*99 Decision will be entered under Rule 50.
Taxpayer purchased property in 1929, which it abandoned in the fiscal year ended October 31, 1940. The property was sold for unpaid taxes for 1934 on December 28, 1935, and under the New York Tax Law taxpayer's right of redemption would have expired on December 27, 1936, unless the taxpayer came within the provisions of certain sections of the law as to occupancy, in which event the period of petitioner's right of redemption would have been extended beyond November 30, 1937, when it paid the 1934 taxes. Taxpayer, acting in good faith, and claiming that there was occupancy, actively contested the validity of the deed, dated February 8, 1937, from the county treasurer to the purchaser, and otherwise acted as the owner of the property until October 1940, when it accepted the refund of the money it had paid for taxes on November 30, 1937, and abandoned the property. Held, taxpayer sustained a deductible loss in the fiscal year ended October 31, 1940.
*1032 These proceedings involve income taxes for the fiscal*100 year ended October 31, 1940. The Commissioner determined a deficiency in the amount of $ 779.06, part of which is in dispute. Certain adjustments made by the Commissioner in his deficiency notice are not assigned as error by petitioner and effect will be given thereto in the decision to be entered in these proceedings.
The only question presented is whether, under the facts herein involved, petitioner sustained a deductible loss in the taxable year as a result of its abandonment of a piece of real estate in that year, where the property had been sold for unpaid taxes in a prior year, petitioner's right of redemption being governed by the applicable statutes of the State of New York.
FINDINGS OF FACT.
Most of the facts in these proceedings have been stipulated by the parties hereto. We adopt the stipulation of facts filed herein as part of our findings of fact, with the exception of that part of paragraph 3 of the stipulation of facts which recites that "The period for redemption of the property by the payment of the unpaid 1934 taxes and charges incident to the tax sale expired on December 27, 1936." We regard the quoted statement as a conclusion of law, the correctness of which*101 will be discussed in our opinion.
The pertinent parts of the stipulation of facts, together with other findings of fact based upon evidence adduced, follow:
Petitioner is a corporation, duly organized and existing under and by virtue of the laws of the State of New York, with its principal office in Long Island City, New York. The return for the period herein involved was filed with the collector of internal revenue for the first collection district of New York.
On or about May 11, 1929, petitioner purchased a one-acre parcel of real property situated in Marlboro, Ulster County, New York, for a consideration of $ 5,000. There is a stucco building on the land, which was almost entirely boarded up during the taxable year. This building was never physically occupied or used for business purposes by petitioner at any time after 1929.
On December 28, 1935, the property was sold to J. M. and Augusta Hepworth by the county treasurer of Ulster County for unpaid 1934 *1033 taxes in the sum of $ 92.37. Notice of the sale of the property for unpaid taxes was published in two newspapers under dates of November 14, 23, and 30, and December 7, 14, and 21, in the year 1935. Notice relating*102 to redemption of the property was published under dates of September 28, October 5, 12, 19, and 26, and November 2, in the year 1936. The unpaid 1934 taxes and charges connected with the tax sale were not paid by petitioner prior to December 27, 1936, and on February 8, 1937, the county treasurer of Ulster County executed and delivered a tax deed to J. M. and Augusta Hepworth, the purchasers thereof.
On or about September 20, 1937, petitioner received the following letter from J. Milo Hepworth:
At the Dec. 28/35 tax sale at Kingston, Ulster Co., N. Y., I purchased your property known as the Winery at Marlboro, N. Y., for taxes not paid for the year 1934, Deed for same has been issued by the County Treas. to me Feb. 8, 1937, time for redemption is long past due and as I have not heard from you presume you no longer want this property. I have sale for it and should you care to reclaim the property you may do so, providing you pay me the same price I am offered and should you care to do so, let me hear from you at once, otherwise I am going to dispose of same.
This was the first time that petitioner learned that the property had been sold for taxes.
