*1457 1. Held, a loss sustained by petitioner in 1936 as the result of a forced sale of real estate under foreclosure of a mortgage, was a loss upon the "sale" of a capital asset within the purview of section 117(d) of the Revenue Act of 1936, and the amount deductible is subject to the limitations therein provided. Helvering v. Hammel,311 U.S. 504">311 U.S. 504.
2. During the taxable year and subsequent to the foreclosure sale, petitioner paid the sum of $4,500 in settlement of a suit by the mortgagee for a deficiency judgment. Held, the amount so paid constituted a part of the total loss sustained as a result of the foreclosure sale. Decision in C. L. Gransden & Co.,39 B.T.A. 985">39 B.T.A. 985, of a question similar in principle, not followed.
*809 This proceeding is for the redetermination of a deficiency in income tax for the year 1936 in the amount of $1,422. The issue is whether a loss sustained by petitioner in the taxable year upon foreclosure of a mortgage on real estate was deductible in full under section 23(e) of*1458 the Revenue Act of 1936, or whether such loss resulted from a "sale" of a capital asset within the meaning of section 117, and hence is subject to the limitations therein provided on the deduction of capital losses. A further question presented is whether an amount subsequently paid during the taxable year by petitioner in a compromise settlement of a suit by the mortgagee for deficiency judgment, in order to be relieved of further liability for the mortgage debt, is to be treated for tax purposes as a part of the loss resulting from the foreclosure sale. The facts were stipulated by the parties.
FINDINGS OF FACT.
Petitioner is a resident of Holdenville, Oklahoma, and filed his individual income tax return for the calendar year 1936 with the collector of internal revenue at Oklahoma City, Oklahoma.
From about 1914 to 1926 petitioner acquired various contiguous tracts of land located in Hughes County, Oklahoma, known as the Yeager farm. The depreciated cost of the land and improvements on January 2, 1936, was $64,332.49, including an unpaid mortgage outstanding against the land and improvements on this farm in the amount of $26,000, for which petitioner was also personally*1459 liable. The petitioner's actual investment in the property amounted to $38,332.49, not including $4,500 which was paid in 1936 by the petitioner for the release of his personal liability under the mortgage of $26,000.
The petitioner was unable to make the payments under the mortgage and a receiver was appointed for this property in 1933. The *810 mortgage was foreclosed and the sale thereof took place on February 18, 1935. The property was acquired by the mortgagee, and the title to the property was transferred to the mortgagee on January 2, 1936, the petitioner having been granted by the court in the receivership proceeding up to January 2, 1936, in which to redeem the property.
The mortgagee instituted proceedings against petitioner seeking a deficiency judgment against petitioner under the mortgage in the amount of about $20,000, and the petitioner, in order to be relieved of any further liability under the mortgage, compromised this proceeding in August 1936 by paying the sum of $4,500.
The petitioner in his income tax return for the taxable year 1936 took a deduction for a loss on account of said foreclosure in the sum of $33,832.49 and also took a deduction*1460 of said $4,500, showing a net loss on the return of $14,650.86. In the deficiency notice from which this appeal was filed the Commissioner allowed a capital loss of $2,015 and disallowed the balance of said loss of $33,832.49 claimed in the return in the sum of $31,817.49. In the deficiency notice the Commissioner made no change with reference to the amount of $4,500 deducted in the petitioner's income tax return representing the payment made to the mortgagee in 1936 in order to be relieved of any further liability under the mortgage.
Respondent admits petitioner sustained a loss in connection with the transaction in 1936, but contends that the deductions allowable to petitioner should be limited to the amount of $2,015.
OPINION.
HILL: The principal issue submitted for decision in this case is whether the loss sustained by petitioner in the taxable year by reason of the foreclosure of a mortgage on real estate owned by him constituted an ordinary loss deductible in full under section 23(e) of the Revenue Act of 1936, as contended by petitioner, or whether, as contended by respondent, such loss resulted from a "sale or exchange" of a capital asset within the meaning of section*1461 117(d) of the same act, and thus was subject to the limitations on deduction of capital losses provided therein. Section 23(e) allows as deductions, in computing the net income of individuals, losses sustained during the taxable year and not compensated for by insurance or otherwise, if incurred in any transaction entered into for profit; while section 117(d) provides that losses from "sales or exchanges" of capital assets shall be allowed only to the extent of $2,000 plus the gains from such "sales or exchanges."
In his income tax return for the year 1936 petitioner deducted $33,832.49 as a loss resulting from the foreclosure sale above mentioned. In the deficiency notice, respondent allowed a capital loss of $2,015, which embraced the allowance of $2,000 provided in section *811 117(d), plus the amount of $15 reported by petitioner as gain from the sale or exchange of capital assets.
