Opinion ID: 1506221
Heading Depth: 1
Heading Rank: 1

Heading: Accrued Interest Upon Mortgages on Acquired Lands.

Text: The taxpayer foreclosed defaulted mortgages upon real estate, and bid in the property at foreclosure sale for an amount equal to the full amount of the mortgage debt and interest. In some cases, in lieu of foreclosure, the taxpayer accepted deeds of the mortgaged property from its mortgagors, and released them from the mortgage debt. The taxpayer's contention is that in either event the accrued interest was not paid unless the land acquired was worth as much as the mortgage debt and interest. When mortgaged property is sold on foreclosure for an amount sufficient to pay the mortgage debt with accrued interest, the mortgagee has received payment in full of its debt, and that is so, regardless of whether the highest bidder at the sale is the mortgagee or a stranger. Where a stranger buys, he pays cash to the officer making the sale, who pays it to the mortgagee. Where the mortgagee buys the property, instead of paying cash to the officer and receiving it back, he credits the amount which he, as purchaser, bids, upon the mortgage debt. In either event, he receives payment in cash or its full equivalent. National Life Ins. Co. v. United States (Ct. Cl.) 4 F. Supp. 1000, certiorari denied Lucey v. United States, 291 U. S. 683, 54 S. Ct. 560, 78 L. Ed. 1070; Walker v. Powers, 104 U. S. 245, 26 L. Ed. 729; Silver v. Wickfield Farms, Inc., et al., 209 Iowa, 856, 227 N. W. 97, 99; Appeal of Manomet Cranberry Company, 1 B. T. A. 706, 709; Ewen MacLennan v. Commissioner of Internal Revenue, 20 B. T. A. 900. The same rule, however, does not, we think, apply to a surrender by the mortgagor to the mortgagee of the mortgaged real estate in consideration of the forgiveness of the indebtedness. The mortgagee in such a case exchanges the loan for the land. If the land is worth as much or more than the amount due upon the loan with accrued interest, the exchange results in the equivalent of payment in full, but not otherwise. Certainly, the accrued interest upon a mortgage is not paid by the acceptance of mortgaged property which is worth less than the principal of the loan. Such a transaction produces no income to the mortgagee. That the insurance company, in lieu of foreclosure, takes the land and releases the mortgagor from liability, and carries the land on its books at the full amount which it has invested in the land, namely, the debt and accrued interest, does not justify the conclusion that accrued interest has been paid. Bookkeeping entries do not constitute income. Doyle v. Mitchell Brothers Company, 247 U. S. 179, 187, 38 S. Ct. 467, 62 L. Ed. 1054; Douglas et al. v. Edwards (C. C. A. 2), 298 F. 229; In re Sheinman (D. C. E. D. Pa.) 14 F.(2d) 323; Young Iron Works v. Commissioner, 21 B. T. A. 1238. It is the interest actually received in cash or its equivalent which is to be returned as gross income. If the rule were otherwise, a life insurance company, all of the loans of which were in default and which was obliged to take over from its mortgagors mortgaged lands of little value in order to save the expense and delay of foreclosure, would be in the same situation with respect to interest received as though all of its loans were good and the interest had been paid in cash.