Prior to the receipt of the letter*103 set forth in the preceding paragraph, petitioner paid taxes on the property accruing after the 1934 taxes as follows:
| Year | Tax | Date paid | Amount |
| 1935 | School taxes | 9-12-35 | $ 27.47 |
| 1935 | Town taxes | 3- 4-36 | 93.58 |
| 1936 | School taxes | 10-27-36 | 44.81 |
| 1936 | Town taxes | 2- 2-37 | 104.10 |
After February 2, 1937, petitioner paid no further taxes on the property, but accrued the taxes on its books until October 1940, when it abandoned the property. Petitioner also insured the property against loss from fire until October 1940, having last renewed its policy in May 1940.
After receipt of the letter dated September 20, 1937, from Hepworth, petitioner wrote the following letter, dated September 23, 1937, to the town clerk of Marlboro:
As owners of the so-called "Winery Property" at Marlboro, New York, we are in receipt of a letter dated September 20th from J. M. Hepworth, Milton, New York, as follows:
"At the December 28, 1935, tax sale at Kingston, Ulster Co. New York, I purchased your property known as the Winery at Marlboro, N. Y., for taxes not paid for the year of 1934. Deed for same has been issued by the County Treasurer *1034 to me February 8, 1937. Time for redemption*104 is long past due and as I have not heard from you, presume you no longer want this property. I have sale for it and should you care to reclaim the property you may do so, providing you pay me the sale price I am offered, and should you care to do so, let me hear from you at once, otherwise I am going to dispose of same."
Needless to say, we are at a loss to understand how this property could have been sold on a tax sale since we have regularly and promptly paid the taxes upon notice of their being assessed. In recent years, we have written you in the month of January asking what taxes were due and enclosing a self-addressed stamped envelope for your convenience in replying. We also have tax receipts for the last few years, in the light of which it would seem that some error has been made.
We are enclosing a self-addressed stamped envelope and will appreciate your advising us promptly regarding the situation.
Petitioner received a reply to this letter from the county treasurer of Ulster County on or about September 28, 1937, which read as follows:
A letter was sent me by the town clerk of the town of Marlborough, Ulster Co. N. Y. dated Sept. 23rd, 1937 from you in reference to*105 Property at Marlboro known as the "Winery Property" which was sold at the 1935 tax sale for 1934 unpaid taxes and bid in by J. M. Hepworth of Marlboro, N. Y. This property was advertised in two county papers for six weeks prior to the sale and also advertised for redemption six weeks the fall of 1936. If you have a receipt for the payment of this 1934 tax then, there has been an error made. The tax law says where property is occupied the tax sale purchaser has to give the owner a six month notice in writing before he can get good title. If you can prove that this property was occupied and that no notice of the sale was given you by the purchaser you can make Mr. Hepworth accept the redemption.
Let me hear from you.
In addition to this exchange of correspondence, and at or about the same time, petitioner's treasurer consulted an attorney in Ulster County, New York, who encouraged petitioner's treasurer to believe that the property could be redeemed.
Under date of November 30, 1937, petitioner paid to the county treasurer of Ulster County, New York, the sum of $ 115.53. There was delivered to petitioner the following document, which was stamped, "Paid Nov. 30, 1937, Ulster Co. *106 Treas. Office, Kingston, N. Y.":
To: Edmond and John Burke
| Amt. | ||||||
| Year | Description | Amount | Required to | |||
| Town of | of Tax | of land | Sold for | Interest | Advertising | Redeem |
| Marlborough | 1934 | Edmond & John | ||||
| Burke | ||||||
| Winery Dock Road | ||||||
| Bounded north by | ||||||
| Road, East & South | ||||||
| by Refrigerator. | ||||||
| West by lands of | ||||||
| Melfa 1 acre | 92.37 | 18.46 | 4.20 | |||
| Cost of Deed to | ||||||
| Purchaser | .50 | $ 115.53 |
*1035 On the reverse side of this document the following appears:
Kingston, N. Y., Nov 30th, 1937 Received from Edmond & John Burke One hundred fifteen & 53/100 Dollars in full of the within Redemption Bill, which does not include any taxes subsequent to the year 1934.