There is no controversy that the property sold under foreclosure was a capital asset, nor that petitioner's loss was incurred in a transaction entered into for profit. The question is whether or not the loss resulted from a "sale or exchange" as that term is used in section 117(d). On*1462 brief, petitioner cites and relies upon the decision of the Circuit Court of Appeals for the Sixth Circuit in , and concedes that the material facts in the Hammel case were substantially the same as those in the case at bar. In that case the Circuit Court of Appeals held that a foreclosure sale was not a "sale or exchange" within the meaning of section 117, and therefore a loss sustained by a mortgagor through foreclosure was not a capital loss subject to the limiting provisions of section 117. However, the decision of the lower court in the Hammel case was reversed by the Supreme Court of the United States in , it being there held that for the purpose of applying the limitations on deduction of capital losses provided in section 117, the term "sales" applied to forced sales as well as voluntary sales.
On authority of the decision last above cited, we approve respondent's determination in the present proceeding in so far as it is involved in the principal issue.
There remains for consideration a second question, relating to the right of the petitioner to*1463 deduct as an ordinary loss the amount of $4,500 paid by petitioner in 1936, subsequent to the foreclosure sale, in order to obtain release from personal liability under the mortgage. In addition to the deduction taken by petitioner in his return for loss of his investment in the property in the amount of $33,832.49 on account of money paid on the purchase price prior to the foreclosure sale, he also deducted as a loss the $4,500 paid to the mortgagee in settlement of a suit for deficiency judgment. In the deficiency notice respondent made no change with reference to such deduction of $4,500, but, by amended answer filed pursuant to leave duly granted, respondent alleged that the payment of $4,500 was a part of the capital loss sustained as a result of the foreclosure sale and, since the maximum amount of deductible loss allowable under the statute is $2,015, the inclusion of the $4,500 in such loss does not increase or otherwise affect the deductible amount thereof. In the amended answer respondent further made claim for the increased deficiency which would result from the disallowance of the deduction of $4,500 taken by petitioner in his return. Petitioner contends that the payment*1464 to secure relief from personal liability under the mortgage was made after the loss of the foreclosure had been fully sustained, and was a separate transaction; hence, that the amount is deductible as *812 an ordinary loss, irrespective of the nature of the loss of his investment in the property resulting from the foreclosure. We do not agree with petitioner's contention.
Petitioner had actually paid $38,332.49 on the purchase price of the land at the time of the foreclosure sale. This amount plus his mortgage indebtedness liability of $26,000 equals $64,332.49, the amount stipulated as the depreciated cost of the land and improvements thereon at the time of the foreclosure sale on January 2, 1936. The record does not disclose the exact amount for which the land sold at foreclosure sale, but it seems safe to assume that it was an amount which when credited on the mortgage indebtedness of $26,000 plus the cost of foreclosure proceedings reduced such indebtedness to about $20,000.
If the payment of the $4,500 by the petitioner in settlement of the balance of his mortgage debt, remaining after the foreclosure sale, was a part of the cost to him in the purchase of the mortgaged*1465 property, it was a part of his realized capital loss which resulted from the foreclosure sale. If, however, the settlement of the mortgage debt deficiency be considered as a transaction unrelated to, and independent of, petitioner's investment in the mortgaged property and the foreclosure sale thereof, there is no basis upon which to predicate a loss since, in such unrelated aspect, petitioner merely settled a personal obligation of about $20,000 by the payment of $4,500.
The mortgage debt deficiency had its inception in the personal obligation of petitioner to pay the purchase price of the lands involved. The foreclosure of the mortgage lien to secure such payment could only occur upon petitioner's failure to discharge the obligation. The foreclosure sale relieved petitioner of such obligation only to the extent that it was reduced by the amount realized on such sale. The payment of the remainder of the purchase price continued to be a personal obligation of petitioner until it was satisfied. Such remainder or deficiency never lost its character as a purchase money obligation. The payment in settlement of such deficiency was merely a payment on the purchase price of the property*1466 which petitioner had obligated itself to make. Such payment of $4,500 was, therefore, part of the cost to petitioner of the mortgaged property and must be included as such in determining the capital loss sustained by it in the foreclosure sale.
Taxation is a practical matter, and in our opinion it is clear that the amount paid by petitioner to escape a deficiency judgment was a part of the total loss sustained by him as a direct result of the foreclosure sale of the realty. It should be so treated for tax purposes. Compare on this point, ; .
*813 , appears to hold contrary to our view herein that the $4,500 payment in settlement of a suit for a deficiency judgment represents a capital loss within the meaning of section 117(d). A question similar to this in principle was involved in the Gransden case as determined by the Board, but it was not included in the subject of review by the Circuit Court which affirmed the Board's decision in *1467 . In so far as our decision in the Gransden case on the question indicated may be construed as being in conflict with our holding herein, it will not be followed hereafter.
The deduction taken by petitioner is disallowed, and respondent's claim for an increased deficiency is approved.
Reviewed by the Board.
Decision will be entered under Rule 50.
TURNER and MELLOTT dissent on the second point.