*1385 Petitioners were members of a partnership which purchased certain real property in 1928, subject to a mortgage. On February 11, 1935, during the taxable year, the property was sold pursuant to foreclosure proceedings, but under state law the partnership had the right to redeem within 12 months from the date of sale. The actual value of the property at the time of sale was materially less than the cost of redemption. The partners were financially able to protect their investment, but immediately after the sale they definitely decided to abandon their right of redemption. Held, (1) that the partnership sustained a loss upon the foreclosure sale in 1935 in the amount of its investment in the property, and (2) that such loss was a capital loss deductible only to the extent provided in section 117(d), Revenue Act of 1934.
*99 This proceeding is for the redetermination of deficiencies in income tax for the calendar year 1935 determined by respondent to be due from petitioners, all members of a partnership, in the following*1386 amounts:
| Jacob and Celia K. Abelson | $1,562.01 |
| Lester Abelson | 627.77 |
| Oscar and Emma Getz | 427.85 |
Joint returns were filed for that year by the petitioners Jacob Abelson and Celia K. Abelson and by the petitioners Oscar Getz and Emma Getz, and a separate return was filed by petitioner Lester Abelson. The cases were consolidated.
The issues presented are (1) whether a loss sustained by the partnership of its investment in certain real estate as the resuld of a foreclosure sale is deductible in 1935 when the sale took place, or in 1936 when the statutory period of redemption expired; and (2), if it is held that the loss is an allowable deduction from gross income for 1935, whether it is deductible as an ordinary loss or a capital loss subject to the limitations of section 117(d) of the Revenue Act of 1934.
FINDINGS OF FACT.
The petitioners are members of the partnership of Abelson & Getz (hereinafter referred to as the partnership), which, at all times material hereto, was engaged in the investment business in the city of Chicago, Illinois. The interests of the petitioners in the partnership are as follows: Jacob Abelson, 22.5 percent; Celia K. Abelson, *1387 22.5 percent; Lester Abelson, 22.5 percent; Oscar Getz, 11.25 percent; and Emma Getz, 11.25 percent. The remaining 10 percent interest was held by two other individuals not parties to this proceeding.
*100 On April 26, 1928, the partnership acquired by warranty deed the real estate on the northwest corner of the intersection of 79th Street and Bennett Avenue in the city of Chicago, known as the Southfield Apartment Building, for the stated consideration of $10; subject, however, to certain taxes, covenants, and a trust deed which was a first mortgage in the amount of $130,000 given to secure an issue of publicly held bonds. Neither the partnership nor any of the partners, however, assumed personal liability for the payment of the mortgage.
For the Southfield property the partnership paid $2,500 initially as earnest money, and an additional $57,713.36 at the time title to the property was received, a total cash payment of $60,213.26. Subsequently the partnership reduced the amount of the mortgage by making payments aggregating the sum of $6,999.98, and made capital expenditures of approximately $6,000 for improvements and alterations on one of the ground floor store*1388 spaces in the building. This made the total investment of the partnership in the Southfield property the sum of $73,213.34.
Deductions for depreciation on the property, aggregating $28,799.65, were taken by the partnership on its Federal income tax returns and allowed by the Government, so that the depreciated cost of this property for computing gain or loss was $44,413.69.
During 1927 and 1928 there had been a boom in real estate activity along 79th Street on the south side of Chicago. It was expected that the territory would become an excellent business district and the increase of prices for business property in that neighborhood was slightly greater and more rapid than was experienced generally in Chicago even during those years of real estate prosperity. Subsequent to 1929 events proved that the expectations for that area had been excessive; and it was ascertained that the desirability of the property had been overstated by the sellers and that certain defects in the building, such as lack of kitchen ventilation in the apartments, had the effect of discouraging tenants at profitable prices. Rents had to be reduced, in some cases substantially, in order to keep the apartments*1389 tenanted.
By 1931 the net operating income from the property was not sufficient to pay the fixed charges and the partnership defaulted in the payment of interest on the mortgage bonds in that year.
Subsequent to the default, negotiations were entered into between the partnership and a committee representing the holders of the bonds secured by the first mortgage for the reorganization of the property; and in February 1932 the partnership executed an assignment of the rents and turned over the property to the trustee appointed *101 by the committee. The trustee thereafter managed the property, the partnership receiving no income therefrom after February 1932.
Proceedings to foreclose the mortgage were begun by the filing of a foreclosure bill in July 1932; but negotiations continued from 1932 to 1935, during which time the prospects declined, and ultimately in 1935, when it was finally determined that no reorganization affording participation by the equity owners was possible, a foreclosure sale was held on February 11, 1935, pursuant to the decree previously rendered. This sale was confirmed on February 25, 1935.
Immediately prior to the foreclosure sale the members*1390 of the partnership met to discuss the possibility of bidding at the sale. It was determined that the maximum bid which might profitably be made by them was $40,000, and Jacob Abelson attended the sale with the intention of bidding that amount. However, the first and only bid was $70,000 and the property was bid in for this figure by the bondholders' committee.
Immediately following the sale the partners again met to discuss the advisability of redeeming the property within the 12-month statutory period of redemption in the State of Illinois. Although it is not entirely clear from the evidence in this proceeding exactly how much was owing in back taxes and penalties upon this property, the partnership computed the cost of redemption to be approximately $80,000, including certain other mecessary expenses. This figure being far above their estimated value of the property, they decided that the property was worthless and abandoned any idea of redeeming it, although they were financially able to do so. Subsequently, in 1936, the period of redemption expired and title passed to the purchasers.
