DocketNumber： Docket No. 99961.
Citation Numbers： 44 B.T.A. 137, 1941 BTA LEXIS 1377
Judges： Fossan
Filed Date： 4/9/1941
Status： Precedential
Modified Date： 10/19/2024
*1377 1. A mortgagee purchased certain mortgaged property at a foreclosure sale. Taxes and water rates against the property had been paid by mortgagee prior to acquisition by foreclosure.
2. When the mortgagee purchased other mortgaged property at the foreclosure sale, taxes and water rates were outstanding against the property and were paid by mortgagee in the following taxable year.
*137 The respondent determined a deficiency of $342 in the petitioners' income tax for the year 1935. Of this amount $92.02 is in controversy.
The only question now presented is whether real estate taxes and water rates paid by a mortgagee, either before or after acquisition of the property by her at a foreclosure sale, are costs of acquiring the property, or are a part of the*1378 mortgage debt.
FINDINGS OF FACT.
The facts were stipulated and in so far as they are material to the issue are substantially as follows:
The petitioners are the executors of the last will and testament of Lucy S. Schieffelin, who died on May 10, 1936. Their address is 176 Broadway, New York, New York.
Prior to June 21, 1935, the decedent held a mortgage on real estate located at 586 Third Avenue, Brooklyn, New York (hereinafter called *138 the Third Avenue property). Her investment in the mortgage was $24,000. The mortgage contained the following provision:
That until amount hereby secured is paid the mortgagor will pay all taxes, assessments or water rates, which may be assessed as lien on premises, and in default thereof, the mortgagee may pay the same, and the party of the first part will repay same with interest and same shall be a lien on said premises and secured by this mortgage.
The mortgage was foreclosed on June 21, 1935, under regularly instituted proceedings and the decedent purchased the real estate at the sale for $25,000. The costs and expenses in connection with the foreclosure aggregated $602.47, all of which were paid prior to the acquisition*1379 of the property. Taxes, assessments, and water rates, with interest and penalty thereon in the amount of $109.65, were paid by the decedent prior to her acquisition of the property. The fair market value of the property at the time of the foreclosure was $23,000.
The respondent determined that the decedent realized a gain from the foreclosure computed as follows:
| Bid in price | $25,000.00 |
| Less: foreclosure costs | 602.47 |
| Balance | 24,397.53 |
| Principal amount of mortgage acquired 12/31/31 | 24,000.00 |
| Gain - All accrued interest on mortgage | 397.53 |
The petitioners concede that the sum of $287.88, a part of such gain, is properly includible as taxable income.
Prior to October 18, 1935, the decedent held a mortgage on real estate located at 3727 Oceanic Avenue, Brooklyn, New York (hereinafter called the Oceanic Avenue property). Her investment in the mortgage was $6,500. The mortgage agreement contained the following provision:
AND the mortgagor covenants with the mortgagee as follows:
* * *
6. That the mortgagor will pay all taxes, assessments or water rates, and in default thereof, the mortgagee may pay the same.
On October 18, 1935, the decedent*1380 purchased the property for $8,000, pursuant to regular foreclosure proceedings. The costs and expenses in connection with the foreclosure totaled $653.45, all of which were paid prior to the decedent's acquisition of the property. Taxes and water rates aggregating $1,090.50 were paid by the petitioner on April 18, 1936. Of the amount so paid the sum of $51.34 was allowed as an expense deduction in 1936. The fair market value of the property at the time of the foreclosure was $7,000.
*139 The respondent determined that the decedent realized a gain from the foreclosure computed as follows:
| Bid in price | $8,000.00 |
| Less: foreclosure costs | 653.45 |
| Balance | 7,346.55 |
| Principal amount of mortgage acquired 8/6/31 | 6,500.00 |
| Gain - All accrued interest on mortgage | $846.55 |
The Commissioner made certain adjustments in the petitioner's net income, including the item of delinquent taxes on the Third Avenue and Oceanic Avenue properties. As to them he took the following action:
Your contention, that in the case of 3727 Oceanic Avenue, there were unpaid delinquent real estate taxes of $1039.06, and on 586 Third Avenue, the delinquent taxes amounted to $109.65, *1381 and that, therefore, in computing the amount of the "excess," the taxes accrued to the date of foreclosure should be applied as a reduction of the bid price, was denied. Such taxes constitute additional costs of the properties acquired.
OPINION.
VAN FOSSAN: The issue is whether taxes paid by the decedent, the mortgagee, either before or after foreclosure, should be included in the debt due to her in computing her gain or loss from the foreclosure transaction, or should be added to the cost of the property purchased by her, thus creating an increased base for the computation of future gain or loss upon its disposition.
The petitioners contend that section 23(k) of the Revenue Act of 1934, *140 and should be applied whether the taxes and assessments are paid before or after the mortgagee acquires the property. They maintain that the taxes and water rates, whether paid or accrued, properly form a part of the debt due to the mortgagee and should be recognized in computing gain or loss on the foreclosure transaction.
*1382 The petitioners quote section 254-6, Real Property Law of the State of New York, *1383 The taxes on the Third Avenue property were paid by the decedent prior to her acquisition of it upon foreclosure. Thus, pursuant to contractual and statutory provisions, they became a specific obligation of the debtor to her, secured by the same character of lien and mortgage as that which secured the original mortgage indebtedness. The base of her investment was thereby enhanced. The amount of the taxes is a factor in determining the decedent's gain or loss upon the foreclosure of the Third Avenue property and hence the petitioner's contention is sustained.
The taxes accrued on the Oceanic Avenue property present a different situation. They were not paid until the taxable year following the date of the foreclosure. The petitioner did not exercise her right to pay the taxes prior to foreclosure and consequently to increase her investment in the mortgage debt secured by that property.
In (affirmed as to the point at issue, ), we said:
It is well settled that if the purchaser of real estate pays taxes thereon which have accrued prior to the date of purchase, such payments are an additional cost*1384 of the property to the purchaser and are therefore not deductible by him as his taxes.
In , the court stated:
When one purchases land which is subject to a lien for taxes, the subsequent payment of those taxes by the purchaser does not constitute an allowable deduction *141 from gross income, for the reason that the taxes accrued while the land was in other ownership and the payment of them is merely a payment of a part of the cost of acquiring the property.
See , and other similar cases.
In the cases from which the above excerpts are quoted the issue was the deductibility of taxes as such, but the principles there set forth are equally applicable to the situation here. As to the Oceanic Avenue property, therefore, the taxes and water rates due thereon at the time of the foreclosure sale and paid by the decedent in the following taxable year constituted additional cost of the property purchased and form no part of the computation of the decedent's gain or loss upon foreclosure.
1. SEC. 23. DEDUCTIONS FROM GROSS INCOME.
In computing net income there shall be allowed as deductions:
* * *
(k) BAD DEBTS. - Debts ascertained to be worthless and charged off within the taxable year (or, in the discretion of the Commissioner, a reasonable addition to a reserve for bad debts); * * * ↩
2. ART. 23(k)-3.
3.
A convenant "that the mortgagor will pay all taxes, assessments or water rates and in default thereof, the mortgagee may pay the same" must be construed as meaning that until the amount hereby secured is paid, the mortgagor will pay all taxes, assessments and water rates which may be assessed or become liens on said premises, and in default thereof the holder of this mortgage may pay the same and the mortgagor will repay the same with interest, and the same shall be liens on said premises and secured by the mortgage. ↩