T.C. Memo. 1998-173
UNITED STATES TAX COURT
SHIRLEY DEAN EMMONS AND CHARLES W. EMMONS, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 17294-95. Filed May 11, 1998.
Shirley Dean Emmons and Charles W. Emmons, pro sese.
William I. Miller, for respondent.
MEMORANDUM OPINION
GALE, Judge: Respondent determined a deficiency in
petitioners' 1991 Federal income tax in the amount of $13,349, an
addition to tax under section 6651(a)(1)1 in the amount of
1
Unless otherwise noted, all section references are to the
Internal Revenue Code in effect for the year in issue, and all
Rule references are to the Tax Court Rules of Practice and
(continued...)
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$2,002, and an accuracy-related penalty under section 6662(a) in
the amount of $2,670.
After concessions,2 the issues for decision are as follows:
(1) Whether petitioners must recognize long-term capital gains
from the foreclosure sale in 1991 of two parcels of real property
held by them; (2) whether petitioners are entitled to a deduction
for ordinary losses for their equity interests in the properties
sold by foreclosure in 1991; (3) whether petitioners are liable
for an addition to tax under section 6651(a)(1); and (4) whether
petitioners are liable for an accuracy-related penalty under
section 6662(a) for substantial understatement of tax.
Some of the facts have been stipulated and are so found.
The stipulation of facts and the attached exhibits are
incorporated herein by this reference.
At the time the petition was filed, petitioners resided in
Chicago, Illinois. In 1991, petitioners owned two rental income
properties that they had owned for more than 1 year. These
properties were located in Chicago, Illinois, at 5335 South
Honore (Honore property) and 7332 Campbell (Campbell property).
In 1991, petitioners' adjusted basis for the Honore property
was $32,963, and they were personally liable for a mortgage on
1
(...continued)
Procedure.
2
Petitioners did not contest and are therefore deemed to
have conceded respondent's determination that they had additional
interest income in 1991. Rule 34(b)(4).
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the property in the amount of $43,356. The property was
foreclosed and sold in that year for $54,435. Of this amount,
$43,356 was used to pay off petitioners' mortgage on the
property. Petitioners did not receive any other amounts from the
sale.
In 1991, petitioners' adjusted basis for the Campbell
property was $84,459, and they were personally liable for a
mortgage on the property in the amount of $88,491. The property
was foreclosed and sold in that year for $106,620. Of this
amount, $88,491 was used to pay off petitioners' mortgage on the
property. Petitioners did not receive any other amounts from the
sale.
On their 1991 Federal income tax return (return),
petitioners did not report any gain with respect to the
foreclosure transactions, but instead claimed a deduction for
ordinary losses on Form 4797 in the amount of $13,600, which
petitioners computed as the excess of the properties' foreclosure
sales prices over the mortgage balances plus depreciation. In
effect, petitioners claimed a loss for their equity in the
properties less depreciation.
Petitioners' return was filed on October 16, 1992.
In the notice of deficiency, respondent disallowed the
$13,600 in claimed losses and determined that petitioners had
long-term capital gains in the amount of $43,633, computed as the
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difference between the total sales prices from both sales
($161,055) and petitioners' total adjusted basis in both
properties ($117,422). The parties now stipulate that
petitioners did not receive the sales proceeds that exceeded the
amounts due on the mortgages. As a result, respondent has
conceded $29,208 of the $43,633 adjustment for capital gains, and
now contends that petitioners only had gain of $14,425, which is
the difference between their total adjusted basis in the two
properties ($117,422) and the combined mortgage liabilities from
which they were relieved ($131,847). Petitioners continue to
claim that they had no gain because they did not receive any
proceeds from the foreclosure sales.
Section 1001(a) defines gain or loss from the sale or other
disposition of property as the difference between the "amount
realized" and the taxpayer's adjusted basis in the transferred
property. The amount realized is the sum of any money received
plus the fair market value of the property (other than money)
received. Sec. 1001(b). The amount realized from a sale or
disposition of property includes the amount of liabilities from
which the transferor is discharged as a result of the sale or
disposition, including a sale in foreclosure. Crane v.
