Freeland v. Comm'r of Internal Revenue
| Decision Date | 05 August 1980 |
| Docket Number | Docket No. 969-78. |
| Citation | 74 T.C. 970 |
| Parties | EUGENE L. and MARY R. FREELAND, PETITIONERS v. COMMISSIONER of INTERNAL REVENUE, RESPONDENT |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
Petitioner bought real estate in California for $50,000, paying the seller $9,000 cash and giving her a purchase-money mortgage in the amount of $41,000. Under California law, there is no personal liability on the mortgagor in a purchase-money mortgage. Petitioner took no deductions for depreciation while he held the property. Subsequently, when the fair market value of the property dropped to $27,000, and the unpaid balance on the mortgage note was still $41,000, petitioner voluntarily reconveyed the property to the mortgagee for no monetary consideration. Held, the reconveyance constituted a sale, and petitioner's loss on the transaction was a capital loss. Paul R. Wassenaar and Paul J. Dostart, for the petitioners.
Karen Nicholson Sommers, for the respondent.
Respondent determined a deficiency in the Federal income tax of petitioners for the taxable year 1975 in the amount of $4,252. After concessions, the sole issue to be decided is whether petitioners realized an ordinary or capital loss upon the voluntary conveyance of real property, encumbered by a nonrecourse purchase-money mortgage, by petitioners to their mortgagee without any monetary consideration.
Some of the facts have been stipulated and are so found. The stipulation of facts together with the exhibits attached thereto are incorporated herein by this reference.
Petitioner Eugene L. Freeland resided in Rancho Santa Fe, Calif., and petitioner Mary R. Freeland resided in Lomas Santa Fe, Calif., at the time of the filing of the petition herein. Petitioners timely filed a joint Federal income tax return for their 1975 taxable year. Mary is a party solely by reason of filing a joint return; therefore, when we herein refer to petitioner, we will be referring solely to Eugene.
On December 31, 1968, petitioner purchased an unimproved 9-acre parcel of real property (property) located on Via de la Valle just inside the city limits of San Diego, Calif., from Lorraine W. Conley (seller) for its then fair market value of $50,000. This property was purchased with the intent to hold, and was in fact held, as an investment. Of the total price paid for the property, $9,000 was paid in cash, and the balance of $41,000 was evidenced by a note secured by a purchase-money deed of trust. Petitioner additionally incurred escrow expenses in the amount of $188 pursuant to this purchase. Petitioner made no improvement to the property while he held title to it and claimed no depreciation deductions.
Section 580b, California Code of Civil Procedure, provides in part:
No deficiency judgment shall lie in any event after any sale of real property for failure of the purchaser to complete his contract of sale, or under a deed of trust, or mortgage, given to the vendor to secure payment of the balance of the purchase price * * *
It is conceded that by application of section 580b, supra, the note in the instant case was secured only by the property and not by the personal liability of petitioner.
The note called for semiannual principal payments of $4,100 for a period of 5 years commencing June 30, 1975, and semiannual interest payments on the unpaid principal amount (with interest accruing from the date of purchase and sale) at the rate of 7 percent. Through April 18, 1975, petitioner had made interest payments in the amount of $20,098; no amounts of principal, however, had been paid as of that date.
In the early months of 1975, petitioner was informed that the street in front of the property would have to be widened. Additionally, a moratorium was placed on sewer construction so that sewers could not be extended to the property. Moreover, there was a problem in obtaining water from the city of San Diego for the property.
To determine the impact of the above circumstances upon the value of the property, petitioner asked Charles W. Christensen & Associates (engineers) to make an engineering study of the parcel. The engineers concluded that the unfavorable developments of the required street widening, the absence of sewer and water connections, and the probable necessity for placing existing electrical wires underground would result in costs to the property owner of approximately $100,000, $55,000, and $65,000, respectively.
