Mendham Corp. v. Comm'r of Internal Revenue
| Decision Date | 10 September 1947 |
| Docket Number | Docket No. 6007. |
| Citation | 9 T.C. 320 |
| Parties | MENDHAM CORPORATION, A CORPORATION OF NEW JERSEY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
Foreclosure of mortgage resulting in elimination of mortgage debt and transfer of New Jersey property previously acquired by petitioner, subject to transferor's basis, in tax-free exchange, held to result in taxable gain to extent that proceeds of mortgage received by transferor-mortgagor exceeded adjusted basis for the property, notwithstanding that petitioner was not itself liable on the mortgage. Lutz & Schramm Co., 1 T.C. 682; R. O'Dell & Sons Co., 8 T.C. 1165, followed; Charles L. Nutter, 7 T.C. 480, distinguished. Emanuel Wagner, Esq., for the petitioner.
Albert Monacelli, Esq., for the respondent.
Respondent determined deficiencies for the taxable year ended December 31, 1939, in income tax and declared value excess profits tax in the following amounts: Income tax, $10,772.98; and declared value excess profits tax, $6,217.98.
Petitioner having abandoned an issue raised in its pleading, the sole remaining question is whether the amount due on a mortgage, including accrued interest and taxes due on realty, constitute ‘property (other than money)‘ received by petitioner in computing the ‘amount realized‘ under Internal Revenue Code, section 111, where petitioner acquired the realty from its parent in a tax-free exchange, subject to the mortgage, and the mortgagee thereafter foreclosed the mortgage and bought in at the foreclosure sale.
Substantially all of the facts have been stipulated.
The stipulated facts are hereby found accordingly.
Petitioner, a New Jersey corporation, filed its tax returns for the year 1939 with the collector of internal revenue for the fifth district of New Jersey. It has kept its books and has prepared its returns on an accrual basis.
Upon its incorporation on June 1, 1932, it acquired from River Park Corporation (hereinafter sometimes referred to as River Park) improved real estate situate in Elizabeth, New Jersey, including certain improved realty hereinafter designated as the Isham property. In exchange for the real estate petitioner issued to River Park its entire capital stock, consisting of 10 shares of no par value common stock. This, it is agreed, was a tax-free transaction.
The Isham property consisted of two office buildings and property occupied by a gasoline station, all adjoining.
River Park had purchased the Isham property in 1927 at a cost of $231,502.16, allocating $140,000 to land and $91,502.16 to buildings; additional capital improvements in the sum of $138,233.26 were made from 1927 to 1931, which increased the amount allocated to buildings to $229,735.42.
In 1928 River Park borrowed $325,000 by placing a mortgage in that amount upon the Isham property. The money was used as follows:
+---------------------------------------------------+
¦To pay off old mortgage on the property¦$140,000.00¦
+---------------------------------------+-----------¦
¦Interest accrued thereon ¦10,706.70 ¦
+---------------------------------------+-----------¦
¦Taxes ¦162.50 ¦
+---------------------------------------+-----------¦
¦Expenses ¦4.00 ¦
+---------------------------------------+-----------¦
¦Improvements on the property ¦25,200.00 ¦
+---------------------------------------+-----------¦
¦Cash in bank ¦148,926.80 ¦
+---------------------------------------+-----------¦
¦Total ¦325,000.00 ¦
+---------------------------------------------------+
Petitioner received the property from River Park subject to the mortgage, but did not become an obligor on the accompanying bond. Upon receipt of the property, petitioner set up the property on its books at its parent's cost— $140,000 allocated to land, $229,735.42 to buildings. It also set up a depreciation reserve of $28,783.33, representing what River Park had reserved on its books as depreciation on the property. Thereafter petitioner took depreciation on the property in each year, as follows, which amounts were allowed as deductions in its tax returns:
+----------------+
¦1932 ¦$4,020.37 ¦
+-----+----------¦
¦1933 ¦5,626.62 ¦
+-----+----------¦
¦1934 ¦5,626.62 ¦
+-----+----------¦
¦1935 ¦5,626.62 ¦
+-----+----------¦
¦1936 ¦5,626.62 ¦
+-----+----------¦
¦1937 ¦5,626.62 ¦
+-----+----------¦
¦1938 ¦5,626.62 ¦
+-----+----------¦
¦Total¦37,780.09 ¦
+----------------+
In connection with the Isham property petitioner accrued on its books and deducted in its income tax returns, but never paid, the following charges, all of which were payable in the years enumerated:
+-------------------------------------+
¦Year ¦Interest on¦Taxes ¦Total ¦
+-----+-----------+---------+---------¦
¦ ¦mortgage ¦ ¦ ¦
+-----+-----------+---------+---------¦
¦1936 ¦$3,396.63 ¦ ¦$3,396.63¦
+-----+-----------+---------+---------¦
¦1937 ¦19,500.00 ¦ ¦19,500.00¦
+-----+-----------+---------+---------¦
¦1938 ¦19,500.00 ¦$2,723.13¦22,223.13¦
+-----+-----------+---------+---------¦
¦Total¦42,396.63 ¦2,723.13 ¦45,119.76¦
+-------------------------------------+
The net operating loss on the Isham property as shown on petitioner's books totals $62,498.93, which total includes (1) $39,000 representing mortgage interest accrued in 1937 and 1938 by petitioner, but never paid, and (2) interest on past due taxes totaling $1,688.51, which respondent considers a financing expense of petitioner, rather than an operating expense of the property.
In 1939 the mortgagee instituted foreclosure proceedings upon the Isham property, and title to the property was conveyed to it by sheriff's deed, dated September 22, 1939, the mortgagee having bid in the property at $100.
The transaction was recorded in petitioner's books as follows:
+----------------------------------------------------------------+
¦Mortgage Payable ¦$325,000.00¦ ¦ ¦
+-----------------------------+-----------+----------+-----------¦
¦Reserve for Depreciation ¦66,563.42 ¦ ¦ ¦
+-----------------------------+-----------+----------+-----------¦
¦Interest Accrued ¦42,396.63 ¦ ¦ ¦
+-----------------------------+-----------+----------+-----------¦
¦Taxes Accrued ¦2,723.13 ¦ ¦ ¦
+-----------------------------+-----------+----------+-----------¦
¦ ¦ ¦ ¦$436,683.18¦
+-----------------------------+-----------+----------+-----------¦
¦Rents Receivable ¦ ¦$2,693.12 ¦ ¦
+-----------------------------+-----------+----------+-----------¦
¦Due from Prudential for Rents¦ ¦4,481.59 ¦ ¦
+-----------------------------+-----------+----------+-----------¦
¦Land and Building “Isham” ¦ ¦369,735.42¦ ¦
+-----------------------------+-----------+----------+-----------¦
¦Due from Agents ¦ ¦79.91 ¦ ¦
+-----------------------------+-----------+----------+-----------¦
¦Surplus ¦ ¦59,693.24 ¦ ¦
+-----------------------------+-----------+----------+-----------¦
¦ ¦ ¦ ¦436,683.18 ¦
+-----------------------------+-----------+----------+-----------¦
¦ ¦ ¦ ¦ ¦
+----------------------------------------------------------------¦
¦To reflect loss on Isham Building taken over by Mortgagee. ¦
+----------------------------------------------------------------+
Following the foreclosure of the mortgage, petitioner set up on its books the sum of $3,200 as a result of an oral agreement with the mortgagee whereby the mortgagee agreed not to sue for a deficiency and petitioner's grantor agreed to pay the mortgagee the sum of $3,200, said agreement having been made prior to the expiration of the three-month statutory period within which a suit for deficiency must be instituted. Suit for deficiency was never instituted. No part of said sum of $3,200 was ever paid either by petitioner or by petitioner's grantor.
In all its income tax returns from 1933 through 1939 petitioner carried the $325,000 mortgage on its...
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