After November 30, 1937, petitioner received various letters, dated December 17, 1937, December 22, 1937, December 24, 1937, and February 28, 1938, all of which indicated that redemption of the property appeared likely without the necessity of court litigation. In the letter dated December 24, 1937, petitioner was advised by its attorney as follows:
I * * * was pleased to note just what you said that there were evidence of possession and occupancy other than those by*107 Chillura and if needs be I am going to use the Hutchins occupancy as well as the other one as part of my argument. One reason I am thoroughly convinced as to our legal standing in this matter is that there seems to be a very definite line of decisions to the effect that improved property with buildings on it is not ever unoccupied property. I presume that can't be carried to the extreme limit but it was the original basis of determining what constituted occupancy.
On or about March 3, 1939, petitioner received a letter dated March 3, 1939, from Hepworth, the text of which is set forth below:
This is to advise you that we had an interview upon their request, with the County's Attorney and the county treas, in regard the redemption of your property at Marlboro, N. Y. We went over the matter thoroughly and the county's attorney advises us that we are entirely within our rights and title is ours according to the tax ruling. We advised him we would settle the matter according to your letter of Nov. 4/37, to settle for $ 200.00 plus taxes and expenses thereon since date of tax sale.
In view of the fact, which I do not think you are aware, since this letter, we have had the assessed *108 valuation of this property reduced from $ 1500.00 to $ 500.00 as it now appears on the tax roll. In this way we have made you a saving of $ 152.00 on taxes since the sale, and I doubt if you, living out of town, could have accomplished this reduction.
I do not want to go into litigation over this, unless necessary, and I fully understand the property belongs to you aside from taxes and expenses due. The county's attorney thought this a fair offer considering the above reduction, and I left the above offer with him today.
The Co. Treas. office is in an embarrassing position as they had no right to accept check from your Mr. Lent, as time of redemption had expired.
It will save us both from further annoyance if you decide to accept my offer which I feel is fair.
Petitioner then wrote, on March 6, 1939, to its attorney enclosing a copy of Hepworth's letter dated March 3, 1939, and requesting to be advised as to the status of the redemption proceedings. Petitioner thereupon received a letter dated March 7, 1939, from its attorney, in which the latter stated that redemption of the property could not be effected without court litigation unless petitioner was willing to meet *1036 *109 Hepworth's terms as set forth in the latter's letter of March 3, 1939. Again, as late as February 15, 1940, petitioner wrote its attorney, requesting to be advised of the status of this matter.
The two letters, dated September 20, 1937, and March 3, 1939, respectively, from Hepworth to petitioner were the only two letters received by petitioner from Hepworth.
In October 1940 petitioner's treasurer visited Marlboro, New York, where the property is located, interviewed the county treasurer of Ulster County, the attorney who had represented petitioner throughout these negotiations, and another attorney. The county treasurer advised him that the $ 115.53 which petitioner paid on November 30, 1937, would be refunded to petitioner upon request. The original attorney advised instituting suit; otherwise he was prepared to give up the case. The new attorney advised that nothing could be done without bringing suit and that perhaps it would be better to drop the matter. Petitioner's treasurer reported the results of his trip to petitioner's president and the company decided to abandon the property and to write the investment off its books.
Thereafter, on or about October 23, 1940, the county*110 treasurer of Ulster County returned to petitioner the above mentioned payment of $ 115.53, with the following letter: "Enclosed you will find check for $ 115.53 which is a refund of the taxes which you redeemed from this office for which redemption was not accepted."
In its income tax return for the fiscal year ended October 31, 1940, petitioner claimed a loss from the sale or exchange of property in the amount of $ 5,500, which property was described as real estate acquired in 1928 at a cost of $ 5,500. 1
OPINION.
Petitioner contends that it sustained a deductible loss of $ 5,000 during the fiscal year ended October 31, 1940, when it abandoned a piece of real estate which it had purchased in 1929 and which had been sold for 1934 unpaid taxes on December 28, 1935. The applicable section of the Internal Revenue Code is set forth in the margin. 2 Respondent contends that petitioner sustained its loss in the fiscal year *111 ended October 31, 1937, the one-year period of redemption provided for by section 152 of the Tax Law of the State of New York 3 having expired on December 27, 1936.
