*1079 1. A note secured by a second mortgage is not ascertained to be worthless as ground for a deduction merely because the mortgaged property has been sold on foreclosure by the holder of the first mortgate when it does not appear from the evidence that the primary obligation of the note in question is worth less than the full amount of the loan.
2. Because of statute law of Massachusetts leaving a mortgagor with no period of redemption after foreclosure under a power of sale contained in the mortgage, semble, a deduction to be taken in respect of the mortgage loan is confined to the year of sale.
*77 The Commissioner determined a deficiency of $2,479.20 in petitioner's income tax for 1935. He disallowed a deduction claimed on account of the worthlessness of a second mortgage note secured by realty sold in 1934 under foreclosure proceedings of the first mortgagee.
FINDINGS OF FACT.
Petitioner, a resident of Boston, Massachusetts, and his two brothers, Mashie and Lawrence Berenson, were testamentary trustees of their father's estate, which comprised*1080 a parcel of improved land at 2101-2115 Washington Street, Boston. Prior to August 1928 this property was subject to a first mortgage in favor of the Boston Penny Savings Bank to secure a loan of $120,000, and also to a second mortgage in favor of petitioner. On August 17, 1928, the bank increased *78 its loan to the estate to $130,000, of which $10,000 was payable in monthly installments of $500 and the remainder was thereafter payable in three years. The new loan bore 6 percent interest and was secured by a first mortgage on the property. Petitioner personally endorsed the note.
To enable the first mortgage loan to be increased, petitioner released the property from the second mortgage. Thereafter a 6 percent demand note dated "September 1928" for $125,000, payable to Annie M. Cashin, was executed by the testamentary trustees and secured by a second mortgage on the property. This note and mortgage were given in consideration of advances made by petitioner to his father and his father's estate for improvement of the mortgaged property; about $75,000 of these advances were in cash. Annie M. Cashin, petitioner's secretary, had no interest in the note; she delivered it*1081 to petitioner, endorsed "without recourse in any event", and assigned the mortgage to him. Her participation in the transaction was deemed advisable because petitioner was both creditor of the estate and a testamentary trustee. The mortgage deed, executed September 11 and recorded September 19, 1928, stated that the premises:
* * * are conveyed subject to mortgage dated August 17, 1928, held by the Boston Penny Savings Bank * * *. This mortgage is upon the statutory condition for any breach of which the mortgagee shall have the statutory power of sale.
No payments of principal were made by the testamentary trustees on their debt to the bank after October 1930 and no interest payments after February 1934. In the autumn of 1934 the bank advised the trustees of its intention to institute foreclosure proceedings under the first mortgage. On November 26, 1934, the mortgaged property was, under foreclosure proceedings, sold to the bank for $90,000. As mortgagee, the bank executed a deed to itself as purchaser, reciting conveyance of the property "by the power conferred by said mortgage and every other power", and to this deed subjoined an affidavit that:
* * * the principal, *1082 interest and tax obligation mentioned in the mortgage * * * was not paid or tendered or performed when due or prior to the sale * * *.
and that notice had been appropriately published in a local newspaper, announcing that the sale was to be made:
* * * By virtue and in execution of a power of sale contained in * * * mortgage deed * * * for breach of the conditions of said mortgage * * *.
The deed and affidavit were recorded on December 14, 1934.
OPINION.
STERNHAGEN: On his return for 1935 the petitioner deducted a loss of $22,000 in respect of the second mortgage described in the findings. *79 The Commissioner disallowed the deduction and the petitioner now claims it as a bad debt. The two categories of deduction are mutually exclusive, . It does not appear anywhere in the record how the amount of $22,000 is arrived at, but, since there is no basis for the deduction in any event, this may be passed over. The petitioner's contention, if we understand it correctly, is that the property securing his second mortgage was sold in foreclosure of the first mortgage in December 1934; that since*1083 there was a right of redemption for a year his security was not abolished until 1935; and hence that it was not until 1935 that he felt the impact of the worthlessness of the debt represented by the $125,000 note.
The sale of realty for taxes has been held to result in loss to the owner deductible in the year when the redemption period expires, ; (on review, C.C.A., 6th Cir.), and the same doctrine has been applied in determining the year of deduction available to an owner of real estate sold upon foreclosure, ; affd., ; ; dismissed, . This principle, however, has no application to petitioner, for he was not the owner of the foreclosed property and so far as the record shows he still held the $125,000 note, which may have been worth the full amount of the loan. The mere fact that the security of the second mortgage fell before the foreclosure of the first mortgage was not determinative of the worthlessness of the obligation*1084 which it secured.
But, assuming with petitioner that the worthlessness of the second mortgage carried with it the worthlessness of the secured note, this clearly occurred in 1934, when the mortgaged property passed to the first mortgagee pursuant to the power of sale contained in the mortgage, ch. 244, General Laws of Massachusetts, 1932, sec. 18, for the mortgagor "had no right to redeem after the foreclosure sale." ; ; ; ; ; ; ; . We are not to say, as petitioner with some confusion urges, that the foreclosure sale was less conclusive than on its face and on this record it appears to be, because of some controversy carried on by petitioner with the bank as to whether it would hold him liable as endorser on the first mortgage note in excess of $10,000.
The Commissioner correctly disallowed the deduction taken for $22,000, and since this is the only item*1085 of the Commissioner's determination which the petition assails, the deficiency must be sustained.
Decision will be entered for the respondent.