R. O'Dell & Sons Co. v. Comm'r of Internal Revenue

• Decision Date: 09 June 1947
• Docket Number: Docket No. 6636.
• Citation: 8 T.C. 1165
• Parties: R. O'DELL & SONS COMPANY, INC., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
• Court: U.S. Tax Court

8 T.C. 1165

R. O'DELL & SONS COMPANY, INC., PETITIONER,

v.COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Docket No. 6636.

Tax Court of the United States.

Promulgated June 9, 1947.

Foreclosure of mortgage and sale of mortgaged property having the effect under State law of discharging petitioner's obligation in an amount greater than its adjusted basis for the mortgaged property, held to result in gain in year in which action for deficiency judgment was barred. Herbert C. Smyth, Jr., Esq., for the petitioner.

Francis X. Gallagher, Esq., for the respondent.

Respondent determined deficiencies in income tax and declared value excess profits tax in the amounts for the years as shown hereinbelow:

+-----------------------------+
                ¦Year¦Income tax¦Declared     ¦
                +----+----------+-------------¦
                ¦    ¦          ¦value excess ¦
                +----+----------+-------------¦
                ¦    ¦          ¦profits tax  ¦
                +----+----------+-------------¦
                ¦1940¦$6,596.43 ¦$104.13      ¦
                +----+----------+-------------¦
                ¦1941¦2,598.65  ¦             ¦
                +----+----------+-------------¦
                ¦1942¦902.80    ¦             ¦
                +-----------------------------+
                

The issue to be decided is whether petitioner realized taxable gain and the amount thereof, if any, upon the judicial sale of its real property as a result of the foreclosure of a mortgage thereon, the amount of the mortgage exceeding petitioner's adjusted basis for the property.

FINDINGS OF FACT.

Petitioner is a New Jersey corporation, incorporated in 1918. It filed its returns for the years involved with the collector of internal revenue for the fifth district of New Jersey.

In 1939 petitioner owned certain real property situated in Newark, New Jersey, against which there was outstanding a mortgage of $150,000 and accrued interest securing the payment of petitioner's bond to the Mutual Benefit Life Insurance Co. (hereinafter referred to as the mortgagee).

Petitioner's total cost of the mortgaged real property was $159,360.49; the allowable depreciation was $45,218.40, making petitioner's adjusted basis $114,142.09.

On May 9, 1939, the mortgagee instituted an action to foreclose the aforementioned mortgage in the Chancery Court of New Jersey, designating petitioner as defendant.

On August 28, 1939, a judgment of foreclosure and sale was entered, adjudging that the mortgaged property be sold to raise and satisfy the sums due the mortgagee in the amount of $163,812.50, together with lawful interest thereon from August 8, 1939, and its costs, and to pay the State of New Jersey the sum of $65.13, together with lawful interest thereon from the above mentioned date, and its costs, and that a writ of execution be issued accordingly. The mortgagee's costs were taxed in the sum of $1,050.64 and the costs of the State of New Jersey in the sum of $9.40.

By virtue of this decree and execution, the Sheriff of Essex County, New Jersey, sold the property to the mortgagee for a bid of $100 at a duly advertised sale held on October 17, 1939; there were no other bidders. An order confirming the sale of the mortgaged property was entered by the Chancellor of the State of New Jersey on October 30, 1939. No action was taken by the mortgagee toward securing a deficiency judgment, or collecting any part of the indebtedness within the three months following the date of confirmation.

Respondent in his notice of deficiency determined that petitioner ‘realized income in the year 1940 on the foreclosure and cancellation of a mortgage issued by you against three parcels of real estate located in Newark, New Jersey, computed as follows:

+------------------------------------------------------------------+
                ¦Total cost of buildings                   ¦           ¦$105,360.49¦
                +------------------------------------------+-----------+-----------¦
                ¦Cost of land                              ¦           ¦54,000.00  ¦
                +------------------------------------------+-----------+-----------¦
                ¦Total cost of properties                  ¦           ¦159,360.49 ¦
                +------------------------------------------+-----------+-----------¦
                ¦Less: Allowable depreciation              ¦           ¦45,218.40  ¦
                +------------------------------------------+-----------+-----------¦
                ¦Adjusted cost                             ¦           ¦114,142.09 ¦
                +------------------------------------------+-----------+-----------¦
                ¦Consideration received:                   ¦           ¦           ¦
                +------------------------------------------+-----------+-----------¦
                ¦Mortgage cancelled                        ¦$150,000.00¦           ¦
                +------------------------------------------+-----------+-----------¦
                ¦Interest accrued for 1937                 ¦1,875.00   ¦151,875.00 ¦
                +------------------------------------------+-----------+-----------¦
                ¦Income realized on foreclosure proceedings¦           ¦$37,732.91”¦
                +------------------------------------------------------------------+
                

OPINION.

OPPER, Judge:

If an owner sells property for more than its basis, the assumption that there has been a taxable gain follows almost inevitably. This is as true where the consideration received is property as where it is cash. Sometimes, the transaction involves an atypical sort of consideration such as release of the transferor's indebtedness. That does not prevent the transfer from being a sale or exchange resulting in capital gain or loss. Harold R. Smith, 39 B.T.A. 892; James B. Lapsley, 44 B.T.A. 1105; Rogers v. Commissioner (C.C.A., 9th Cir.), 103 Fed.(2d) 790; certiorari denied, 308 U.S. 580; rehearing denied 308 U.S. 635; Stamler v. Commissioner, (C.C.A., 3d Cir.), 145 Fed.(2d) 37. So where an owner pledges its property for a loan, the proceeds of which are greater than its basis, and subsequently succeeds in transferring the property for a cancellation of the debt, the excess of what it received over the basis of the property is gain, taxable in the year in which the property is disposed of and the debt discharged. Lutz & Schramm Co., 1 T.C. 682.

It is true that the present petitioner's cost is greater than the mortgage and if it were not for depreciation adjustments there would have been no gain under any theory. But in this respect it is like Crane v. Commissioner, 331 U.S. 1. As in that case, a correct disposition of petitioner's tax liability after the elimination of the mortgage indebtedness, and taking into consideration the benefits received from prior depreciation deductions, can not be achieved except upon a review of the whole transaction when the property is disposed of and the indebtedness disappears.

The only difference in this instance is that the elimination of petitioner's obligation came through the operation of New Jersey law and legal processes. ¹ But the consequence of the Hammel case² and its companion ³ is to eliminate the distinction between forced and voluntary sales. And the local statutory scheme makes it clear that foreclosure, sale, and collection of any deficiency are virtually one transaction. We do not regard as justified a result which would separate what is in substance and effect a single whole. Peninsula...