Commonwealth, Inc. v. Commissioner

COMMONWEALTH, INC., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Commonwealth, Inc. v. Commissioner Docket No. 88264. United States Board of Tax Appeals 36 B.T.A. 850; 1937 BTA LEXIS 646; November 11, 1937, Promulgated *646 The owner of realty, subject to a mortgage, deeded the property to the mortgagee without consideration and thereby sustained a loss. Held, that the loss so sustained is an ordinary loss deductible in full and is not a capital loss subject to the limitation under section 117 of the Revenue Act of 1934. Herbert L. Swett, Esq., and Roscoe C. Nelson, Esq., for the petitioner. T. G. Histon, Esq., for the respondent. ARUNDELL *851 In this proceeding the respondent determined a deficiency in income tax for the calendar year 1934 in the amount of $1,332.39. The petitioner contests only so much of the deficiency as arises out of the Commissioner's action in limiting a loss on real estate to $2,000 under the capital loss provisions of the Revenue Act of 1934. The petitioner claims that there was an abandonment of the property because of worthlessness and that it is entitled to deduct the full amount of the loss sustained. FINDINGS OF FACT. The petitioner, an Oregon corporation, in 1934 was the owner of a parcel of real estate improved by a dwelling in Portland, Oregon. This property had been mortgaged by a prior owner, Rudolph Christman, *647 in 1926 to the New York Life Insurance Co., for the principal sum of $15,000. The mortgage loan carried 6 percent interest, payable semiannually and was to be curtailed at the rate of $450 semiannually, beginning in December 1929. In 1931 Christman sold the property subject to the mortgage to petitioner's wholly owned subsidiary, the Union Holding Co. In 1932 the Union Holding Co. dissolved and conveyed the property to the petitioner by a deed dated November 4, 1932. This deed made no mention of the mortgage. The last installment of principal paid on the mortgage was paid in December 1932, and the last interest payment was made in December 1933, which payment cleared the interest on the mortgage to December 31, 1933. Taxes were allowed to accumulate unpaid after 1930. No other payments were made with respect to the property except slight expenditures for miscellaneous items such as caring for the lawn, trimming shrubbery, and water service. The last such expenditure by the petitioner was made on November 22, 1934. In January 1934 the petitioner offered to convey title to the property to the mortgagee, New York Life Insurance Co., without consideration. The mortgagee requested*648 the petitioner to continue to hold title until later in the year and in the meantime to attempt to dispose of the property. No disposition being made, the petitioner in September 1934 again offered to deed the property to the mortgagee. Through its Portland counsel, the mortgagee advised the petitioner that it would accept title in lieu of foreclosure. The mortgagee, without request or suggestion from the petitioner, paid to the petitioner the sum of $50. This sum, while stated to be consideration for the conveyance of the realty, was understood by the parties to the transaction to cover the costs of revenue stamps and recording fees and to be consideration for certain personal property on the premises such as shades and linoleum, which the petitioner agreed not to remove. On November 23, 1934, the petitioner executed a deed to the property to the mortgagee. That deed, in addition to reciting a *852 consideration of $50, set forth that as a part of the consideration the mortgagee released the petitioner and the original mortgagors from the covenants and agreements of the mortgage executed in 1926. The balance due on the mortgage at the time of conveyance to the mortgagee*649 was $11,400, plus interest from December 31, 1933. In its return for 1934 the petitioner claimed a loss in the amount of $12,632.23 arising out of the above transaction. The respondent allowed $2,000 as a capital loss and disallowed the balance of the amount claimed. The petitioner's basis for gain or loss on the property in 1934 was $8,988.85. OPINION. ARUNDELL: There is no issue in this case as to the petitioner's having sustained a deductible loss in 1934 through the conveyance of its equity in the real estate to the mortgagee. As the parties have agreed that the basis for gain or loss was $8,988.85 and the petitioner lost all of its interest in the property, there is no longer any question as to the amount of the loss sustained. The only issue requiring decision is whether the loss was an ordinary loss sustained on abandonment of the property and deductible in full, or whether it was a capital loss arising out of a sale of the property and subject to the $2,000 limitation prescribed by section 117 of the Revenue Act of 1934. The only indications of a sale are the recitations in the deed of considerations of $50 and release of liability under the mortgage. These, *650 however, were not in fact considerations for the conveyance of petitionner's equity. Under petitioner's agreement with the mortgagee the $50 was paid to the petitioner for documentary stamps, recording fees, and for the personal property on the premises conveyed. The purported release of liability under the mortgage was of no benefit to the petitioner for it had no liability under the mortgage. Neither the petitioner nor its grantor assumed the mortgage liability, but took title subject to it. Hence, there was no personal liability on the part of the petitioner. ; . . Inasmuch as there was in fact no consideration to the petitioner, the transfer of title was not a sale or exchange. The execution of the deed marked the close of a transaction whereby petitioner abandoned its title. Cf. , *651 , holding that a taxpayer does not sustain a deductible loss of the value of real estate while retaining title to it. Counsel for the respondent, by a memorandum in lieu of a brief, states, without argument, that he relies on the case of ; . In a long opinion in that case the court said that "there is no such thing as abandonment to particular persons, or for a consideration." We presume that this is the language that counsel desires us to consider. We do not inquire whether the cited case, decided in 1908, is still regarded as good law in Oregon, for in our opinion it is not controlling here. That case involved a parol sale of land with appurtenant water rights. The inquiry was as to who among several claimants had priority in certain water rights. We have no such question here. This case raises no question as to whether the petitioner parted with its property; that is established and it is immaterial whether the process of parting be called an abandonment or given some other designation. The important fact is that the petitioner*652 has irrevocably lost its investment in the property. We hold the loss sustained to be an ordinary loss resulting in an allowable deduction in the full amount of $8,988.85. Decision will be entered under Rule 50.