The building on the Southfield property was completed late in 1927, and was of a construction*1391 modern at that time. It consisted of 20 apartments on the second and third floors and 7 stores on the ground floor. Two of these stores were made into one at an expense of $6,000 to suit the necessities of one of the tenants. The estimated life of the building was approximately 40 years. While the property was carried on the account of the trustee at December 31, 1934, at a value of $122,000, the actual value of the property was not in excess of $60,000.
The trustee in possession of the property made reports covering operations from February 1932 to December 31, 1934, inclusive, which reports reveal the following:
| Feb. 1 to Dec. 31, 1932 | 1933 | 1934 | |
| Operating profit | $5,242.79 | $6,541.19 | $5,519.80 |
| Taxes | 3,025.00 | 2,157.84 | 1,858.44 |
| Available for interest | 2,217.79 | 4,383.35 | 3,661.36 |
| Interest and coupon tax | 6,760.05 | 7,184.63 | 6,970.43 |
| Deficit after interest | 4,542.26 | 2,801.28 | 3,309.07 |
| Principal requirement | 3,125.00 | 3,500.00 | 3,750.10 |
| Deficit after principal | 7,667.26 | 6,301.28 | 7,059.17 |
*102 These figures show that the property was managed consistently at a loss, despite the fact that the property tax rate was substantially lowered*1392 in the year 1934.
The partnership sustained a loss in 1935 when the foreclosure sale was held and the subsequent decision was made not to redeem the property.
The loss sustained by the partnership in respect of its investment in the Southfield property was in the amount of $44,413.69.
OPINION.
HILL: The partnership of Abelson & Getz, of which all the present petitioners were members, purchased in 1928 certain real property in Chicago known as the Southfield Apartment Building, subject to a first mortgage in the amount of $130,000. Neither the partnership nor petitioners assumed personal liability for the payment of the mortgage. The mortgage was foreclosed and on February 11, 1935, the property was sold pursuant to decree of the court, but under Illinois law the partnership had the right to redeem within a period of 12 months from the date of sale. The cost of redemption would have been approximately $80,000, while the actual value of the property in 1935 was not in excess of $60,000. The property was not redeemed, and as a result of the foreclosure sale the partnership sustained a loss of $44,413.69, representing the amount of its depreciated investment in the property. *1393 Petitioners deducted their proportionate shares of such loss in their individual returns for the taxable year.
Petitioners contend that the loss was sustained, for tax purposes, in 1935 at the time of the sale, and that the entire amount is deductible as an ordinary loss, relying upon , and other decisions of like effect.
*103 In determining the deficiencies, respondent disallowed in their entirety the loss deductions claimed by petitioners from gross income of the taxable year, holding that any loss suffered by the partnership on account of the foreclosure sale of the Southfield Apartment Building was sustained in 1936, upon termination of the period of redemption, and was a capital loss subject to the limiting provisions of section 117 of the Revenue Act of 1936. On brief, respondent urges the same contention, and also, in the alternative, that if the loss be held to have been sustained in 1935 it was a capital loss, subject to the limiting provisions of section 117 of the Revenue Act of 1934. Sections 117(d) of both acts are identical and, so far as material here, provide that losses*1394 from "sales or exchanges" of capital assets shall be allowed only to the extent of $2,000, plus the gains from such sales or exchanges.
The contention of petitioners that the loss sustained by the partnership is deductible as an ordinary loss is predicated upon the holding of the Circuit Court of Appeals in the Hammel case, supra, that a foreclosure sale is not a "sale or exchange" within the meaning of the statute. This decision, however, was reversed by the Supreme Court in , where it was held that the term "sales" applied to forced sales as well as voluntary sales, within the purview of section 117 of the Revenue Act of 1934, limiting the deduction of capital losses. The Supreme Court further held that the definitive event fixing the loss was the foreclosure sale and not the decree of foreclosure which ordered and preceded the sale. It is to be noted that in the Hammel case there was no statutory period of redemption extending beyond the date of the foreclosure sale. The decision last cited governs the instant case, and the contention of petitioners that the loss in question is deductible in full can not be*1395 sustained. It is immaterial that neither the partnership nor any of these petitioners assumed personal liability for payment of the mortgage. ; .
There remains for consideration the question of the year in which the loss was sustained; that is, whether the loss was complete in the taxable year 1935 when the property was sold under foreclosure, or in 1936 upon expiration of the period of redemption. It has been held that a taxpayer is entitled to deduct the loss sustained on account of foreclosure of a mortgage on real property only in the year when the period of redemption expires. 1 But this rule is not *104 applicable in a case where it is shown that the right of redemption was wholly without value in the year of sale and was abandoned by the taxpayer, whether or not he retained legal title to and possession of the property until expiration of the redemption period. The loss is allowable in the year in which it reasonably appears that the taxpayer's investment in the property became wholly worthless. 2
*1396 The facts in the present case show (1) that the actual value of the property at the time of the foreclosure sale was very materially less than the amount it would have cost the partnership to redeem; (2) that immediately after the sale the partners met for a discussion of the advisability of redeeming, and, although financially able to redeem, they definitely and unanimously decided that their investment was not worth the cost of redemption and abandoned such right; and (3) that neither the partnership nor the partners individually ever took any further action in the matter. Subsequently there was in fact no redemption. The partners were the persons most directly interested, and there is nothing disclosed by the record which calls in question the bona fides of their action or even indicates other than the exercise of good business judgment. The facts, we think, constitute persuasive proof that the value of the partnership investment in the property and of its right of redemption was completely extinguished during the taxable year.
For the reasons indicated, we hold that the loss of the partnership was sustained in the taxable year 1935, and that pursuant to section 117(d), *1397 supra, the amount thereof is deductible only to the extent of $2,000, plus the gains from capital sales or exchanges, if any.
Decisions will be entered under Rule 50.