*990 1. Petitioner having sold property within the taxable year, receiving cash, a certified or cashier's check and a second mortgage in payment, must include the amounts of such cash and check in the computation of gain or loss therefrom, notwithstanding the check and cash so received were deposited in a banking institution that failed three days after such check was deposited and before she was able to withdraw and make use of the funds so deposited.
2. Id. - The respondent having used the face value of the mortgage received in the foregoing transaction, less 10 percent, in the determination of gain or loss upon said sale, and the petitioner having failed to sustain the burden of proof that said value was incorrect, such determination is approved.
*142 The respondent having determined a deficiency in income tax of $4,291.27 for the taxable year 1926, the petitioner brings this proceeding for the redetermination thereof, claiming error in the determination that she received a profit of $41,529.22 in said year from the sale of certain realty; that she*991 received the sum of $25,000 *143 in cash from said sale; that the purchase money note received therefrom was marketable or that it had any reasonable value; and that the said purchase money note for $37,500 had a market value of 10 percent less than its face. The respondent determined a deficiency for 1927 of $3.61 which the petitioner does not contest.
FINDINGS OF FACT.
The petitioner, an interior decorator, is an individual, and is a resident of Palm Beach, Florida. She purchased certain realty in New York City, Known as "57th Street Property", at an original cost of $19,000 in 1920. Subsequently, certain improvements and expenses incident to the ownership of said property increased the basic cost thereof to $31,536.64. She sold this property in or about June 1926 for $75,000, receiving $5,000 cash upon consummation of the transaction, and a certified or cashier's check about 65 days later, upon a New York bank, for $20,000. The purchasers, B.J. and L. V. Weils, assumed an existing $12,500 first mortgage upon the property. Shortly after receipt of the check for $20,000 (about three weeks) she received a purchase money second mortgage for $37,500, signed by Bertha*992 Kahn, a domestic servant in the employ of the purchasers, for the balance of the sale price.
When she received the $20,000 check through the mail she was in Sarasota, Florida. She promptly endorsed and sent it by mail to the First National Bank of Palm Beach for collection and credit to her account. The bank failed three days after receiving the check and before she had drawn upon said deposit, tying up not only the cash collected upon said check but about $4,000 of the initial payment of $5,000 received by her from the said sale which she had also deposited in that institution. Although she communicated with her representatives in New York immediately after learning of the bank's failure, requesting that payment of the check be stopped, her instructions were too late, the check having already been honored by the paying bank.
As a result of her conference with the president of the First National Bank of Palm Beach an agreement was consummated within the taxable year by which he voluntarily offered, and she accepted, a second mortgage in exchange for the assignment of her account in the bank. She received interest on that mortgage for a while. Finally it was agreed that the*993 property itself, covered by the mortgage, would be deeded to her, she to assume the first mortgage thereon. During her ownership of the property she received net rental income of $1,384.38 therefrom. After several years, finding that she was unable to carry the property, she abandoned it and lost everything.
The petitioner was in very pressing need of cash, she having relied upon the aforesaid $20,000 check, to complete an apartment building *144 she had begun in Sarasota. Realizing the state of the market in Florida at the time concerning such paper, she went to New York, and there, through two of her personal friends, one Williams, a real estate and insurance broker and one Leys, a wholesale jeweler, she attempted to effect a sale of the $37,500 mortgage notes received in the sale of her 57th Street property, but was unsuccessful. Having failed to sell the mortgage, Williams arranged a loan of $8,000 for her at the bank upon his and her endorsement, secured by the mortgage. The said mortgage was finally paid in full, though not until about a year and a half after due date.
While the petitioner disclosed the details of the sale of her 57th Street property in a schedule*994 appended to her individual income tax return for 1926, she included no part of the profit therefrom in the computation of her net taxable income. The respondent has finally determined a profit of $41,539.22, computed as follows:
| Sale price | $75,000.00 | ||
| Cost price | $19,000.00 | ||
| Abstract of title | 275.00 | ||
| Improvements, 1921 | 11,958.64 | ||
| Total | $31,233.64 | ||
| Less: | |||
| Depreciation at 2% for 5 years on: | |||
| Building | $6,300.00 | ||
| Improvements | 11,958.64 | ||
| $1,825.86 | |||
| Depreciated cost | $29,407.78 | ||
| Add: Closing fees | 303.00 | ||
| 29,710.78 | |||
| Profit realized on sale | $45,289.22 | ||
| Less: Discount of 10% on purchase | |||
| money mortgage of $37,500.00 | 3,750.00 | ||
| Taxable profit to be reported | $41,539.22 | ||
| Taxable profit reported | None | ||
| Increase | $41,539.22 |
OPINION.