*112 *1037 An examination of the pertinent sections of the Tax Law of New York reveals that section 150 provides that the county treasurer shall advertise and sell real estate upon which a tax has been levied when such tax with interest thereon has remained unpaid for a period of six months after the first day of February following the date on which the tax was levied. Section 151 of the Tax Law contains the provisions relating to the publication of notice with respect to such a sale. No contention is made by either party that the sale which took place on December 28, 1935, failed to meet the requirements of these sections of the Tax Law of New York.
Section 154 of the Tax Law of New York provides that "If such real estate, or any portion thereof, be not redeemed as herein provided, the county treasurer shall execute to the purchaser a conveyance of the real estate so sold * * * which conveyance shall vest in the grantee an absolute estate in fee, subject, however, to all claims the county or state may have thereon * * *" and section 155 provides that "A purchaser or his legal representative may, upon receiving a conveyance * * * possess and enjoy for his own use the real estate*113 described in such conveyance, unless redeemed as herein provided * * *."
In the instant case, the county treasurer of Ulster County, on February 8, 1937, executed and delivered a tax deed to J. M. and Augusta Hepworth, the purchasers at the tax sale. If that was a valid tax deed, then, from the time of its delivery, the purchaser is clothed not merely with the title of the person who had been assessed for the taxes and had neglected to pay them, but with a new and complete title in the land, under an independent grant from the sovereign authority, which bars and extinguishes all prior titles and encumbrances of private persons and all equities arising therefrom. Lee v. Farone (1941), 261 App. Div. 674; 27 N. Y. S. (2d) 585; affd. (1942), 288 N.Y. 517">288 N. Y. 517; 41 N. E. (2d) 927. However, petitioner's position, from the time it first received notice of the tax sale on or about September 20, 1937, in the form of a letter from Hepworth, until it accepted, on or about October 23, 1940, the refund of the sum of $ 115.53 from the county treasurer, to whom it had paid this sum on*114 November 30, 1937, in an attempt to redeem the real estate in question, was that the tax deed was not valid.
For Federal income tax purposes "The regulations require, and the decisions recognize, that claimed losses must be evidenced by closed *1038 and completed transactions, fixed by identifiable events, bona fide and actually sustained during the taxable period for which allowed * * *." Commissioner v. Peterman (C. C. A., 9th Cir).), 118 Fed. (2d) 973, 976, and cases therein cited. In the case of Morton v. Commissioner (C. C. A., 4th Cir.), 104 Fed. (2d) 534, reversing 38 B. T. A. 534, it was held that a taxpayer's loss from the mortgage foreclosure sale of realty was not realized until the year in which the litigation in connection with the sale was finally settled. At page 536 of its opinion the court stated that "The litigation involved the validity of the sale itself and until it was determined whether the sale was to stand or the property or its equivalent would be recovered by the petitioner nothing concerning the transaction was settled." The same result has been reached*115 by this Court in a case in which the dispute did not result in formal court action. Arabol Manufacturing Co., 26 B. T. A. 1068. Therefore, although we are not concerned with the legal soundness of petitioner's claim under the Tax Law of New York, nevertheless we are concerned with the bona fides of his claim as a matter of fact.
Section 158 of article 7 of the Tax Law of New York provides that "The provisions of article six of this chapter * * * shall, in so far as it is not otherwise herein provided, govern and control the action of the county treasurer * * * and the same rights and remedies shall be deemed to exist under the provisions of this article, as are provided for in said article six." Section 134 of article 6 has been held to apply to sales by county treasurers. Sheldon v. Russell (1915), 91 Misc. 278">91 Misc. 278; 154 N. Y. S. 632. Section 134 provides as follows:
If any lot or separate tract of land sold for taxes by the department of taxation and finance and conveyed, or any part thereof shall, at the time of the expiration of one year given for the redemption thereof, be in the*116 actual occupancy of any person, the grantee to whom the same shall have been conveyed, or those claiming under him, shall within one year from the expiration of the time to redeem, serve a written notice on the person occupying such land, either personally or by leaving the same at the dwellinghouse of the occupant, with a person of suitable age and discretion belonging to his family. If the occupant does not reside in the tax district in which the real estate is situated the notice may be served by mail in the manner required by law in respect to notices of nonacceptance or nonpayment of notes or bills of exchange. Service on one joint tenant or tenant in common shall be service on all the joint tenants or tenants in common. Service on a tenant shall be service on his landlord. The term "occupant" shall be construed to mean a person who has lawfully entered upon the land so occupied, and is in possession of the same to the exclusion of every other person. And the term "occupancy" shall mean the actual lawful and exclusive use and possession of such lands and premises by such an occupant. The notice shall state in substance, the sale and conveyance of the land, the person to*117 whom made, the amounts required to redeem such land specified in section one hundred and thirty-six of this chapter, and that unless such amounts shall be paid into the state treasury for the benefit of the grantee, or those claiming under him, within six months after the time of filing of the evidence of the service of such notice with the department of taxation and finance, the conveyance *1039 shall become absolute and the occupant and all others interested in the land be forever barred from all right or title thereto. No conveyance of land occupied as aforesaid shall be recorded until the expiration of the time mentioned in such notice, and the evidence of the service of such notice shall be recorded with such conveyance. As amended L. 1928, c. 845, § 10; L. 1932, c. 335, § 3, eff. March 21, 1932.