Petitioner is an attorney whose practice is primarily related to the real estate area. It was his opinion, after considering the report from the engineers, that the property was worth approximately $27,000 in 1975. As the unpaid balance on the note was $41,000, he considered the property to be totally worthless to him. The above-mentioned circumstances would severely limit the ability of any developer to undertake improvement or subdivision of the property. As a result of this conclusion, petitioner decided to terminate his interest in the property as expeditiously as possible.
On October 27, 1975, petitioner reconveyed the property to the seller by quitclaim deed. This deed was duly recorded and delivered to the seller. Petitioner received no monetary consideration from the seller in return for the reconveyance. Petitioner's only other alternative to rid himself of the property was to default on the note and wait for the seller to foreclose. At the time of the conveyance, there had been no foreclosure action instituted by the seller, nor was there any threat thereof.
On their 1975 Federal income tax return, petitioners claimed the amount of $8,855 as an ordinary loss under section 165(a) and (c)(2), I.R.C. 1954,1 as a result of the reconveyance of the property. By amended petition, petitioners claim the proper amount of the loss to be $9,188. Respondent agrees that $9,188 is the proper amount of the loss, but claims that the loss is capital rather than ordinary, the treatment thereof governed by sections 165(f), 1211, and 1212.
OPINIONPetitioner purchased real estate in California in 1968 for $50,000, paying the vendor $9,000 cash and giving a purchase-money deed of trust (hereinafter mortgage) for the balance of $41,000. By 1975, when the balance due on the purchase price was still $41,000, certain conditions existed which reduced the fair market value of the property to $27,000. Since under California law petitioner was not personally liable on the note secured by the purchase-money mortgage, petitioner decided to terminate his interest in the property, which he accomplished by reconveying the property to the vendor-mortgagee by quitclaim deed dated October 27, 1975, for no monetary consideration. Petitioner claims an ordinary loss in the amount of $9,1882 for 1975 as a result of the transaction. The amount of the loss is not in dispute, but respondent determined that the loss is deductible only as a loss on the sale or exchange of a capital asset subject to the limitations provided in sections 12113 and 1212.4
Section 165(a) and (c)(2) allows a deduction from ordinary income for losses incurred in transactions entered into for profit. The above sections, however, are limited by section 165(f) which provides that losses from sales or exchanges of capital assets shall be allowed only to the extent allowed in sections 1211 and 1212. That petitioner's interest in the mortgage property was a capital asset is not in dispute. The issue is whether petitioner's transfer of the property to the mortgagee was a “sale or exchange” within the meaning of those sections.
The parties have framed the issue in terms of abandonment, both parties implicitly agreeing that a loss sustained on abandonment is an ordinary one. Petitioner states that the issue to be decided is whether a disposition by abandonment constitutes a sale or exchange. Respondent concedes that an abandonment of property is not a disposition by sale or exchange, but argues that this disposition was the equivalent of a foreclosure sale rather than an abandonment.
It appears that by reconveying the property to the seller, petitioner accomplished an abandonment under California law. See Gerhard v. Stephens, 442 P.2d 692, 69 Cal. Rept. 612 (1968), wherein it was held that, as a general rule, for there to be an abandonment, there must be an intent to abandon and one decisive and conclusive act to clearly indicate this intent, which the reconveyance accomplished here. But see Commissioner v. Hoffman, 117 F.2d 987 (2d Cir. 1941). But regardless of whether petitioner's intent and overt act of reconveyance qualified the reconveyance as an abandonment under California law, we are concerned here with whether the voluntary reconveyance, per se, constituted a sale or exchange within the meaning of section 1211(b)(1) of the Internal Revenue Code. See Helvering v. Jones, 120 F.2d 828 (8th Cir. 1941).
That a disposition, causing gain or loss to be recognized under section 1001, occurs upon a reconveyance of property in satisfaction of a mortgage obligation is well settled. E.g., Parker v. Delaney, 186 F.2d 455 (1st Cir. 1950); however, not every taxable disposition of property is a sale or exchange. Fox v. Commissioner, 61 T.C. 704 (1974); Smith v. Commissioner, 66 T.C. 622 (1976), revd. sub nom. Schleppy v. Commissioner, 601 F.2d 196 (5th Cir. 1979).
