*2470 1. In 1918, petitioner sold for a consideration of $11,000 real property which cost, less depreciation $9,800, and included in his income a profit of $1,200. The consideration was paid, $100 in cash, $6,000 by the assumption of an existing mortgage, $4,000 by a second mortgage given by the purchaser and $900 in notes. In 1920, in a foreclosure proceeding by the holder of the first mortgage, petitioner reacquired the property at auction for $7,000. After payment of the first mortgage and expenses, there was $127.14 applicable to the second mortgage; as to the balance of $3,872.86, the second mortgage became worthless. Held, the sale in 1918 and purchase in 1920 were separate transactions. The profit on the sale in 1918 was properly included in income of that year. The price paid on the reacquisition is the basis for computing gain or loss on future disposition of the property.
2. Evidence relating to bad debts concerning which there are no allegations in the pleadings is not within the issues and may not be considered.
*1016 This is a proceeding to redetermine a deficiency of $506.09 in income taxes for the years 1919 and 1920. The petitioner alleges *1017 errors (1) in the calculation of the amount of gain derived from real estate sales; (2) in the amount deducted as interest paid, and (3) as to the year 1920, in the allowance of bad-debt deductions. The testimony was in the form of depositions. After the depositions were taken, certain facts were stipulated.
There was testimony tending to show that certain debts represented by promissory notes had become worthless during the taxable year. These debts were not claimed as deductions in the petitioner's income-tax return and are not mentioned in the allegations of fact in the petition.
FINDINGS OF FACT.
The petitioner is a resident of Cambridge, Md., and in the years in question was engaged in the real estate business.
A stipulation of the parties was filed, which reads as follows:
For the Year 1919.
1. That the interest deductions allowed by the auditor for said year and upon which the assessment is based*2472 are correct.
2. That the income for said year upon which the assessment is based shall be increased by $60.00 and $100.00 for dividends received from the Farmers and Merchants National Bank and the Cambridge Manufacturing Company, respectively, or a total increase of $160.00; that said income shall be decreased by $50.00 and $200.00 and $66.67 for errors in the Spitler, Morgan and Underhill sales, respectively, or a total decrease of $316.67, making a net decrease $156.67.
For the Year 1920.
1. That the interest deductions allowed by the auditor for said year and upon which the assessment is based are correct.
2. That the income for said year and upon which the assessment is based shall be increased by $60.00 and $100.00 for dividends from the Farmers and Merchants National Bank and the Cambridge Manufacturing Company, respectively, or a total increase of $160.00; that the Wilson sale is accepted as stated in the Revenue Agent's report; that the income for said year shall be decreased by $100.00 for errors in the Willey sale, or a net increase of $60.00.
3. That as to the deductions claimed for losses on the McGrath farm of $1,200.00; on the note of Milford Phillips*2473 of $700; on the note of John H. Phillips of $1,000.00, and on the notes of J. W. Mowbray, T. H. Jones, Parker Bowley and Charles Jackson aggregating the sum of $1,371.03 making a total of $4,271.03, oral argument at the hearing set for the 19th day of October, 1926, is waived, and the respective contentions relative to these items are hereby submitted to the Board upon the depositions taken by the appellant and upon the appellant's income returns for the years 1918, 1919, and 1920, and upon briefs to be submitted by the respective parties on the 1st day of November, 1926.
In 1918 the petitioner owned a farm, referred to as the McGrath farm, which had cost him $10,000, and upon which depreciation of $200 had been taken. He sold it on December 31, 1918, for a consideration *1018 of $11,000, made up as follows: cash, $100; a mortgage of $6,000 assumed by the purchaser; a note for $400 payable January 1, 1919; a note for $500 payable January 1, 1919; a second mortgage on the property for $4,000 given by the purchaser, dated December 31, 1918, and due in one year. The petitioner reported in 1918 a profit on the sale of $1,200. On January 7, 1919, he assigned the second mortgage*2474 to a third party and guaranteed its payment. It was subsequently transferred to another party by petitioner's assignee. The testimony does not disclose whether or not the $400 and $500 notes were paid. In 1920, foreclosure proceedings were instituted by the holder of the first mortgage against the petitioner and his wife as mortgagors, and in the course of these proceedings the farm was offered for sale at public auction. At the foreclosure sale on September 21, 1920, the petitioner bought the property for $7,000. The terms of sale were, "15% cash on date of sale, balance in twelve months, or on the final ratification of sale, or all cash at option of purchaser, the credit portion to bear interest from date of sale, * * *." He also paid $326.66 as interest on a balance of the purchase price for the time between the date of sale and the date of payment of such balance. The date of payment of such interest does not appear. Upon the conclusion of the foreclosure proceedings and after payment of the amount due on the first mortgage and the costs of the proceedings, there was a surplus of $127.14, which was distributed to petitioner in part payment of the second mortgage. Petitioner*2475 paid $4,000 to the holder of the second mortgage under his guaranty and this mortgage was reassigned to him on November 5, 1920.
