*2258 The evidence is insufficient to establish that a mortgage taken back by petitioner on real estate sold in 1925 had no fair market value in that year or that its value was any less than that found by the respondent.
*1110 The respondent determined a deficiency in income tax for the year 1925 in the amount of $2,564.09 as the result of increasing petitioner's income by the face value, less discount, of a first mortgage note received by petitioner in connection with the sale of real estate in the taxable year. Petitioner alleges that this was error and claims that the note had no fair market value when received.
FINDINGS OF FACT.
Petitioner in 1925 sold a piece of real estate in Miami, Fla., including improvements on the land and furnishings of the house which she and her husband had occupied for several years as a residence. She acquired the property in 1922 at a cost, including subsequent improvements, of $16,499.10. The sale price was $51,500, of which the purchaser paid $17,167 in cash and gave a first*2259 mortgage note payable in three annual installments for the balance of $34,333. The purchasers, designated in the record as the Keokuk Co., bought the property with a view to widening the street and developing what subsequently became known as the Biscayne Boulevard. The purpose of the purchaser was not known at the time of the sale to either the petitioner or her husband, who negotiated the sale. Actual construction of the boulevard was not commenced until after 1925.
Either in the latter part of 1925 or early in 1926 petitioner's husband applied at two banks for a loan of $3,000 or $4,000 and offered the mortgage note as collateral security. Both banks refused to make the loan on the security offered, one of them because it was "not in the mortgage buying business" and the other because it "did not consider the property worth what the mortgage called for or anywhere near that amount."
The assets of the Keokuk Co. consisted largely of equities in properties encumbered by first mortgages. It did not have sufficient cash to pay off the mortgages nor to carry out the boulevard project.
*1111 The first semiannual interest payment on the mortgage held by petitioner was*2260 made in February, 1926. Some time in 1926 petitioner's husband received a letter from a person unknown to him, offering to take up the mortgage if a substantial discount would be allowed. Petitioner and her husband felt that the person who wanted the mortgage was perhaps sufficiently interested to pay the face amount of the mortgage and refused to sell at any material reduction. The negotiations were concluded in September or October, 1926, and petitioner received for the mortgage $34,000, which was $333 less than its face amount. The money to buy up the mortgage was supplied by interests other than the Keokuk Co. after that company, due to a lack of capital, was unable to carry out its plans for the boulevard.
In her income-tax return for 1925 petitioner reported a profit of $667.90 on the sale of the property involved, this amount being the difference between cost, $16,499.10, and the down payment of $17,167. To the return she attached a statement that, "Mortgage notes have no fair market value. Will return all collections on same as profit when I realize on the mortgage." The return as filed showed an alleged loss of $810.02 for the year.
The respondent increased petitioner's*2261 income by the amount of $34,000 as profit on the sale of real estate.
OPINION.
ARUNDELL: Section 202 of the Revenue Act of 1924, which deals with the determination of the amount of gain or loss, provides in subdivision (c) that:
The amount realized from the sale or other disposition of property shall be the sum of any money received plus the fair market value of the property (other than money) received.
Petitioner asserts as her defense against the deficiency determined that the mortgage received in 1925 had no fair market value. The evidence consists of the testimony of petitioner's husband who negotiated the sale, two bankers to whom the mortgage was offered as collateral for a loan, and an officer of the mortgagor company.
Petitioner's husband, as far as the record shows, had no knowledge of the financial responsibility of the mortgagor. His claim that the mortgage had no fair market value is based on his failure to obtain a loan on it. While it may be as he says, that he could not have sold the property in December of 1925 for what it had cost in 1922, yet he had sufficient faith in the value of the mortgage that in 1926 he would not sell it at any substantial*2262 discount. One of the bankers to whom application for a loan was made would not accept the mortgage as collateral for the reason that his bank was not handling that kind *1112 of paper. He frankly said he did not know whether the mortgage could have been sold for its face value or any part of it. The other banker refused the loan because he thought the mortgage called for more than the property was worth. He, however, had no personal knowledge of the financial responsibility of the mortgagor. The present secretary of the mortgagor company testified that the company was organized in 1925 for the purpose of taking advantage of the situation arising out of the proposed Biscayne Boulevard and limited its purchases of property to that vicinity. The plans for the boulevard broke down for awhile apparently because of the Keokuk Co.'s lack of capital, but this did not occur until 1926, and then powerful financial interests came to the rescue and supplied the money for the purchase of the outstanding mortgages. Whether this situation was known to the public in 1925 is not shown. This last witness, so far as the record shows, had no knowledge of the market value of mortgages in*2263 1925.
In considering the evidence in this case, it is, we think, a fact of considerable importance that the sale by petitioner does not come within the category of the exploitation schemes such as we considered in , where the only security for the notes was "wild land, unimproved real estate that produced no income." Even under the facts in that case, the evidence established that the notes had some value. The situation here is entirely different. The property sold by the petitioner was improved, having on it a furnished dwelling, which would afford for greater security for the payment of the mortgage notes than was the case in the majority of the boom-period transactions. While the evidence as to the purchaser and its capitalization and method of operation is rather meager, it appears that it was not in the class of the typical speculator who hoped to complete the transaction by a quick resale, but that it was purchasing the property as a part of the project for developing the boulevard.
The evidence does not convince us that the mortgage held by petitioner in 1925 had no fair market value or that its value was any*2264 less than that found by the respondent. Cf. .
Decision will be entered for the respondent.