Failure to comply with section 134 would prevent the acquisition of title by the grantee by virtue of the tax sale and deed. Finch Pruyn & Co. v. People (1943), 40 N. Y. S. (2d) 797; and it has also been held that section 134 must be liberally construed in favor of the owner or occupant. In re Bingham's Estate (1940), 17 N. Y. S. (2d) 981, 988.*118 However, it is not necessary for this Court to determine whether petitioner was an "occupant" within the meaning of section 134; nor is it necessary for this Court to determine whether Hepworth's letter of September 20, 1937, satisfied the requirements of section 134. But it is proper and important, under the circumstances of this case, for this Court to take account of the Tax Law of New York and to note the fact that the validity of the tax deed is not free from doubt, because they are material to the question of the bona fides of petitioner's claim which is opposed to the validity of the tax deed.
Furthermore, section 136 of the Tax Law of New York 4*120 extends the period of redemption under specified conditions to within six months from the service of the written notice required by section 134. Finally, it is possible under the circumstances set forth in section 137 of the Tax Law of New York 5 for the period of redemption to extend to *1040 within two years from the expiration of the year allowed by law for the redemption of the land sold for taxes. Petitioner sought to exercise his right of redemption before the proper authorities prior to the expiration of the period*119 provided for by sections 136 and 137. Thus, if petitioner came within the provisions of sections 134 and 136, or 137, as to occupancy, his right of redemption would not have expired on December 27, 1936, pursuant to section 152 of the New York Tax Law. In fact, having paid the 1934 taxes on November 30, 1937, petitioner's right of redemption would not have expired at all under such sections, and there would be no dispute here as to the year in which petitioner's loss was sustained.
*121 "'The question', said the court in Rhodes v. Commissioner, 6 Cir., 100 F. 2d 966, 969, 'whether property becomes worthless during a particular year is one of fact.'" Commissioner v. Peterman, supra, at page 976. "The fact that litigation was pending," said the court in Morton v. Commissioner, supra, at page 536, "would have the same effect as would the fact that there was a period in which the right of redemption under a foreclosure sale could be exercised." In Frederick Krauss, 30 B. T. A. 62, this Court held that the sale of land in Florida for taxes did not result in a loss to its owner so long as the right of redemption existed. This Court further held in the case of J. C. Hawkins, 34 B. T. A. 918; affd. (C. C. A., 5th Cir.), 91 Fed. (2d) 354, which respondent cites and upon which he relies, that a mortgagor of real estate in California did not sustain a deductible loss upon foreclosure sale in 1931 until the right of the original owners to redeem the property expired twelve months later, because the sale did not*122 become absolute and the transaction closed until such event. The Krauss and Hawkins cases, on the one hand, and the Morton case, on the other, are not in this respect inconsistent; they represent different fact situations. The instant case is a combination of those situations, because in the instant case we have a dispute which, as a general matter, involves the validity of the sale itself and, more specifically speaking, requires a consideration of the correct length of the period in which petitioner could exercise its right of redemption. The petitioner's good faith in contesting the validity of the tax sale is shown by its action in making payment of the unpaid taxes to the county treasurer shortly after it first became aware of the tax sale; in consulting counsel; in renewing its fire insurance policy on the premises; in paying taxes through February 2, 1937, and thereafter in accruing taxes for later years on its books; and, until it decided to abandon the property, in adhering to its position that its right of redemption had not expired. The fact of abandonment in the taxable year here in question is not questioned; nor is there any contention made that the property*123 became worthless prior to the taxable year herein involved. Cf. Helvering v. Gordon, 134 Fed. (2d) 685; Bickerstaff *1041 v. Commissioner, 128 Fed. (2d) 366. Under such circumstances, we are of the opinion that the effect of this bona fide dispute in the instant case was the same as the actual litigation in the Morton case, namely, "to postpone the fixing of the loss until the year in which the settlement was made." Morton v. Commissioner, supra, at page 537. We hold that petitioner's loss was sustained in the fiscal year ended October 31, 1940, and, no contention being made by the respondent that the loss is not ordinary, as claimed, we sustain the petitioner's view. Shelden Land Co., 42 B. T. A. 498, 504, 505.