MORRIS: Subdivisions (a) and (c) of section 202 of the Revenue Act of 1926 provide as follows:
(a) Except as hereinafter provided in this section, the gain from the sale or other disposition of property shall be the excess of the amount realized therefrom over the basis provided in subdivision (a) or (b) of section 204, and the loss shall be the excess of such basis over the amount*995 realized.
* * *
(c) 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.
*145 There are two questions for our determination, both of which arose from the sale of the petitioner's 57th Street property in 1926 - (1) the effect upon the gain realized, if any, of the default of the First National Bank of Palm Beach and the resulting failure of the petitioner to receive the proceeds from the $20,000 check received by her in that transaction together with the further loss of an additional $4,000 deposited by her in that institution, and (2) whether the respondent correctly included the face value of the mortgage, $37,500, less 10 percent, received as a part of the sale price in that transaction, in the determination of taxable net income.
While the fortuitous closing of the First National Bank of Palm Beach resulted in some ultimate loss, whether deductible for tax purposes or not we need not decide, the fact remains that she first received $25,000 in cash or the equivalent which she deposited in an institution of her own choosing. Thus when these*996 amounts were received she was the recipient of income irrespective of whether she later lost it or not. Under the statute all gross income must be included in the return, except that exempt from taxation, although losses arising within the same taxable year may exceed the amount thereof. Such losses must be claimed, as deductions under the applicable provisions of the statute. The petitioner makes no claim for a loss, as such, by reason of the bank closing. She merely contends that she received no income within the taxable year by reason of the closing of said bank and her resulting inability to withdraw the cash deposited therein. If her position would be logically sustained the same rule would hold if she had used such funds to speculate in the stock market and had suffered a loss.
Neither are we able to conclude, as the petitioner would have us, that the $37,500 trust, which she received as part of the consideration in the sale of her property during the taxable year, had no fair market value. The petitioner was the only witness to testify in her behalf. Her sole testimony upon this subject was to the liams and Leys, to sell the mortgage, but was unable to do so. Williams*997 and Leys, to sell the mortgage, but was unable to do so. Williams was a real estate and insurance broker and Leys a wholesale jeweler, and neither was shown to have any special qualification to dispose of the mortgage paper, nor, indeed, is there any showing of the extent to which they exerted themselves in so doing. The petitioner's counsel makes much of the fact that the real purchasers did not sign the mortgage notes, but that Bertha Kahn, a dummy, did so. Though we are willing to concede, for the purpose of discussion, that the negotiability of the mortgage may have been affected by this fact, there is nothing to show, except that Bertha Kahn was a domestic servant, that she was not perfectly reliable and able to respond in payment thereof, even if the property had *146 not been sufficient in value to cover the amount of the mortgage upon forced sale.
The record shows that the property sold in 1926 for $75,000, $62,500 greater than the first mortgage of $12,500. We can only infer, from the record, therefore, that the property was reasonably worth that amount in the absence of a showing that it was not. Therefore, there was ample security in the property itself to*998 cover the $37,500 second mortgage at the time of sale. It is significant too, though not conclusive of fair market value within the taxable year, that the mortgage was finally paid in full. It is also significant to note that an $8,000 loan was arranged by Williams upon his and the petitioner's personal endorsements, secured by this mortgage. If the petitioner had shown that Williams' and her personal endorsements at the bank were in and of themselves good for such a loan at that institution, the fact that the mortgage was posted as collateral security therefor might be discounted. But we have no such proof and we may reasonably assume that the bank attributed a substantial value to the mortgage when the loan was made.
For the above and foregoing reasons we are of the opinion that the respondent's determination must be approved.
Judgment will be entered for the respondent.