*899 In 1932 the petitioners were the owners of lands in a reclamation district of California mortgaged to an amount in excess of their then fair market value. The reclamation district had levied an assessment against the lands in the amount of $81,846.51, which was a prior lien on the lands. The assessment was not a personal obligation of the petitioners. To protect its mortgage the mortgagee advanced $15,258.63 in the purchase of bonds of a par value of $80,933.99, plus accrued interest of $1,160.06, which were applied in satisfaction of the assessment referred to plus accrued interest. The mortgagee charged the $15,258.63 against the petitioners. The respondent has held that the petitioners derived income from the transaction to the amount of the difference between the assessment plus accrued interest and the cost of the bonds, or $66,835.42, and has added one-half of that amount to the net incoem reported by each petitioner for 1932. Held, that the amount thus added to the reported net income of each did not constitute taxable income of each in 1932.
*293 These proceedings, consolidated for hearing, involve income tax deficiencies for 1932 as follows:
| Petitioner | Docket No. | Deficiency |
| P. J. Hiatt | 82568 | $4,907.58 |
| Anna Belle Hiatt | 82569 | 4,785.05 |
The question presented by these proceedings is, Did the petitioners realize a taxable gain of $66,835.42 when reclamation district bonds having a face value of $82,093.99 (including accrued interest) were purchased for their account by a mortgagee at a cost of $15,258.63, which bonds were used to satisfy an assessment for special benefits of the reclamation district in the amount of $81,846.51 (plus accrued interest), which assessment was a lien upon petitioners' lands but not a personal obligation of the petitioners?
FINDINGS OF FACT.
In 1932 the petitioners were husband and wife, domiciled in the State of California.
In 1913 the Legislature of the State of California created Reclamation District 1500 (Stats. 1913, ch. 100), as agent of the state to carry out certain works of reclamation on lands located within its boundaries.
Prior to 1919 and at all times subsequently the*901 petitioners owned approximately 1,800 acres of farm lands located within the district.
In 1919, in accordance with state law, the reclamation district levied an assessment upon the lands located within its boundaries in the principal amount of $5,000,000. This assessment was duly apportioned *294 and spread upon the lands in the district in accordance with benefits. For the purposes of the assessment the petitioners' lands were appraised at $324,396. The portion of the assessment spread upon the lands owned by the petitioners amounted to $81,846.51 in principal amount and became a lien upon the lands in August 1919.
Thereafter the district caused bonds to be issued against the assessment and sold, and the proceeds thereof were used by the district for the purposes for which the assessment was levied, namely, construction of works of reclamation, incidental expenses, and charges for maintenance and operation. In addition to the lien of the reclamation assessment the petitioners' lands were subject to a deed of trust (mortgage) in favor of the California Trust & Savings Bank (a Sacramento bank), securing an indebtedness which on September 1, 1932, amounted to approximately*902 $221,500. The fair market value of the lands, freed from all assessments, on that date was not in excess of $145,000.
Under the statutes of the State of California the assessment standing against any lands in the reclamation district could be satisfied by the delivery to the county treasurer of reclamation district bonds of a par vlaue, plus accrued interest, equal to the amount of the assessment standing against the lands. No interest had been paid upon the bonds for a long period of years and they were selling on the market at approximately 18 percent of the face value thereof.
On September 26, 1932, the California Trust & Savings Bank, for the purpose of protecting its mortgage from the menace of the underlying and admittedly superior statutory assessment lien, advanced under its trust deed for the Hiatts' account $15,258.63 for the purpose of purchasing bonds to satisfy the assessment lien standing against petitioners' lands. This amount was used to acquire bonds of the reclamation district having a total par value of $80,933.99 and bearing accrued interest of $1,160.06. The bonds thus acquired were surrendered to the county treasurer as fiscal agent of the reclamation*903 district and accepted at their par value in payment of the entire assessment of $81,846.51, which was thus canceled a nd discharged.