Decision will be entered under Rule 50.
Footnotes
1. The evidence establishes the cost of the property to have been $ 5,000 rather than $ 5,500.↩
2. SEC. 23. DEDUCTIONS FROM GROSS INCOME.
In computing net income there shall be allowed as deductions:
* * * *
(f) Losses by Corporations. -- In the case of a corporation, losses sustained during the taxable year and not compensated for by insurance or otherwise.↩
3. Section 152 of the Tax Law of the State of New York is part of article 7 (entitled, "sales by County Treasurers for Unpaid Taxes and Redemption of Lands") of chapter 60 of the Consolidated Laws of New York. It provides as follows:
"Tax Law -- § 152. Redemption.
"The owner, occupant or any other person may redeem any real estate sold for taxes as aforesaid at any time within one year after the last day of each sale, by paying to the county treasurer of the county, for the use of the purchaser, or those claiming under him, the sum mentioned in the certificate of sale, together with interest thereon at the rate of ten per centum per annum * * * to be computed from the date of such certificate * * * and any tax or assessment * * * on such real estate, which the holder of said certificate shall have paid between the days of sale and redemption, with interest thereon at the rate of ten per centum per annum from the date of payment * * *."↩
4. § 136. Redemption by occupant and certificate of redemption.
The occupant, or any other person, may at any time within the six months mentioned in such notice redeem such land by paying into the treasury the consideration money stated in the certificate of sale, with the addition of twenty per centum thereon, any tax or assessment (plus interest, penalties and other charges allowed by law with respect thereto) on such land, which the tax sale purchaser, or those claiming under him, shall have paid between the days of sale and redemption, with interest thereon at the rate of ten per centum per annum from the date of payment (provided such purchaser, or those claiming under him, shall have notified the department of taxation and finance immediately upon the payment thereof), such sums as may have been paid by such purchaser, or those claiming under him, for redemption of such land from prior or subsequent tax sales thereof, with interest thereon at the rate of six per centum per annum from the date of payment, and the statutory fees paid for the deed. Every such redemption shall be as effectual as if made before the expiration of the year allowed for the redemption of the land sold.↩
5. § 137. Redemption by occupant before notice and effect of failure to redeem.
The occupant of any lot or separate tract of land sold for taxes by the department of taxation and finance, or any part thereof, or any other person may, at any time before the service of such notice by the purchaser or those claiming under him, and within two years from the expiration of the year allowed by law for the redemption thereof and not thereafter, redeem any land so occupied, by filing with the department of taxation and finance satisfactory evidence of such occupancy, and by paying to such department the same amounts as are specified for redemption under section one hundred thirty-six of this chapter, with the exception of the statutory fees for the deed where no deed has been issued. On application for such redemption the department may take all material evidence offered with reference to the occupation of the lands in question. The hearing shall be had on at least ten days notice to the party applying for the redemption. In case of failure to redeem within the time herein specified, the sale and conveyance thereof shall become absolute and the occupant and all other persons barred forever. As amended L. 1928, c. 845, § 10; L. 1932, c. 335, § 5, eff. March 21, 1932.↩