Commissioner, 331 U.S. 1 (1947); United States v. Hendler, 303
U.S. 564 (1938); Chilingirian v. Commissioner, 918 F.2d 1251 (6th
Cir. 1990), affg. T.C. Memo. 1986-463; sec. 1.1001-2(a)(1),
Income Tax Regs.
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As a result of the foreclosure sales, petitioners were
relieved of personal liabilities totaling $131,847, and it has
been stipulated that they received no other amounts from the
sales. Accordingly, the amount realized by petitioners was
$131,847. The parties have stipulated that petitioners' adjusted
basis in the properties totals $117,422, and that both properties
were held for more than 1 year. Petitioners, therefore,
recognized a long-term capital gain in the amount of $14,425 from
the foreclosure transactions, measured as the difference between
the amount realized and their adjusted basis.
Petitioners argue that they could not have had any capital
gain from the foreclosures because they lost the properties and
even though the foreclosure proceeds exceeded their mortgage
liabilities, none of the proceeds was received by them. We note
first that respondent is no longer attempting to tax petitioners
on the proceeds that exceeded the mortgage payoffs. But as to
the proceeds used to pay off the mortgages, petitioners
apparently believe that they must have actual receipt of money or
property in order to have taxable gain for income tax purposes.
This contention has been rejected by the Supreme Court. Crane v.
Commissioner, supra at 13; United States v. Hendler, supra at
566. Rather, a taxpayer is treated as having gain when he
benefits from having his debts paid off, as if the money were
first paid to the taxpayer and then paid over by him to his
creditors. Crane v. Commissioner, supra; United States v.
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Hendler, supra. Therefore, a taxpayer who transfers mortgaged
property, whether to the mortgagee or another third party, and is
discharged from his liability on the mortgage debt in
consideration for the transfer, realizes a benefit in the amount
of the liability discharged. In the instant case, this reasoning
dictates that petitioners have taxable capital gain to the extent
that their personal mortgage indebtedness, paid off with the
foreclosure proceeds, exceeded their basis in the properties.
Crane v. Commissioner, supra; United States v. Hendler, supra;
Chilingirian v. Commissioner, supra.
Petitioners' claim that they are entitled to a deduction for
ordinary losses equal to their equity in the properties less
depreciation is without merit because, as discussed above, their
amount realized as a result of the foreclosures exceeded their
adjusted basis in the properties.
Respondent determined an addition to tax under section
6651(a)(1) for the late filing of petitioners' return. The
return was due on April 15, 1992, and filed on October 16, 1992.
There is no evidence of an extension to file. Section 6651(a)(1)
imposes an addition to tax for failure to file timely Federal
income tax returns unless the taxpayer shows that such failure
was due to reasonable cause and not willful neglect. United
States v. Boyle, 469 U.S. 241, 245 (1985). Petitioners have not
addressed the late filing or offered any reasonable cause
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therefor. Accordingly, we find petitioners liable for the
addition to tax under section 6651(a)(1).
Respondent also determined that petitioners are liable for
the accuracy-related penalty for substantial understatement of
tax under section 6662(b)(2). In this regard, petitioners have
not provided substantial authority for the positions taken on
their return. In fact, Mrs. Emmons testified that the accountant
who prepared the return informed her that the foreclosure
transactions resulted in taxable gain to petitioners and that she
nonetheless insisted that the return be prepared showing losses
on these transactions. Furthermore, petitioners did not make
disclosures within the meaning of section 6662(d)(2)(B)(ii).
Therefore, due to the concessions made by the parties and the
findings herein, the penalty will be sustained in the event the
Rule 155 computation indicates that petitioners' understatement
of tax exceeds the greater of $5,000 or 10 percent of the amount
of tax required to be shown on the return.
To reflect the foregoing and concessions,
Decision will be entered
under Rule 155.