The question whether a reconveyance of property to a seller-mortgagee by various means and under various circumstances constitutes a sale or exchange for Federal tax purposes has been before the courts in numerous cases over an extended period of time, with the conclusions being at times inconsistent and confusing. Factors that have been given consideration include (1) whether the transfer was voluntary or involuntary, (2) whether the mortgage debt was released or not, and whether the transferor received any additional (even minimal) consideration or boot, (3) whether the transferor-mortgagor was personally liable on the mortgage debt, (4) whether the...
To continue reading
Request your trial
-
Nat'l-Standard Co. v. Comm'r of Internal Revenue
...consistently held that such property has been sold or exchanged. See, e.g., United States v. Davis, 370 U.S. 65 (1962); Freeland v. Commissioner, 74 T.C. 970 (1980); Danenberg v. Commissioner, 73 T.C. 370, 380-381 (1979), and cases cited thereat. Against the foregoing background, I turn to ......
-
Citron v. Comm'r of Internal Revenue
...they were relieved of liabilities by means of their abandonment resulting in a sale or exchange. See, for example, Freeland v. Commissioner, 74 T.C. 970, 982-983 (1980), and Middleton v. Commissioner, 77 T.C. 310, 319-324 (1981), affd. per curiam 693 F.2d 124 (11th Cir. 1982). More specific......
-
Yarbro v. C.I.R.
...for sale to customers in the ordinary course of business. Finally, the Tax Court, following the course charted in Freeland v. Commissioner, 74 T.C. 970 (1980), and Middleton v. Commissioner, 77 T.C. 310 (1981), aff'd per curiam, 693 F.2d 124 (11th Cir.1982), held that an abandonment of prop......
-
Ebben v. C.I.R.
...be "sale or exchange" within meaning of capital gains provisions even though transferor received no economic benefit); Freeland v. Commissioner, 74 T.C. 970, 977 (1980) The tax court, in a decision unanimously reviewed by the full court, has specifically held that a gift of encumbered prope......
-
Accelerating losses with an assignment for the benefit of creditors.
...included as proceeds derived from the disposition of such property and reduced the Taxpayer's basis in such assets. Freeland v. Com'r, 74 T.C. 970 (1980); and Middleton v. Com'r, 693 F.2d 124 (11th Cir. 1982), aff'g 77 T.C. 310 (1980). By commencing the Assignment for the Benefit of Credito......
-
Withdrawal from a partnership after Citron and Echols.
...76-189, 1976-1 CB 181. (4) In Lester J. Arkin, 76 TC 1048 (198 1) (abandonment of an interest in a land trust), and Eugene L. Freeland, 74 TC 970 (1980) (abandonment by a partnership of real property subject to an encumbrance), an abandonment under state law was considered a sale or exchang......
-
Tax Land Mines That Await the Unwary Bankruptcy Practitioner
...§§ 523(a)(1) and 507(a)(7). 5. IRC § 1398(g). 6. IRC § 1398(i). 7. Helvering v. Hammil, 311 U.S. 504 (1941); Freeland v. Commissioner, 74 T.C. 970 (1980); Allan v. Commissioner, 86 T.C. 655, 659 (1986), aff'd 856 F.2d 1169 (1988). 8. See 11 U.S.C. § 554. 9. Samore v. Olson, 930 F.2d 6 (8th ......
-
Advising the noncorporate debtor through foreclosure: possibilities for eliminating capital gains in Chapter 11.
...Laport, 671 F2d 1028 (7th Cir. 1982)(49 AFTR2d 82-793, 82-1 USTC [paragraph]9230); Lester J. Arkin, 76 TC 1048 (1981); Eugene L. Freeland, 74 TC 970 (24)Bankruptcy Code Section 362(d)(2) gives a secured creditor the right to seek relief from the automatic stay by demonstrating the debtor's ......