*1032 Petitioner released certain first mortgage debts in return for bonds of the Home Owners' Loan Corporation, less in amount than the debts, and for notes in the amount of the difference, secured by second mortgages on the properties. Held the second mortgage debts may not be charged off as worthless in the absence of a showing that the debtors were unable to pay or that a possible defense to an action on the notes has been raised.
*222 The respondent has determined deficiencies in income and excess profits taxes for the calendar year 1934 in the amounts, respectively, of $513.62 and $37.29, which arise from the Commissioner's disallowance of deductions for debts claimed by the petitioner to have become worthless in the course of refinancing certain mortgages held by it. Only a part of each deficiency is contested. The issue presented is whether the second mortgage notes accepted in the refinancing to cover the difference between the face value of the mortgage indebtedness and the bonds of the Home Owners' Loan Corporation received by the petitioner in*1033 the same transaction, were worthless in the taxable year.
The petitioner asks in addition that we find an overassessment of taxes for the year 1935 based on similar transactions carried through then. The respondent moved on trial for dismissal of the petition in so far as it purports to cover the year 1935, since the Commissioner has not determined a deficiency for that year but has determined an overassessment of $109.56. The case was submitted on the motion and on the evidence and briefs.
FINDINGS OF FACT.
The petitioner is a California corporation doing business in that state. Prior to the years in question, during 1929 and 1930, the petitioner made certain loans to individuals as described below secured by first mortgages on parcels of real estate. During 1934 and 1935 those mortgage loans were refinanced, in each case, through the discharge of the first mortgage and the acceptance by petitioner of bonds of the Home Owners' Loan Corporation in a face amount equal, in each case, to only a part of the mortgage released. In addition the debtor executed to the petitioner in each instance a note, secured by a second mortgage on the property involved, approximately equal*1034 in amount to the difference between the face amount *223 of the bonds and the mortgage released. The face amount of the bonds advanced by the Home Owners' Loan Corporation, together with the amounts of additional loans made by that agency to the home owner for the discharge of taxes, title expenses, and other miscellaneous items, became in each case a senior obligation outstanding against the realty.
The details of these transactions, together with the market value of the real estate involved on the dates of refinancing, are set out in the following table:
| Refinancing date | Debtor | Owed to petitioner | HOLC bonds received by petitioner | Total HOLC loan | Second mortgage debt | Value of realty |
| 1934 | ||||||
| Mar. 31 | K. R. Luedtke | $1,675.00 | $1,250.00 | $1,405.00 | $425.06 | $1,600 |
| Apr. 17 | Louise D. Knarr | 6,500.00 | 5,880.00 | 5,880.00 | 735.00 | 6,600 |
| May 31 | Lillian B. Bellamy | 8,946.26 | 6,650.00 | 7,117.80 | 900.00 | 9,600 |
| Nov. 16 | Mabel C. Meek | 2,412.08 | 1,949.25 | 1,949.25 | 490.00 | 3,500 |
| 1935 | ||||||
| Hoffbauer | 1,384.97 | 1,280.00 | 1,280.00 | 300.00 | 1,500 | |
| Goodman | 3,995.98 | 3,185.65 | 3,185.65 | 350.00 | 4,000 | |
| Hessler | 2,534.57 | 1,949.25 | 1,949.25 | 149.00 |
*1035 The Home Owners' Loan Corporation was aware in each case of the second mortgages executed by the debtors to the petitioner and approved this procedure.
The petitioner on the date of the receipt of the junior mortgages in each case charged off the subordinate indebtedness as worthless and carried each such debt on its books at $1. Appropriate deductions for the resultant bad debts were made in the income tax return of the petitioner for the years in question.
Efforts were made by the petitioner subsequent to charging off these debts to collect the amounts due and these resulted in a payment on the Luedtke debt of $60 and on the Meek debt, after advances of $150 for repairs, of $300.
OPINION.
HILL: The issue before us is whether the subordinate obligations outstanding against the realty described above were worthless during the taxable year and thus give basis to the deduction by petitioner, their owner, of appropriate amounts for bad debts.
Prior to a consideration of this issue we must dispose of the motion of the respondent for dismissal of so much of the petition as purports to relate to 1935. The basis for the motion is that the Commissioner has not determined*1036 a deficiency for 1935 but has only found an overassessment. In these circumstances we have repeatedly adhered to the position that the Board is without jurisdiction where no deficiency has been determined. ; *224 . Accordingly the motion of the respondent to dismiss so much of the petition as purports to relate to the year 1935 is granted.
In support of its position on the principal issue here presented the petitioner has shown that the properties involved in the refinancing in each case had a value above the first mortgage indebtedness insufficient in the opinion of petitioner's witness to give any market value to the junior obligations. The petitioner argues further that the second mortgage debts were worthless for the additional reason that under California law they were not valid obligations.
We find it unnecessary to pass on petitioner's first contention. Whether or not the margins indicated in the table set out above were sufficient to give any value to the second mortgages, the petitioner has not shown that the debtors individually were unable to pay their*1037 obligations. The record contains some evidence of failure of the petitioner to make collections but does not establish the inability of the debtors to pay. In these circumstances we can not hold that the debts were worthless when charged off in 1934. See ; . Cf. ; .
On his second argument we think petitioner must also fail. The case of ; , has held, it is true as pointed out, in a situation similar to those here involved, that a second mortgage in the amount of the difference between the Home Owners' Loan Corporation bonds received and the face of the first mortgage, executed by the mortgagor, without the knowledge of the Home Owners' Loan Corporation, as the price of consent to the refinancing, is invalid as against public policy. See also ; *1038 ; ; .
These cases, however, leave open the question of the validity of such mortgages executed with the knowledge and consent of the Home Owners' Loan Corporation. In those instances where, as here, the Home Owners' Loan Corporation has knowledge of the second mortgages executed in the refinancing and follows a practice allowing them in a certain specified percentage of the bonds involved in each case, it can scarcely be said that these transactions cross public policy. See McAllister v. Drapeau, supra, p. 916; ; ; (Ark., 1939).
An additional reason for refusing to enforce the second mortgage debt assumed in , was assigned by the court there as resting on the terms of the refinancing agreement by *225 which the original debt was fully discharged. This holding does not alter our conclusion here. The debtors, whether*1039 or not released by the terms of the refinancing from the entire first mortgage debts, nevertheless agreed to pay the deficiencies. Whether or not they offer or succeed with the defense of accord and satisfaction, the possible existence of this defense does not warrant us here in holding these debts worthless. See ; ; , and cases there cited.
Decision will be entered for the respondent.