Testimony was offered in depositions relating to debts claimed as worthless, represented by the following promissory notes:
| Maker | Date | Payable | Amount |
| J. J. Mowbray | Dec. 20, 1919 | 6 months | $444.00 |
| J. J. Mowbray | Jan. 20, 1919 | 6 months | 113.34 |
| J. J. Mowbray | Feb. 20, 1920 | 60 days | 60.53 |
| T. H. Jones, et al | May 29, 1920 | 6 months | 412.08 |
| T. H. Jones, et al | Feb. 20, 1920 | 6 months | 128.92 |
| P. Bowley, et al | Apr. 20, 1920 | 6 months | 104.00 |
| P. Bowley, et al | Apr. 19, 1920 | 6 months | 98.00 |
| C. Jackson, et al | Apr. 17, 1920 | 6 months | 100.00 |
| Total | 1,460.87 |
Note of Milford Phillips, for $800, dated July 26, 1920, payable four months after date.
Note made by J. H. Phillips, on August 2, 1920, payable four months after date, on which J. J. Phillips and petitioner became endorsers in order named.
None of the debts represented by the above-mentioned promissory notes were claimed as deductions in petitioner's income-tax return and they are not mentioned in the petition.
*1019 The petitioner reported his income*2476 on a cash receipts and disbursements basis. It does not appear whether or not he kept books.
OPINION.
LOVE: The stipulation disposes of the controversy with respect to amounts of gain or loss on real estate sales, the inclusion in income of dividends received, and deductions of interest. This leaves for decision only the questions (1) whether or not a deductible loss was sustained upon the reacquisition of the McGrath farm by petitioner in 1920; and (2) whether or not he is entitled to deduct as bad debts the notes mentioned in the stipulation, in paragraph 3, under 1920.
The sale of the McGrath farm in 1918 constituted a completed transaction, and the profit thereon was properly included in income of that year. The reacquisition in 1920, at foreclosure sale, was a separate transaction and the price paid therein is the basis upon which to compute gain or loss on future disposition of the property. . Therefore, no part of the profit on the sale in 1918 may be deducted as a loss in 1920. However, the petitioner received as a part of the consideration on that sale a second mortgage of $4,000, given by the purchaser. *2477 This mortgage was reckoned at face value in arriving at the profit. Petitioner thereafter assigned it to a third party and guaranteed its payment. Upon the mortgagor's default, petitioner was obliged to pay. In the foreclosure proceedings, after payment of the amount due on the first mortgage and the expenses, there remained only $127.14 applicable to the second mortgage. As to the balance of $3,872.86 of principal, this mortgage became worthless. The petitioner is entitled to deduct the latter amount as a bad debt.
There were also given, as part of the consideration in the sale in 1918, notes totaling $900, payable January 1, 1919. Counsel for petitioner in his brief states these notes also were not paid, but the evidence does not disclose whether they were paid or not, and we cannot accept this statement as a substitute for evidence.
During the taking of the depositions, the respondent moved to strike out the testimony relating to the notes made by Mowbray, Jones, Bowley and Jackson. This motion must be granted, since these notes are not within the issues raised by the pleadings. For the same reason, we are precluded from considering the testimony in regard to the*2478 notes of Milford Phillips and J. H. Phillips. See ; .
Judgment will be entered on 15 days' notice, under Rule 50.
Considered by TRUSSELL, SMITH, and LITTLETON.