Court Opinion

ID: 4484794
Source: CourtListenerOpinion
Date Created: 2020-01-16 21:16:59.629005+00
Date Added: 2024-06-11T14:54:05.100605
License: Public Domain

OPINION. Oppeb, 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 trans-ation. We do not regard as justified a result which would separate what is in substance and effect a single whole. Peninsula Properties Co., Ltd., 47 B. T. A. 84. That the final phase of the transaction was closed and completed just over the end of the year in which it was begun is no more of an impediment to the fixing of the year of completion of the present gain than is, for example, the establishment of loss where a foreclosure takes place in one year and the transaction is not finally closed until the period of redemption expires in another. J. C. Hawkins, 34 B. T. A. 918; affd. (C. C. A., 5th Cir.), 91 Fed. (2d) 354. Since the present foreclosure was not followed up by any attempt to collect a deficiency, the proceeding to foreclose petitioner’s property and the subsequent running of the short New Jersey statute have the effect under state law of transferring the property and giving petitioner an effective — if technical — defense against a deficiency judgment. This leaves it in the same position for all practical purposes as that of an owner who voluntarily transfers mortgaged property in exchange for cancellation of its obligation, and requires treatment as taxable gain of the excess over its basis of what it received from the lender Lutz & Schramm Co., supra. We find no error in respondent’s determination. Reviewed by the Court. Decision will be entered for the respondent.   The New Jersey practice with respect to mortgage indebtedness involves the preliminary necessity of a foreclosure sale as a prerequisite to any subsequent attempt to collect a deficiency. Stamler v. Commissioner, 145 Fed. (2d) 37, 39. If the price fixed for the property at the sale is less than the mortgage debt, a proceeding to obtain a judgment for the difference may be brought, but only within three months after confirmation of the foreclosure sale. N. J. S. A., 2: 65-2. Even then, the amount collected wUl be limited by a virtual credit to the mortgagor of the equivalent of the fair market value of the property at the time of sale. Harvester B. & L. Assn. v. Elbaum, 119 N. J. L. 437; Stamler v. Commissioner, supra. Among other gaps in the present record is the complete absence of any evidence as to the value of the foreclosed property, leading to the possibUlty as a somewhat speculative matter that, even if the mortgagee bad attempted to collect the balance of the debt, it would have failed, and that this situation might account for its inaction.    Helvering v. Hammel, 311 U. S. 504.    Electro-Chemical Engraving Co. v. Commissioner, 311 U. S. 518.