T.C. Sum m ary Opi ni on 20 13 -4 7

UNITED STAT ES TAX COURT

DRUCELLA T. MALONZO, Peti ti on er v . COMM ISSI ONER OF INTERNAL REVENUE, Resp on de nt

Doc ke t No . 11 60 8- 12 S. File d Jun e 1 0, 2 01 3.

Dru cel laT. Malo nz o, p ro se. Nath anH. Hall , forres po nd en t.

SUMM ARY OPINION GERBER, J ud ge : Th is cas e was he ardpu rs ua ntto th e p ro vi si on s o f se ct io n 74 63 of t he Int ern al Rev enue Co de in effec t wh enth e p et it io n was fil ed . 1

Unl es s o th erwi se in di cat ed , all sec ti on refe ren ces are t o t he Int ern al 1 Rev enue Co de in effe ctforth e y ear i n i ss ue .- 2 -

Pu rs ua ntto sec ti on 74 63 (b ), th e d eci si on to be en te redis no t re vi ewab le by any ot he r co urt, an d t hi s o pi ni on sh al l n otbe tre at edas p rece de ntforan y ot he r cas e. Res po nd en t d et erm in eda $7 37 in co m e ta x d efi ci en cy forpe ti ti on er’s 2 00 8 t ax y ear. Th e so le qu es ti on forou r co ns id erat io n i s wh ethe r pe ti ti on er re al iz eda cap it al ga in att rib ut ab le to he r ab an do nm en t o f, an d t he subs eque ntfor ecl os ur e o f th e m ortg ag e lo ansec ur in g, h er re al pro pe rty. Bac kg ro un d Pet it io ne r res id edin Cal ifo rn iaat the ti m e h er p et it io n was fil ed . Duri ng 20 05 sh e p ur ch as eda res id en ce i n S acra m en to , Cal ifo rn ia(res id en ce). Sh e res id edth ere u nt il so m et im e dur in g 2 00 6, wh ensh e m ov edto SanFran ci sc o, Cal ifo rn ia . For s om e p orti on of 2 00 7 p et it io ne r ren te d o utth e res id en ce, rep orte d th e in co m e fro m

th e ren ta l, an d c la im ed$1 2,1 18 in de pr eci at io n. Lat er i n 2 00 7 pe ti ti on er was un ab le to ren t o utth e res id en ce. At t ha t t im e, th e fai r m ark etva lu e of th e res id en ce was les s t ha n the ou ts ta nd in g m ortg ag e lo anba la nc e an d pe ti ti on er s to pp edm ak in g t he m ortg ag e p aym en ts an d i n e ffec t ab an do ne d t he res id en ce. Alt ho ug h p et it io ne r st op pe d m ak in g t he m ortg ag e p aym en ts , sh e to ok no form al st ep s t o t ran sf

er t it le or t o p ro vi de he r le nd er wi thno ti ce o f he r in te nt io n to ab an do n t he res id en ce. Aft er p et it io ne r st op pe d m ak in g m ortg ag e p aym en ts , th e le nd in g i ns ti tu ti on de te rm in edth atpe ti ti on er’s n ot e was in de fau ltan d t he- 3 -

m ortg ag e lo ansec ur in g t he res id en ce was for ecl os edup on du rin g 2 00 8. Th e res id en ce was res ol d b y

th e le nd er fo r $2 78 ,31 4.8 4 i n e arl y 20 08 . Pet it io ne r pa id$3 33 ,23 9 fo r th e res id en ce i n 2 00 5, an d tha t am ou ntwas co ns id eredby resp on de ntto be pe ti ti on er’s u na dju st edba si s i n the res id en ce. Dur in g 2 00 8 p et it io ne r’s le nd er s en t h er a Fo rm 10 99 -A, Acqu is it io n o r Aba nd on m en t o f Sec ur edPro pe rty, refle ct in g t ha t t he ou ts ta nd in g b al an ce o f he r m ortg ag e o bl ig at io n was $3 25 ,85 5.0 6. Th e sa m e Fo rm 10 99 -A refl ect edth e fai r m ark etva lu e o f th e res id en ce t o b e th e res al e p ric e o f $2 78 ,31 4.8 4. Fi na ll y , th e Fo rm 10 99 -A refl ect edth atJan ua ry 22 , 20 08 , was t he “ da te of l en de r’s acqui si ti on orkn owl ed ge of aba nd on m en t” . Res po nd en t ex am in edpe ti ti on er’s 2 00 8 i nc om e ta x re tu rnan d d et erm in ed th atsh e h ada $4 ,73 4 l on g- te rm cap it al ga in whi ch , intu rn , res ul te d i n a$7 37

