay up at least 5% of the project cost before clean energy credits can be claimed.

So effectively IRA(and IRS's latest update on this) is consistent with 2013-29/1603 w.r.t. clean energy credits, namely, if u pay up at least 5% pre-8/16, u are good to go on $7500 credit.

https://www.irs.gov/pub/irs-drop/n-13-29.pdf

As said before, that is incorrect.

[bavarianride]

Originally Posted by TurtleBoy

As said before, that is incorrect.

As u pointed out, IRS's update(consistent to 2013-29 and section 1603) yesterday says this:

"For tax purposes in general, a contract provision that limits damages to an amount equal to at least 5 percent of the total contract price is not treated as limiting damages to a specified amount. For example, if a customer has made a non-refundable deposit or down payment of 5 percent of the total contract price, it is an indication of a binding contract."

Your interpretation would make sense if the above says "at most 5 percent", which is 0-5%, i.e. it can be no damage/non-refundable deposit.

But the language says "at least 5 percent", which is 5-100% or more, so that's how I reach my interpretation.

[TurtleBoy]

Originally Posted by bavarianride

As u pointed out, IRS's update(consistent to 2013-29 and section 1603) yesterday says this:

"For tax purposes in general, a contract provision that limits damages to an amount equal to at least 5 percent of the total contract price is not treated as limiting damages to a specified amount. For example, if a customer has made a non-refundable deposit or down payment of 5 percent of the total contract price, it is an indication of a binding contract."

Your interpretation would make sense if the above says "at most 5 percent", which is 0-5%, i.e. it can be no damage/non-refundable deposit.

But the language says "at least 5 percent", which is 5-100% or more, so that's how I reach my interpretation.

You are just not following whatsoever. The guidance issued yesterday is very clear. A deposit is not required in order to have a binding contract. Read the what is a binding contract section.

[bavarianride]

Originally Posted by TurtleBoy

You are just not following whatsoever. The guidance issued yesterday is very clear. A deposit is not required in order to have a binding contract. Read the what is a binding contract section.

Yes the "at least 5 percent" comes directly from "What Is a Written Binding Contract?" from the IRS guidance issued yesterday.

And there is an explicit sentence to state that 5% qualifies as binding, that is as clear as IRS can get.

Do note IRS issued multiple notices(2013-19 and then 2013-29) to get the language aligned with Section 1603.

We can also wait till 2022 tax season to see what the 1040 steps say.

https://www.irs.gov/businesses/plug-...30-and-irc-30d

[TurtleBoy]

Originally Posted by bavarianride

Yes the "at least 5 percent" comes directly from "What Is a Written Binding Contract?" from the IRS guidance issued yesterday.

And there is an explicit sentence to state that 5% qualifies as binding, that is as clear as IRS can get.

Do note IRS issued multiple notices(2013-19 and then 2013-29) to get the language aligned with Section 1603.

We can also wait till 2022 tax season to see what the 1040 steps say.

https://www.irs.gov/businesses/plug-...30-and-irc-30d

You really need to step back, read it and think about it a little. What you keep quoting is not the definition of a binding contract for this purpose, it is an exception to the limitation.

From the guidance issued yesterday:
In general, a written contract is binding if it is enforceable under State law and does not limit damages to a specified amount (for example, by use of a liquidated damages provision or the forfeiture of a deposit).

As you can see, there is nothing in that definition requiring a deposit in order for it to be binding. Actually, the opposite, with that alone if the consequences of breaking the contract is losing your deposit then it is not considered to be a binding contract for tax purposes.

The IRS then makes an exception for contracts that limit damages to a specified amount saying that if the deposit/down payment is at least 5% of the contract amount it is not considered to be limited.

The relevant section from yesterday's guidance is:
While the enforceability of a contract under State law is a facts-and-circumstances determination to be made under relevant State law, if a customer has made a significant non-refundable deposit or down payment, it is an indication of a binding contract. For tax purposes in general, a contract provision that limits damages to an amount equal to at least 5 percent of the total contract price is not treated as limiting damages to a specified amount.


In summary you do not need to have a deposit in order to have a binding contract. If you do have a contract where damages are limited to the loss of a deposit then that deposit must be at least 5% of the contract price in order for it to be considered binding for tax purposes.

[bavarianride]

Originally Posted by TurtleBoy

From the guidance issued yesterday:
In general, a written contract is binding if it is enforceable under State law and does not limit damages to a specified amount (for example, by use of a liquidated damages provision or the forfeiture of a deposit).

My interpretation is that this first sentence is not talking about deposit. Instead, it says binding written contract has unlimited damage(as in "does not limit damage to a specified amount"). This is Notice 2013-19 definition.

Originally Posted by TurtleBoy

For tax purposes in general, a contract provision that limits damages to an amount equal to at least 5 percent of the total contract price is not treated as limiting damages to a specified amount.

This means if there is any limit, it needs to at least 5 percentage, e.g. 5-100%, or more. This is Notice 2013-29 definition.

Just take a step back and ponder on the intent of Notice 2013-19 and 2013-29.

IRS wants taxpayer to make a commitment before claiming tax credits.

If binding contract has no damage/no non-refundable deposit of a certain amount(e.g. at least 5% as required by IRS), the taxpayer has not demonstrated commitment.

[TurtleBoy]

Originally Posted by bavarianride

My interpretation is that this first sentence is not talking about deposit. Instead, it says binding written contract has unlimited damage(as in "does not limit damage to a specified amount"). This is Notice 2013-19 definition.



This means if there is any limit, it needs to at least 5 percentage, e.g. 5-100%, or more. This is Notice 2013-29 definition.

Just take a step back and ponder on the intent of Notice 2013-19 and 2013-29.

IRS wants taxpayer to make a commitment before claiming tax credits.

If binding contract has no damage/no non-refundable deposit of a certain amount(e.g. at least 5% as required by IRS), the taxpayer has not demonstrated commitment.

OMG It specifically says it is talking about a deposit. At this point you are posting nonsense just to post. You obviously do not understand contracts and damages. We are done. Anybody following this knows by now to ignore what you are posting as it makes no sense at all.

[bavarianride]

Originally Posted by TurtleBoy

OMG It specifically says it is talking about a deposit. At this point you are posting nonsense just to post. We are done. Anybody following this knows by now to ignore what you are posting as it makes no sense at all.

Well IRS language may not make sense at times, but the auditors surely will stick to them during audits.

And I sincerely hope the tax software for 2022 will guide folks correctly on this.

Another point to ponder on is that it took 10 days for IRS to issue 2013-29 on top of 2013-19, that is lightning-quick for IRS.

So that gives us some hints how bad is "unlimited damage".