dissenting: In his income tax return for 1933 the petitioner reported a net loss of $10,784.07. In the determination of the deficiency the respondent has found an adjusted net income of $152,-896.78, and an income tax liability of $62,969.87. Contributing to the adjusted net income are the following amounts, all of which are in issue in this proceeding:
(a) Net loss disallowed_$22, 410. 36
(b) Accrued interest (added)- 89, S09. 68
(c) Bonus (added)__ 30,785.85
(d) Profit on foreclosure (added)_ 18,731.00
Total- 161, 736. 89
All of the amounts in issue stem from the foreclosure sale of land of the Lagoona Beach Co., which was bid in by an agent for the mortgagees at a price of $435,000. The Court sustains the petitioner’s contention with respect to items (c) and (d)," above. It admits that the petitioner did sustain a net loss of $22,410.36 but finds that the deductible net loss must be limited by section 117 (a) (2) of the Revenue Act of 1932. With this conclusion I am in accord. I am not, however, in accord that the correct amount of the net loss was $22,410.36, as more fully explained below. The Court also reduces the accrued interest to be added to the petitioner’s net income from $89,809.68 to $86,389.03, which is 68.413 percent of the accrued interest included in the Court’s decree of $126,275.75.
The Court finds that the fair market value of the petitioner’s interest in the real estate acquired at the foreclosure sale was $133,405.35. I think that the amount was much less. To prove his case the petitioner introduced in evidence the testimony of three expert real estate men who gave their opinion as to the fair market value of the entire property at the date of the foreclosure sale. The highest appraised value given by any witness was $105,000. The petitioner contends, and I think correctly, that the fair market value of the property was not in excess of $105,000, 68.413 percent of which is $71,833.65. The petitioner, therefore, contends that the actual loss sustained by him upon the transaction was the difference between $71,833.65 and the stipulated cost of his interest in the mortgage notes, $155,721.05, or $83,887.40. There was no countervailing evidence as to the fair market value of the land. I think, therefore, that the net loss was actually $83,887.40.
In its opinion the Court states that the high bid price made by the agent for the mortgagees at the foreclosure sale, namely, $435,000, “indicates intent to prevent anyone else from securing the property at a price less than the investment therein. It thus appears that the mortgagees agreed, in substance, not to let anyone else acquire the property for less than the indebtedness, including the interest. That there was only one bid proves little or nothing. The mortgagees’ high bid may have been the opening bid, made at once, precluding even a slightly less offer by any other bidder.” As a Judge of the Court who heard the witnesses in this case I emphatically dissent from this view. There is not a particle of evidence to support it. At the hearing of this proceeding the petitioner testified as follows :
A. I thought the property was then worth about two hundred thousand dollars, to have bid and your idea of the net value of the property?
A. I thought the property was then worth about two hundred thousand dollars. I think I was very optimistic, because the first time we tried to sell it after then, which was in 1934, we authorized the sale at one hundred fifty thousand dollars and the man thought he had a propspect but wasn’t able to move it.
Q. You told us now what your thought was about the market value of the property. I am asking you what influenced your conception of the market value of the property? Was it the amount of the bid?
A. No connection at all.
Q. Can you tell me what consideration was given in connection with the fixing of the bid to possibilities of redemption?
A. We didn’t consider it.
Q. You understand what the term redemption means?
A. Tes, somebody comes in and pays us. That wasn’t in the picture.
Q. What can you tell us about a consideration given at that time to a deficiency judgment?
A. Oh, no thought of it at all.
Q. Why not?
A. Other creditors had not been able to collect anything. What could we collect ?
Q. Hopeless?
A. Hopeless, certainly. There was no chance. The only thing we looked to was the land.
The argument of the attorney for the petitioner in bis brief is that the Lagoona Beach Co. notes had no value in excess of the value of the land and that the bid price of $435,000 was made with the full knowledge on the part of the mortgagees that the notes could be surrendered in payment of the bid price. The evidence is to the effect that this was done and that no cash was paid in on the bid price.
All of the evidence goes to show that the Lagoona Beach Co. notes had no value in excess of the value of the land which secured them; also that there was no probability that the defunct Lagoona Beach Co. or parties in interest would ever redeem the property at a price in excess of its value. It was immaterial to the petitioner and his associates whether the property was bid in at its fair market value or at an amount in excess of that value which could be paid by the surrender of the notes.