2 in co m e ta x d efi ci en cy

for 20 08 . Res po nd en t co m

pu te d t he ga in as f

ol lo ws:

Res po nd en t’s d et erm in at io n was th atpe ti ti on er’s g ai n was cap it al as 2 op po se d t o “ or di na ry ”. Ther e was no co nt ro ve rs y be twee n t he pa rti es as t o whe th er an y

ga inwou ldco ns ti tu te ord in ary orcap it al in co m e. Ther e is no ev id en ce i n o urreco rdpro vi di ng th e rat io na le forres po nd en t’s d et erm in at io n. Pet it io ne r’s on ly con te nt io n was th atsh e was en ti tl edto anab an do nm en t l os s.- 4 -

Am ou ntreal iz ed (o ut st an di ng m ortg ag e b al an ce) $3 25 ,85 5 Less : b as is Purch as e p ric e $3 33 ,23 9 Recap tu redde pr eci at io n (12 ,11 8) Adju st edba si s (32 1,1 21 ) Gain 4,73 4 Inres po ns e, pe ti ti on er s ub m it te d a n a m en de d 2 00 8 F ed eral Inc om e Tax Return, rep orti ng a $3 13 ,73 7 o rd in ary in co m e lo ss fro m th e ab an do nm en t o f th e res id en ce. Dis cu ss io n Res po nd en t co nt en ds th atpe ti ti on er h ada lo ng -te rm cap it al ga in res ul ti ng fro m th e fo recl os ur e o f th e m ortg ag e lo ansec ur in g t he res id en ce. Aft er co ns id eri ng de pr eci at io n a ll owe d o r al lo wab le , res po nd en t’s v ie w is th atth e fo recl os ur e res ul te d i n asal e o r ex ch an ge wher e p et it io ne r’s in de bt edne ss ex ceed edhe r ad

jus te d b as is in th e res id en ce. Pet it io ne r co nt en ds th atsh e h adan or di na ry lo ss fro m

he r ab an do nm en t o f th e res id en ce. Pet it io ne r se es he r in te nd ed ab an do nm en t as a si tu at io n wh ere s he lo stth e v al ue of t he res id en ce ata ti m e whe n the de btob li ga ti on ex ceed edth e v al ue . W e m us t d eci de whethe r th e ci rcu m st an ces of t hi s ca se res ul t i n a n o rd in ary lo ss att rib ut ab le to ab an do nm en t o r a cap it al ga in att rib ut ab le to a sa le or ex ch an ge . The b as ic pri nc ip le s t ha t g ov ern th es e ci rcu m st an ces are t o b e fo un d i n- 5 -

a wel l-e st ab li sh edli ne of c as es be gi nn in g wi th th e Supr em e Co urt’s o pi ni on in Cran e v . Comm is si on er, 3 31 U.S. 1 (1 94 7) . In Cr an e, th e ta xp ay er i nh eri te d re al pr op erty th atwas e nc um

be redby a m ortg ag e th atha d n otbe enass um edby the ta xp ay er. Fo r ta x p ur

po se s t he tax pa y er cl ai m edde pr eci at io n u si ng th e v al ue of th e p ro pe rty. W

