Derby Realty Corporation v. COMMISSIONER OF INTERNAL REVENUE
| Citation | 35 BTA 335 |
| Decision Date | 27 January 1937 |
| Docket Number | Docket No 81213. |
| Parties | DERBY REALTY CORPORATION, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. |
| Court | U.S. Board of Tax Appeals |
O. W. Swecker, Esq., for the respondent.
This case involves a deficiency of $846.07 in petitioner's income tax for the year 1932, which arises in part on respondent's disallowance of $19,804.84 as a net loss in that year carried forward from 1931 and resulting from the sale, in foreclosure of a mortgage, of certain land in 1930. The issue raised on a reserve for future improvements which was disallowed by respondent has apparently been abandoned by the petitioner, leaving as the sole issue the year in which the loss on the foreclosure sale was sustained. Respondent contends that it was the year of the sale, 1930; petitioner, the year when its right of redemption expired, 1931.
The facts, which were stipulated, are as follows:
The petitioner, Derby Realty Corporation, is a Michigan corporation.
The business of the petitioner is that of a subdivider of and dealer in real estate.
The petitioner in March of 1926 purchased farm property in Michigan at a cost of $50,570.25, paying part of the purchase price in cash and securing the balance to the vendor by the execution of mortgages. Petitioner later defaulted in its payments on the mortgages. At that time the principal of the mortgages had been reduced to $22,140. The property was advertised for sale and sold in foreclosure of the mortgages on October 11, 1930. The period during which the petitioner could redeem the property under Michigan law expired on October 11, 1931.
Petitioner reported on its income tax return for the year 1931 a loss resulting from the foreclosure in the amount of $28,430.25.
As a result of the foreclosure loss, the petitioner's income tax return for the year 1931 showed a net loss of $19,804.84, which was carried forward to its 1932 return as a deduction.
The property above referred to was purchased in 1926 and was never redeemed by the petitioner.
Petitioner here contends that under Michigan law the mortgagor retains legal title to mortgaged property after foreclosure sale and until the expiration of his right to redeem; and that the purchaser on foreclosure sale therefore acquires no interest in the realty, but only a right to be vested with legal title when the deed executed at the time of the foreclosure sale shall become finally effective at the end of the redemption period. Furthermore, it is urged that the mortgagor has a right of possession after foreclosure sale and until the end of the redemption period.
The relevant provisions of the statutory law of Michigan on foreclosure of mortgages and extinction of the right of redemption after foreclosure are as follows (Comp. Laws of Michigan, 1929, vol. 3):
§ 14433 Deed of sale; endorsement, deposit with register, recording; entry upon redemption. SEC. 9. The officer or person making the sale shall forthwith execute, acknowledge, and deliver, to each purchaser a deed of the premises bid off by him; * * * And he shall endorse upon each deed the time when the same will become operative in case the premises are not redeemed according to law. * * * In case such premises shall be redeemed, the register of deeds shall, at the time of destroying such deed, as provided in section twelve 12 of this chapter, write on the face of such record the word "Redeemed," stating at what date such entry is made, and signing such entry with his official signature.
§ 14434 Same; effect upon failure to redeem premises. SEC. 10. Unless the premises described in such deed shall be redeemed within the time limited for such redemption as hereinafter provided, such deed shall thereupon become operative, and shall vest in the grantee therein named, his heirs or assigns, all the right, title, and interest which the mortgagor had at the time of the execution of the mortgage, or at any time thereafter, * * * and the record thereof shall thereafter, for all purposes be deemed a valid record of said deed without being re-recorded, * * *
§ 14435 Redemption; payment of sum bid and expenses, effect. SEC. 11. If the mortgagor, his heirs, executors, administrators, or any person lawfully claiming from, or under him or them, shall, within one 1 year from the time of such sale, redeem the entire premises sold, by paying to the purchaser, his executors, administrators or assigns, or to the register of deeds in whose office such deed is deposited for the benefit of such purchaser, the sum which was bid therefor, with interest from the time of the sale at the rate per cent, borne by the mortgage, not exceeding ten 10 per cent, per annum, and in case such payment is made to the register of deeds, the sum of one 1 dollar as a fee for the care and custody of such redemption money, then such deed shall be void and of no effect; * * *
§ 14436 Same; destruction of deed; record. SEC. 12. Upon the payment of the entire sum bid at such sale, and interest thereon, and the fee of one 1 dollar mentioned in the preceding section, as aforesaid, to the register in whose office the deed therefore shall have been deposited, or upon delivering to such register a certificate, signed and acknowledged by the person entitled to receive the same, and certified by some officer authorized to take the acknowledgement of deeds, setting forth that such sum, with interest, has been paid to such person, and upon paying to such register a fee of twenty-five 25 cents, such register shall thereupon destroy such deed, and shall enter in the margin of the record of such mortgage a memorandum that such mortgage is satisfied; * * *
§ 14656 Equity of redemption; liability to sale on execution; redemption. SEC. 121. All rights of redeeming mortgaged real estate and real estate sold on execution, may be sold on execution in the manner herein prescribed for the sale of other real estate on execution, excepting in the case hereinafter specified; and such equity of redemption may be redeemed, and the rights of any purchaser may be acquired, in the same manner, and upon the same terms and conditions as other real estate sold on execution.
§ 14659 Equity of redemption not to be sold under execution on certain judgment. SEC. 124. When a judgment shall be recovered for a debt secured by mortgage of real estate, or for any part of such debt, it shall not be lawful for the sheriff or other officer to sell the equity of redemption of the mortgagor, his heirs or assigns in such estate, by virtue of any execution upon such judgment.
Section 14631 permits the redemption within one year of the sale of any land sold on execution of judgment on payment of the bid price and interest.
Little is needed by way of judicial gloss upon these provisions. It seems clear that under section 14956 the mortgagor is entitled to possession of the mortgaged property until the foreclosure sale, Nusbaum v. Shapero, 249 Mich. 252; 228 N. W. 785; and even until foreclosure has been perfected by expiration of the period of redemption, Lowrie & Robinson Lumber Co. v. Rubin, 245 Mich. 224; 222 N. W. 169; Janower v. Sibley Lumber Co., 222 N. W. (Mich.) 736. In the Lowrie case it was said, at page 170:
* * * The rights of plaintiff which took title as a lienor for materials furnished are no greater than those of a mortgagee, and, upon foreclosure, the court may not, pending sale and the statutory period of redemption, dispossess a mortgagor and place the mortgagee in full possession.
As to the nature of the interest which the mortgagor holds after the foreclosure sale and before the period of redemption has passed, the Michigan courts have held that it is a right of redemption which takes the place of his former equity of redemption held before the foreclosure sale. The court said in Roff v. Miller (sometimes cited as McCreery v. Roff), 189 Mich. 558; 155 N. W. 517, pp. 518, 519:
* * * It is now settled that the purchaser, at a foreclosure by advertisement, ordinarily acquires an equitable interest in the land which he may, during the period given for redemption, transfer in full to another. And that his assignee, if there is no redemption, will take the legal title when it matures exactly as the original bidder himself would have taken it. Gage v. Sanborn, 106 Mich. 269, 64 N. W. 32.
* * * * * * *
* * * Such legal title does not vest at once upon the auction sale on statutory foreclosure (Jones on Mortgages, § 1884), but only at the expiration of the period allowed for redemption. Until the end of that period the foreclosure proceedings may be abandoned, if the parties choose to do so (Dodge v. Brewer, 31 Mich. 227), or a subsequent mortgagee may still demand an assignment of the mortgage.
In the Gage case, cited in the above quotation,...
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