The only argument of the respondent upon this point is that it was immaterial what the fair market value of the property was at the time of the foreclosure sale. His argument is that the petitioner and his associates bid $435,000 for the property and that that amount must be accepted as its fair market value. The Court has not sustained the respondent’s contention upon this point. It has found the fair market value of the land to be $200,000 at the time of the foreclosure sale and that the petitioner’s proportionate part of that fair market value is $133,405.35.
We have then this situation: The petitioner sustained a loss upon the foreclosure transaction. Yet this Court holds that the petitioner derived taxable income from the transaction represented by accrued interest in the amount of $86,389.03.
This result gives me much puzzlement. Without the receipt of any money or of any property equaling the petitioner’s investment in the mortgage notes, the petitioner is held liable to income tax upon a large amount of accrued interest which he did not receive. In the words of Nicodemus, “How can these things be?”
The incidence of the income tax is upon “gains, profits, and income.” Without any gain or profit and without the receipt of anything that has the semblance of income, how can it be said that a man has received taxable gain ? Is a man taxable upon a transaction which results ira. a loss % The taxpayer made his return upon the cash basis. In Avery v. Commissioner, 292 U. S. 210, it was held that a shareholder’s dividends were received in the calendar year in which the shareholder received his check. In that case it was stated as a fact that the shareholder kept his accounts on the cash receipts and disbursements basis. The Supreme Court held that if we give the words of the statute, section 201 (e) of the Revenue Act of 1921, their ordinary meaning, “clearly the dividends under consideration were not actually received by the taxpayer during 1924 and 1929 * * * And, unless Congress has definitely indicated an intention that the words should be construed otherwise, we must apply them according to their usual acceptation.”
By many decisions of the Supreme Court we are told that questions involving income tax liability should be construed according to truth and substance and not mere form. The income tax is imposed upon true gains. The amount taken as a tax is simply a portion of the amount of the income received.
In this case the petitioner is not paying tax upon any amount received. In truth and substance the petitioner was no richer after the foreclosure sale than he was before. He did not receive the wherewithal bo pay the tax which this Court finds to be due. The conclusion of the Court seems to me to lack the touch of reality. It is contrary to fact.
Were it not for the decision of the Supreme Court in Helvering v. Midland Mutual Life Insurance Co., 300 U. S. 216, the deficiency in income ta x determined by the Commissioner would at most be nominal. Indeed, but for that opinion it is probable that the respondent would not. have determined a deficiency to be due from the petitioner. That case involved the question of whether a life insurance company, which is taxable under entirely different provisions of the income tax law from other corporations or individuals, was taxable upon interest which was paid by a credit against the purchase price of property bid in by a mortgagee on a foreclosure sale. The Court did not know what the fair market value of that property was. It expressly stated that there was no evidence as to the fair market value of the property before it.
I am unable to understand the soundness of the application of the Supreme Court’s opinion in the above cited case to the present. In Hadley Falls Trust Co. v. United States, 110 Fed. (2d) 887, the Circuit Court of Appeals for the First Circuit, referring to Helvering v. Midland Mutual Life Insurance Co., supra, said: “Although the language of the court is very broad, we can not believe that it was intended to preclude examination into the fair market value of property under all circumstances, especially in a case where the agency required to engage in the process of valuation, viz., tbe Treasury Department, has itself been responsible for the rule making valuation necessary.” In that case the court took a common sense view of the matter and decided the issue for the taxpayer. In my opinion that is what this Court should do in this case and not force the- taxpayer to bear the expense of an appeal.
The Court finds that article 193 of Eegulations 77 is applicable to this proceeding. That regulation provides that “If the creditor subsequently sells the property so acquired, the basis for determining gain or loss is the fair market value of the property at the date of acquisition.” It thus appears that upon a subsequent sale of the property purchased at the foreclosure sale the basis for the computation of gain or loss is $133,405.35. The petitioner will, therefore, never be permitted to include as a part of the basis upon the sale of the property the accrued interest of $86,389.03 which the Court holds is taxable income to this petitioner for 1933. It seems to me plain that the Congress never intended such a result.