*806 In 1931 petitioner acquired a bond and securing mortgage at a cost of $35,000, knowing the obligor mortgagor had died without any estate. In 1933 petitioner became mortgagee in possession of the property when a bank which had acquired title to the mortgaged property went into receivership and the interest was defaulted. In 1937, by authority of a Federal District Court, the receiver conveyed the mortgaged property, then having a fair market value of $21,000, to petitioner by quitclaim deed. It is not contested that the amount due the petitioner was increased in various ways to $43,587.91 up to the time when the property was conveyed to the petitioner. Held, in the computation of its income tax for 1937, petitioner was entitled to deduct the difference between $43,587.91 and $21,000 as a then ascertained worthless debt under section 23(k) of the Revenue Act of 1936.
*895 Respondent determined a deficiency of $1,053.74 in income tax of petitioner for the year 1937. On its return for that year petitioner deducted $27,487.91 as a bad debt, which*807 was determined by respondent to be a capital loss and allowed only to the extent of $2,000. By amended answer respondent asks an increase in the deficiency, alleging that he erred in allowing any portion of the deduction. Certain of the facts were stipulated and others established by testimony. Upon this basis we make the following findings of fact.
*896 FINDINGS OF FACT.
The petitioner, a corporation with its principal office in Philadelphia, Pennsylvania, filed its return for the year 1937 with the collector for the first district of Pennsylvania.
Edward C. Brown was the owner of certain improved real estate located in Philadelphia which he mortgaged on December 2, 1924, to secure a loan of $35,000 payable in three years and bearing interest at 6 percent. In addition, he executed a bond for $70,000, conditioned upon payment of the loan.
On October 15, 1925, the Southwestern National Bank acquired title to this property, subject to the mortgage of $35,000. In 1926 Brown was adjudged a bankrupt and died on or before July 1, 1928, leaving no estate. On July 4, 1931, petitioner acquired the bond and mortgage for a consideration of $35,000. It knew at that time*808 that the obligor had died without leaving an estate.
The Southwestern National Bank went into receivership in 1933, the interest on the mortgage became in default, and petitioner became mortgagee in possession of the property. It remained in such possession until 1937. It is not contested that during this period, because of certain payments and accruals by petitioner, the original amount of $35,000 due it and its cost basis for the receivable was increased to $43,587.91. In January 1937 the mortgaged property was appraised for the receiver of the Southwestern National Bank as having a fair market value of $21,000 as of that time. On February 8, 1937, by decree of the United States District Court for the Eastern District of Pennsylvania, the receiver was given authority to convey the mortgaged property to petitioner and such conveyance was made by the receiver's quitclaim deed on February 17, 1937. Petitioner has retained title since that time.
In 1937, at the time the property was conveyed to it by the receiver, petitioner was owed a total net indebtedness of $43,587.91 secured by that property. Appraisers employed by petitioner in October 1936 had reported a fair market*809 value for the property at that time of $16,100. On its return for 1937 petitioner deducted the difference between this figure and $43,587.91, or $27,487.91, as a bad debt ascertained to be worthless in that year. Respondent made no adjustment of the amount of the loss but held it to be a capital loss and allowed it to the extent of $2,000. The fair market value of the mortgaged property at the time acquired by petitioner on February 17, 1937, was $21,000.
OPINION.
LEECH: The petitioner was the owner of a debt in the uncontested amount of $43,587.91. That the mortgagor had died insolvent did *897 not change this fact. Such condition merely affected the extent to which the debt was recoverable. Recovery was thus limited to such amount as could be realized from the mortgaged property securing the debt.
It is apparent that for some time prior to the taxable year the security had a value substantially less than the amount of the debt. Thus, during that period, a basis existed for a partial charge-off had petitioner desired to avail itself of that privilege. It was not, however, required to take such action but could first realize upon the security and then charge*810 off the balance of its cost of the receivable as then ascertained to be wholly worthless. ; .
This it has done. The value of the collateral was realized and applied on the debt. This was done by the owner of the legal title to the mortgaged property making a transfer thereof by quitclaim deed to petitioner. In its essence for present purposes this is not different from the case in which foreclosure was effected and the proceeds from the sale of the property paid to petitioner; or where the owner of legal title paid in cash to petitioner the fair market value of the mortgaged property for a release of the mortgage. Petitioner merely realized from the security all that was recoverable on the debt, leaving an unpaid balance which was wholly worthless. Petitioner's loss was not sustained upon a sale or exchange because it has neither sold nor exchanged property. It merely received payment in part of the indebtedness due it. *811 ; ; ; .
We hold that, under section 23(k) of the Revenue Act of 1936, petitioner is entitled to deduction of that portion of its indebtedness unsatisfied after the transfer to it of the mortgaged property by the receiver. We have found that the receipt of this property constituted a recovery of $21,000.
Decision will be entered under Rule 50.