Pender v. Commissioner of Internal Revenue, 4532.

• Decision Date: 03 June 1940
• Docket Number: No. 4532.,4532.
• Parties: PENDER et al. v. COMMISSIONER OF INTERNAL REVENUE.
• Court: U.S. Court of Appeals — Fourth Circuit

110 F.2d 477 (1940)

PENDER et al. v. COMMISSIONER OF INTERNAL REVENUE.

No. 4532.

Circuit Court of Appeals, Fourth Circuit.

March 11, 1940.

Writ of Certiorari Denied June 3, 1940.

Richard B. Barker, of Washington, D. C. (Ivins, Phillips, Graves & Barker of Washington, D. C., on the brief), for petitioners.

John J. Pringle, Jr., Sp. Asst. to Atty. Gen. (Samuel O. Clark, Jr., Asst. Atty. Gen., and Sewall Key and Joseph M. Jones, Sp. Assts. to Atty. Gen., on the brief), for respondent.

Before PARKER, SOPER, and DOBIE, Circuit Judges.

Writ of Certiorari Denied June 3, 1940. See 60 S.Ct. 1103, 84 L.Ed. ___.

PARKER, Circuit Judge.

This is a petition to review a decision of the Board of Tax Appeals holding deduction of loss sustained in the sale of real estate to be subject to the limitation of $2,000.00 prescribed by Sec. 117(d) of the Revenue Act of 1934, 48 Stat. 680, 26 U. S.C.A. Int.Rev.Acts. Petitioners are David Pender and wife of Norfolk, Va., who filed a joint income tax return for the year 1935. In 1928, in a transaction entered into for profit, they acquired title to real property located on Boush Street in Norfolk and assumed indebtedness against it secured by deed of trust. On December 5, 1935, after certain capital improvements had been made on the property, its depreciated cost to petitioners was $159,419.21, and the amount of the notes outstanding secured by the deed of trust was $41,224.05. On that date, petitioners conveyed this property, together with another piece of real estate worth $10,000, to the holders of the notes in satisfaction of the indebtedness evidenced thereby. The loss to petitioners on the two pieces of property so conveyed was $129,041.78; and they sought a deduction from income on account thereof in the sum of $51,216.30, which resulted in a showing of no tax liability on their return. The Commissioner disallowed the deduction, however, except to the extent of $2,000, and the Board of Tax Appeals affirmed his action thereon. The facts surrounding the conveyance of the property were thus found by the Board: "On December 5, 1935, the notes secured by the Boush Street property were past due both as to principal and interest in the total amount of $41,224.05. Prior to this date the mortgagees had made persistent demands that the debt be paid and threatened foreclosure if payment was not forthcoming. Petitioner was unable to pay the debt in cash and offered to convey his rights in the property in satisfaction of the debt. The mortgagees refused this offer and demanded a statement showing petitioner's financial condition. This statement showed that petitioner owned the National Lane property above described which was unencumbered and at that time had a market value of $10,000. To prevent foreclosure petitioner conveyed to the mortgagees his title to the Boush Street property and in addition conveyed to them the National Lane property in consideration of his release from all liability with respect to the mortgage indebtedness."

Sec. 117(d) of the Revenue Act of 1934, 26 U.S.C.A. Int.Rev.Acts, provides: "(d) Limitation on Capital Losses. Losses from sales or exchanges of capital assets shall be allowed only to the extent of $2,000 plus the gains from such sales or exchanges."

It is admitted that the property conveyed constituted capital assets of petitioners, but the contention is made that there was no sale or exchange within the meaning of this section, but a mere surrender of property in extinguishment of an indebtedness. We cannot accept this contention. Prior to the conveyance petitioners were the owners of the property with all the rights of use and enjoyment incident to ownership. The Boush Street property had been conveyed by deed of trust to secure the payment of notes which petitioners had assumed; but this meant no more than that legal title had been conveyed to a trustee who was authorized to sell the property and used the proceeds in payment of the notes in the event of default. Petitioners were the owners of the fee, with power to "lease, sell, and in every respect, deal with the mortgaged premises as owner." Hale v. Horne, 62 Va. 112, 121. When they found themselves unable to pay the notes on maturity, instead of allowing the property to be sold by the trustee, they themselves sold it to the note holder, along with another piece of property, for the amount evidenced by the notes. That this was a sale of the property conveyed within any fair meaning of the term, even though the consideration was extinguishment of the debt secured by the deed of trust and not payment in money, does not admit of doubt. As said by Mr. Justice Gray in the Five Per Cent Cases, 110 U.S. 471, 478, 4 S.Ct. 210, 214, 28 L.Ed. 198, "A sale, in the ordinary sense of the word, is a transfer of property for a fixed price in money or its equivalent". See, also, United States v. Benedict, 2 Cir., 280 F. 76, 80; 4 Words & Phrases, Second Series, 437, 441. Here the satisfaction of the notes upon which petitioners were liable was unquestionably the equivalent of the payment of money.

If the two pieces of property had been...