The reclamation bonds above referred to were not purchased by the petitioners. Neither did they ever come into the possession of the petitioners. The bank, at the solicitation of Edward Schranz, Jr., the president of the board of directors of Reclamation District No. 1500, authorized Schranz to purchase the bonds and apply them in satisfaction of the assessment. The advance was made by the bank with the full approval of the petitioners, and the bank charged the petitioners with the $15,258.63 which it had advanced in their behalf in the purchase of the bonds.
*295 There was practically no market for lands in Reclamation District No. 1500 in 1932. Sales that have been made since 1932, freed from all assessments, have practically all been at prices less than the total amounts that had been assessed upon them for works of reclamation and improvements. The petitioners' lands in 1936 had a value of about $176,800. The value in 1932 was about 20 percent less than that amount.
The California Trust & Savings Bank went into receivership subsequent*904 to 1932. The petitioners' total indebtedness to the bank on January 1, 1936, was $223,355.29 plus unpaid interest of $40,661.74. The bank's claim against the petitioners was compromised in 1936 for an amount of approximately $166,600.
The petitioners filed separate income tax returns for 1932. In neither return was any amount reported as taxable gain from the transaction by which the California Trust & Savings Bank advanced $15,258.63 in the acquisition of reclamation bonds which were applied in satisfaction of the assessment standing against the lands of $81,846.51 plus interest. In the determination of the deficiency the respondent has determined that the petitioners, together, owed an assessment plus accrued interest of $82,094.05, which was satisfied by an investment of cash in the amount of $15,258.63, thereby resulting in a profit of $66,835.42, one-half of which, or $33,417.71 has been added to the net income reported by each petitioner. He has also added to the net income reported by P. J. Hiatt $2,604.87 representing one-half of the difference between an assessment of $6,399.13, standing against lands in the reclamation district and $1,189.39, the cost of bonds to*905 cancel that assessment which the respondent in his deficiency notice states were "truned in for application at par value against assessments against land owned by you and N. L. Miller." No proof has been offered by the petitioners relative to the item of $2,604.87 added to the net income reported by P. J. Hiatt.
OPINION.
SMITH: The question presented by these proceedings is whether the petitioners realized taxable income by having assessments against their lands in the amount, including interest, of $82,094.05 satisfied by a charge against them on the books of the mortgagee of the lands of $15,258.63, the latter amount representing the cost to the mortgagee of purchasing bonds to satisfy the assessment. In his deficiency notices the respondent states: "These transactions are held to be equivalent to sales and the difference between the purchase price of the bonds and the amount of credit received against the assessments represents property subject to tax just the same as if the bonds had been purchased and sold outright, even though the *296 credit may have applied against an item that had been capitalized." The authorities relied upon by the respondent in his determination*906 are ; ; ; certiorari denied, .
The facts in the above cited cases were entirely different from those which obtain in teh proceedings at bar. In , the Kirby Lumber Co. was held liable to income tax upon profit realized by it in the redemption of some of its bonds at a price less than the issuing price. The facts clearly showed that the company had a cash profit from the redemption of the bonds at prices less than the issuing price. In , the facts were that the American Chicle Co. had purchased the assets of another corporation and as a part of the purchase price had assumed the payment of the bonds at par. The American Chicle Co. redeemed some of these bonds at less than par. The case involved, as the Court pointed out, a "narrow point." Upon the facts*907 before it the Court held the company liable to income tax in respect of the difference between the par value of the bonds and the redemption price. Substantially the same facts obtained in , and . In all of these cases a reduction in the amount of a personal obligation of a taxpayer was involved. No such situation is presented by these proceedings.
