O'Keefe v. Commissioner

JOHN A. O'KEEFE, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

O'Keefe v. Commissioner

Docket No. 102457.

United States Board of Tax Appeals

44 B.T.A. 290; 1941 BTA LEXIS 1355;

April 24, 1941, Promulgated

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SALE OR EXCHANGE - VOLUNTARY TRANSFER TO RELIEVE OF LIABILITY. - A taxpayer and his partner gave to the mortgagee a quitclaim deed for a piece of property subject to a debt for which they were personally liable and subject to a large amount of back taxes. The taxpayer was insolvent at the time. Held, that the transaction was a sale or exchange and the resulting loss was subject to the limitation of section 117(d) of the Revenue Act of 1936.

James A. O'Callaghan, Esq., for the petitioner.

Alvin B. Peterson, Esq., for the respondent.

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MURDOCK

The Commissioner determined a deficiency of $1,807.74 in income tax for the calendar year 1937. The issue for decision is whether a loss suffered by a partnership of which the petitioner was a member was deductible as an ordinary loss or as a capital loss subject to the limitation of section 117(d) of the Revenue Act of 1936.

FINDINGS OF FACT.

The petitioner, an individual, resides in Chicago and filed his income tax return for the taxable year with the collector of internal revenue for the first district of Illinois.

A partnership, composed of the petitioner and John P. Kerwin, as equal partners, purchased a piece of property in Chicago in 1928 for $50,750, paying $20,000 in cash and giving two notes secured by a purchase money mortgage for the balance of $30,750. The notes were thereafter paid down to $12,800. The last payment on this debt was made in 1932. No payments of interest or principal were made thereafter.

The mortgagee, who had sold the property to the partners, began a foreclosure proceeding in February 1937. The petitioner and Kerwin entered into an agreement with the mortgagee in October 1937, reciting that the petitioner and Kerwin were personally liable for the payment of the mortgage indebtedness and desired to procure the cancellation and extinguishment thereof, and they agreed to give a quitclaim deed for the real property covered by the mortgage, and the mortgagee agreed to accept the conveyance "in full payment, satisfaction and discharge of said unpaid mortgage indebtedness and all unpaid interest thereon * * * and of all and every other obligation and liability to the party of the first part whatsoever under said Trust Deed and notes." The petitioner and Kerwin gave a quitclaim deed to the mortgagee on October 26, 1937. The foreclosure proceeding was thereafter dismissed.

The accrued and unpaid taxes against the property in October 1937 amounted to $9,253.44. The fair market value of the property at that time was about $9,000. The petitioner was insolvent during October 1937.

The partnership filed an information return for the calendar year 1937, showing a loss of $38,700 on the conveyance of the property to the mortgagee and, after offsetting rental income of $1,087.04, a net loss of $37,612.96. The petitioner claimed a deduction on his return of one-half of the partnership loss, or $18,806.48. He reported on that return salary and other compensation for personal services in the amount of $25,576.26, after deducting business expenses of $5,109.54, and net income of $2,054.79. No capital gains were realized or reported by either the partnership or the petitioner for 1937.

The Commissioner, in auditing the return of the partnership, disallowed the entire loss of $38,700 on the ground that the basis for gain or loss on the property had not been substantiated, and further explained that any loss on the transaction would be a loss from the sale or exchange of a capital asset and would be limited to $2,000 under section 117 of the Revenue Act of 1936. He determined that the income of the partnership for 1937 was $1,087.04.

The Commissioner, in determining the deficiency against the petitioner, made certain adjustments which are not in controversy and added $19,350 to income, representing a disallowance of a deduction for the petitioner's half of the partnership loss and an addition to income of $543.52, being one-half of the income of the partnership.

OPINION.

MURDOCK: The respondent now concedes that the partnership sustained a loss of $38,700 from the disposition of the mortgaged premises. He contends, however, that the loss was a capital loss which entitles the partnership to a deduction of only $2,000. The petitioner cites the case of , where the taxpayer was allowed a deduction for loss upon the abandonment of property, but that case is distinguishable from the present case because there the taxpayer was not personally liable for the debt, whereas, here, the petitioner and his partner were personally liable. The principal contention of the petitioner seems to be that the transaction whereby the mortgaged premises were disposed of was not a sale or exchange within the meaning of section 117(a). He cites on this proposition . The taxpayer in that case voluntarily surrendered property subject to a debt for which he was not personally liable. That case is distinguishable from the present case on the same grounds that the Hoffman case is distinguishable. Although the taxpayer here was personally liable for the payment of the debt, he argues that his case is not substantially different from the Polin and Hoffman cases because of his insolvency. His argument is that, since he was insolvent and since the value of the property was not greater than the amount of unpaid taxes, there really was no consideration for the surrender of the property. This petitioner was not in bankruptcy and was earning a large salary. Furthermore, he was acting with his partner and there is no evidence that his partner was insolvent or that the partnership was insolvent. The release of an insolvent person from liability may be consideration for a transfer just as the release of a solvent person, even though it may benefit the former less than the latter. The petitioner and his partner bargained with the mortgagee and gave a quitclaim deed for the property as consideration for their release from further liability on the mortgage and notes. Similar transactions have been held sales or exchanges within the meaning of section 117(a) and the deductions limited to $2,000. ; certiorari denied, ; ; certiorari denied, ; ; and . Cf. . This case is not distinguishable from that group of cases.

The petitioner cites and relies upon . That case has been distinguished heretofore from cases like the present on the ground that it involved a mortgagee who was claiming a deduction for a bad debt on notes of the mortgagor, and who did not sell those notes when he returned them to their maker in exchange for the property, since those notes in the hands of the maker amounted to nothing whatsoever. Cf. , affirmed . It may be distinguished from the present case on the same grounds. Furthermore, if the Bingham case is not thus distinguishable from a case like the present, it would them seem to be contrary to the recent decisions of the Supreme Court in , and

Decision will be entered under Rule 50.