Court Opinion

ID: 4471103
Source: CourtListenerOpinion
Date Created: 2020-01-09 22:01:56.427642+00
Date Added: 2024-06-11T14:53:47.814124
License: Public Domain

TtjrNee, /., dissenting: There is little doubt that it would', be impossible to convince the man on the street that gain has been realized by a mortgagee through his acquisition of mortgaged property at a foreclosure sale where the fair market value of the property at the time of such acquisition is substantially less than his investment in the mortgage and the mortgage notes. The Supreme Court said in Farmers Loan & Trust Co. v. State of Minnesota, 280 U. S. 204, that “Taxation is an intensely practical matter and laws in respect of it should be construed and applied with a view of avoiding, so far as possible, unjust and oppressive consequences.” Were there nothing further in the books, we might well conclude that article 193, supra, is a reasonable interpretation of the statute and that the sale of mortgaged property and the satisfaction of the mortgage claim by credit of the selling price thereto are to be ignored and the transaction, for income tax purposes, treated only as an exchange of the mortgage claim for the real estate. In Helvering v. Midland Mutual Life Insurance Co., 300 U. S. 216, however, the Supreme Court has held that where mortgaged property is sold under foreclosure, even though to the mortgagee, and the mortgage claim is satisfied by credit of the purchase price thereto, such sale and credit may not be ignored but must be given full legal effect in determining the income tax consequences to the mortgagee. The Court said: * * * A mortgagee wlio, at foreclosure sale, acquires the property pursuant to a bid of the principal and accrued interest is, as purchaser and grantee, ia a position no different from that of a stranger who acquires the property on a bid of lilse amount. It is true that the latter would be obliged to pay in cash the amount of his bid, while the formality of payment in cash is ordinarily dispensed with when the mortgagee acquires the property on his own bid. But the rights acquired qua purchaser are the same in either case; and, likewise, the legal effect upon the mortgage debt is the same. In each case the debt, including the interest accrued, is paid. Where the stranger makes the purchase, the debt is discharged, by a payment in cash; where the mortgagee purchases the property, the debt is discharged by means of a credit. * * * In the instant case, however, it is held that Midland Mutual Life Insurance Co. is controlling as to interest but not as to the debt itself. Such a holding is, in my opinion, wholly untenable. Not only is there nothing in the above pronouncements by the Supreme Court which would permit recognition of the sale and credit of the selling price to the mortgage claim only so far as such sale and credit effected the payment of interest, but, to the contrary, the Court plainly and pointedly said, “In each case the debt, including the interest, is paid.” Furthermore, I am unable to find in article 193, sufra, any statement or even the suggestion of a thought which gives any support to the straddle taken by the majority on the issues in this case. The effect of the regulation is to ignore the foreclosure sale and the satisfaction of the mortgage claim by a credit thereto of-vfhe proceeds of the sale and to treat the occurrences as an exchange by' the mortgagee of his mortgage claim for the property. See Hadley Falls Trust Co. v. United States, 110 Fed. (2d) 887. That so much of the mortgage claim as represents interest is not to be dealt with separately is shown by the regulation itself by specifically excluding from the computation, in case of loss on the exchange, accrued interest not reported as income, the inference clearly being that otherwise the interest features of the mortgage claim are confined within the bounds of the exchange. Either under Midland Mutual Life Insurance Go. there is collection of the debt and the interest thereon to the extent of the proceeds of the sale of the mortgaged property, or, applying the regulation, there is an exchange of property for property, the gain or loss being measured by the difference between the fair market value of the property received and the cost or other basis of the mortgage claim exchanged therefor. Logic and reason require one conclusion or the other; there can be no justification for application of the regulation to one part and Midland Mutual Life Insurance Co. to another part of the same transaction. Hadley Falls Trust Co. v. United States, supra, it seems to me, presents the strongest possible case for application of the regulation. Analyzing the practical results of the purchase by a mortgagee of the mortgaged property at the foreclosure sale, the court justified the treatment of the transaction as an exchange of the property for property as distinguished from the ordinary purchase of property, and concluded that the regulation “cannot be held a plain misinterpretation of a clear, unambiguous provision of the statute.” The court had already pointed out that the regulation had continued in the same form since it was promulgated under the Revenue Act of 1926, and, if a reasonable interpretation of the statute, it must, under Helvering v. Reynolds Co., 306 U. S. 110, and other cases of the same import, be given the same force and effect as if it were a part of the statute itself. Though it recognized that the regulation and the pronouncements of the Supreme Court in Midland Mutual Life Insurance Co. were in conflict and could not be reconciled, the court further justified its application of the regulation on the ground that the Supreme Court did not have the regulation before it in the case mentioned and did not therefore pass upon its soundness or validity. While it is true that this tribunal and other courts in seeking the answer to questions otherwise difficult have often fallen back on the proposition that the repeated reenactment of a statute without substantial change amounts to legislative approval of a regulation of long standing, they have on numerous other occasions rejected regulations equally venerable on the theory that they did not- present a reasonable interpretation or application of the statute, and in some instances, even the existence of a regulation has been ignored. In other words, where the regulation and the tax year are concurrent and the regulation is found to be a reasonable interpretation of the statute or principle of law involved, it is applied and the pronouncements argued for by the petitioner as to the force and effect of a regulation of long standing are very solemnly declared; but where the courts have felt that the regulation was not a reasonable interpretation of the statute or the principle of law involved, it has just as positively been overruled, whether hoary with age or of recent promulgation. With all due respect to the court in Hadley Falls Trust Co. in its efforts to find some justification for the application of a practical rule, I am unable to see that the Supreme Court in any manner limited its pronouncement of the law with respect to the satisfaction of a mortgage claim through the sale of the mortgaged property and the crediting of the proceeds therefrom. If I am correct in this view, it is not within the province of this Court to give effect to any regulation promulgated by the respondent, whether practical or impractical or new or old, if contrary to the law so declared. It is my opinion therefore that the Supreme Court has precluded us from applying the regulation in question, and unless and until the Supreme Court itself, or Congress by specific legislation, indicates some other measure for determining gain or loss in transactions such as we are here concerned with, we have no alternative but to apply the rule laid down in Helvering v. Midland Mutual Life Insurance Co., supra. It may well be that, regardless of the correct rule in the instant case, application of the regulation in T. Eugene Piper, supra, was justified even though in apparent conflict with Midland Mutual Life Insurance Co., since that case was governed by the installment sales provisions of the act wherein the Commissioner was specifically directed to promulgate regulations for the computing and reporting of income and losses on installment sales obligations. Be that as it may, that case is no less contradictory in its treatment of interest and principal than the instant case. For the reasons stated, I respectfully note my dissent. Tyson, J., agrees with this dissent.