In , it was held that the doctrine of , and , has no application in any case where, as here, the indebtedness reduced is not the personal obligation of the taxpayer although it may be a lien upon its lands. The facts in the Fulton case were that the taxpayer purchased certain real property upon which there stood a prior mortgage which was not assumed by the taxpayer. Thereafter the taxpayer was able to secure the release of the mortgage lien by the payment of less than its full face amount. *908 Later the taxpayer sold the property and in its income tax return for that year set forth its adjusted cost basis as being the purchase price of the land, including the full face amount which it compromised for a smaller sum. It based its position upon the doctrine of The Board held, however, that the adjusted cost basis could only include the amount actually paid to settle the mortgage rather than its face amount. It said that the Kirby Lumber Co. and the American Chicle Co. cases had no application to the case because *297 the mortgage lien discharged by the taxpayer was not its own personal obligation even though it was a lien on its lands. In , the facts were that the taxpayer acquired assets subject to an outstanding mortgage securing bonds issued by the seller. The American Seating Co. did not assume liability on the bonds. Subsequently, the buyer purchased the bonds then outstanding in the hands of the public for less than par and the mortgage was satisfied. We held that the payment represented part of the cost of the assets and did not result*909 in taxable income in the year in which it was made. Cf. ; and .
In , the facts were that the taxpayer owned practically all of the stock of a California corporation. By an agreement between the taxpayer and a third party such third party canceled the amount of the corporation's indebtedness. It was claimed by the Government that such cancellation of indebtedness amounted to a taxable gain by the taxpayer in view of the fact that he was practically the sole stockholder of the corporation. The Board held, however, that Lawrence realized no income in the transaction, but at most realized an increase in the value of his stock as a capital investment.
Likewise, in , the Board held that , has no application in a case where the taxpayer secures a reduction in the cost of a capital investment but there is no reduction for personal obligation in connection therewith.
*910 Special assessment benefits such as those levied upon the lands of the petitioners, when paid, are not legal deductions from gross income. Under the income tax law they are treated as additional cost of the land benefited. ; affd., . Where, as here, the land owner does not pay the assessment in full the only additional cost to the land owner is the amount that he pays on the assessment. If he obtains a reduction of the assessment, such reduction merely serves to reduce the amount of the additional cost of the land. It does not result in taxable income. The cost of the petitioners' lands in 1932 was not enhanced by $82,094.05 by the satisfaction of the special assessment upon it, but only by the amount of $15,258.63, which was the amount of cash advanced for their benefit by the California Trust & Savings Bank in satisfaction of the assessment.
The respondent in his deficiency notices also relies upon the decision of the Board in . It was there held that since in 1928 the petitioner transferred to its principal creditor certain*911 real estate in consideration *298 of the cancellation of its indebtedness, which indebtedness was in excess of the petitioner's equity in the property, the transfer constituted a sale upon which the petitioner realized taxable profit. The Board's decision in that case was reversed by the . The court stated:
* * * In effect the transaction was similar to what occurs in an insolvency or bankruptcy proceeding when, upon a debtor surrendering, for the benefit of his creditors, property insufficient in value to pay his debts, he is discharged from liability for his debts. Thsi does not result in the debtor acquiring something of exchangeable value in addition to what he had before. There is a reduction or extinguishment of liabilities without any increase of assets. There is an absence of such a gain or profit as is required to come within the accepted definition of income. * * *
It is true that the total debt against the petitioners' lands in 1932 was reduced to the extent of $66,835.42 by the purchase of the bonds and their application against the assessment. But the remaining indebtedness was*912 far in excess of the market value of the lands then, or at any subsequent date. No gain, profit, or income can be spelled out of such a transaction. At most it served only to increase the mortgagee's equity in the lands. Even after the transaction the petitioners' equity in the lands was valueless.
The petitioners have offered no evidence with respect to the transaction by which the respondent added to the gross income of P. J. Hiatt $2,604.87, as shown in our findings of fact, although the transaction appears from the deficiency notice to have been of the same nature as that considered herein. For lack of proof upon the point, the action of the respondent in adding $2,604.87 to the reported net income is sustained.
Reviewed by the Board.
Judgment will be entered under Rule 50.
MURDOCK, LEECH, and TURNER concur only in the result.