he n the tax pa y er s ub se qu en tl y so ldth e p ro pe rty, the va lu e o f th e pr op erty an d t he m ortg ag e b al an ce were ap pr ox im at el y equa l an d s he rece iv eda ne t am ou ntof $ 2,5 00 whi ch sh e tr eat edas t he ga in fro m th e sa le . The Co m m is si on er, o n t he ot he r ha nd , tre at edth e v al ue of t he pro pe rty les s de pr eci at io n a s t he tax pa y er’s b as is an d t he ou ts ta nd in g b al an ce o f th e m ortg ag e pl us th e $ 2,5 00 as t he sal e p ric e, th ereb y res ul ti ng in a la rg er g ai n a ndanin crea se d ta x b ur de n. Th e Supr em e Co urt, h ol di ng forth e Co m m is si on er, d eci de d t ha t t he am ou ntof t he un as su m edm ortg ag e is to be co ns id eredpart o f th e p ro ceed s o f sa le . So m e 3 6 years l at er, the Supr em e Co urt co ns id eredwhet he r th e sa m e ru le ap pl ie s ev enwher e th e u np ai d a m ou ntof ano nr eco ur se m ortg ag e ex ceed edth e fai r m ark etva lu e o f th e p ro pe rty so ld . In tha t ca se , itwas h el d t ha t the tax pay er, al th ou gh requi redto in cl ud e th e o ut st an di ng m ortg ag e o bl ig at io n a s p ro ceed s o f sa le , was n oten ti tl edto a lo ss to th e ex te ntth atth e m ortg ag e ex ceed edth e fai r m ark etva lu e o f th e p ro pe rty. See Co m m is si on er v . Tuft s, 4 61 U.S. 30 0 (1 98 3) .- 6 -

Ina cas e d eci de d s oo n a fte r Tuf ts , th e Co urt o f App eal s fo r th e Fi fth Cir cu it affi rm edth is Co urt’s h ol di ng th atanab an do nm en t o f rea l p ro pe rty subjec t t o a no nr eco ur se de btis a “ sa le or e xc ha ng e” fo r pu rp os es of d et erm in in g wh ethe r a lo ss is a cap it al lo ss . See Yarb ro v. Co m m is si on er, 7 37 F.2d47 9 (5 th Cir . 19 84 ), aff’g T.C. Me m o. 1 98 2- 67 5. Th atcas e in vo lv edth e que st io n o f whe th er an in di vi du al tax pay er’s l os s re su lt in g fr om th e ab an do nm en t o f un im pr ov edreal es ta te subjec t t o ano nr eco ur se m ortg ag e ex ceed in g the fai r m ark etva lu e is an or di na ry lo ss or acap it al lo ss . Pet it io ne r’s cas e p res en ts a si m il ar que st io n t o t ha t ad dr es se d i n Yarbr o- - whe th er h er ab an do nm en t o f rea l es ta te subjec t t o am ortg ag e ex ceed in g the fai r m ark etva lu e is anord in ary lo ss or acap it al ga in be cau se of c on si de rat io n o f th e ou ts ta nd in g m ortg ag e. Pet it io ne r pu rch as edth e p ro pe rty, dep reci at edit , and , aft er he r in ab il it y

to ren t i t o ut , walk edaway when he r m ortg ag e o bl ig at io n was in ex ces s o f th e v al ue of t he pro pe rty andals o i n e xc es s o f he r ad jus te d b as is in th e pr op erty . Here, li ke th e ta xp ay er i n C ran e, pe ti ti on er cl ai m edde pr eci at io n b as ed on he r ba si s o r co st . Eventh ou gh sh e wal ke d away fro m th e p ro pe rty with th e in te nt io n o f no lo ng er m ak in g p aym en ts onth e m ortg ag e, th e subs eque nt fo recl os ur e o f th e m ortg ag e lo ansec ur in g t he pro pe rty con st itut eda “ sa le or ex ch an ge ”. See s ec. 1 .10 01 -2 (a)( 1) , Inc om e Tax Reg s.- 7 -

Pet it io ne r is th eref

or e n oten ti tl edto anord in ary lo ss du e to ab an do nm en t th atis equa l t o t he va lu e o f th e p ro pe rty becaus e th atwou ldig no re the factth at sh e h el d acap it al ass etth atwas s ub ject t o am ortg ag e. Acco rd in gl y , we m us t su st ai n re sp on de nt ’s det erm in at io n tha t p et it io ne r ha d a$4 ,73 4 c ap it al ga inan d th atth ere i s a r es ul ti ng 20 08 in co m e ta x d efi ci en cy of $ 73 7. To re fle ctth e fo reg oi ng , Deci si on wil l b e en te redfor res po nd en t.