DocketNumber： No. 49062
Citation Numbers： 124 Ct. Cl. 626, 110 F. Supp. 606
Judges： Howell, Jones, Littleton, Madden, Whitaker
Filed Date： 3/3/1953
Status： Precedential
Modified Date： 1/13/2023
delivered the opinion of the court:
Plaintiff sues to recover the amount which it had to pay for stamps which the Bureau of Internal Revenue ruled should have been affixed to certain deeds received by it from mortgagors who had defaulted in the payment of the mortgage debt. Forty-four deeds are involved. The deeds were ' given in lieu of foreclosure proceedings. They were all executed between February 2, 1938 and December 31, 1941.
Section 3480 of the Internal Revenue Code levies a tax “for and in respect of” various documents set out in subsequent sections, among which are “conveyances”, described in section 3482. Among the conveyances listed are deeds—
* * * whereby any lands, tenements, or other realty sold shall be granted, assigned, transferred, or otherwise conveyed to, or vested in, the purchaser or purchasers * * * when the consideration or value of the interest or property conveyed, exclusive of the value of any lien or encumbrance remaining thereon at the time of the sale, exceeds $100 and does not exceed $500, 50 cents; and for each additional $500 or fractional part thereof, 50 cents. This section shall not apply to any instrument or writing given to secure a debt.
Plaintiff’s liability for the tax is to be determined by a proper construction of this section as applied to the facta of each transaction.
The following articles from Treasury Regulation 71 (1932 ed.) are helpful in construing the statute. Article 77 provides:
In calculating the amount of stamps which must be affixed to a deed of conveyance, the tax is computed upon the full consideration for the transfer less all encumbrances which rest on the property before the sale and are not removed by the sale. * * *
Article 112 reads:
Conveyance by mortgagor to mortgagee. — A conveyance by defaulting mortgagor to mortgagee in consideration or the cancellation of mortgage debt is subject to*629 tax calculated on the amount of the mortgage debt plus unpaid accrued interest.
The taxes demanded of plaintiff were computed in accordance with article 112. We think this article is a correct interpretation of section 3482, sufra. It governs most, if not all, of the transactions in question.
Plaintiff had two reasons for not wishing to institute foreclosure proceedings in these cases and for attempting to secure a deed instead. The first was that it would have been impossible to have secured a deficiency judgment against the mortgagor, because of sections 1083-a and 1083-b of the New York Civil Practice Act, as these sections were interpreted by the courts in New York, and, hence, a deed from the owner would accomplish all that could be accomplished by foreclosure and would save this expense. The second reason was to avoid the New York tax on mortgages, as explained later.
Under the above-mentioned sections of the New York Civil Practice Act a mortgagee was not entitled to a deficiency judgment against the mortgagor if the court found that the fair and reasonable market value of the mortgaged premises acquired on foreclosure or otherwise exceeded the mortgage debt, and the courts adopted the uniform practice of treating the assessed value as the reasonable market value of the mortgaged premises. In each of the forty-four conveyances in question the assessed valuation of the property exceeded the mortgaged debt. It was, therefore, impossible for the mortgagee to force the payment of anything more than the transfer to it of the property. Hence, wherever if was possible to induce the mortgagor to transfer the property to it without the necessity of a foreclosure, this procedure was adopted.
Each one of the conveyances with which we are concerned contained a clause that the mortgage on the property at the time of the conveyance was not to merge with the fee. The mortgage remained on the property notwithstanding the conveyance. This enabled the plaintiff to resell the property in consideration, in whole or in part, of an agreement by the purchaser to assume the existing mortgage, either in full or as it might be modified or renewed. In this way plain
Although the mortgage was not canceled when the property was conveyed, in every case, except five, plaintiff gave to its grantor a covenant not to sue on the mortgage debt. So, while the mortgage was not canceled in consideration of the transfer of the property to plaintiff, the liability on the mortgage debt was nevertheless extinguished.
In twelve cases the mortgagor paid plaintiff some consideration for the covenant not to sue, in addition to the transfer of the property. In two cases the plaintiff paid to the mortgagor some small consideration for the transfer, in addition to the covenant not to sue. The facts relative to some of the transactions differ in some respects from the others; but the controlling fact in all, except the five above mentioned, is that the liability of the mortgagor on the mortgage debt was expressly extinguished. Therefore, although the deed did not recite the extinguishment of liability on the mortgage debt as a consideration for the transfer, this nevertheless was the actual consideration.
This brings all of these transactions within the terms of articles 77 and 112 of Treasury Regulation 71. We quote article 112 again:
A conveyance by defaulting mortgagor to mortgagee in consideration of the cancellation of mortgage debt is subject to tax calculated on the amount of the mortgage debt plus unpaid accrued interest.
The Act levies a tax with respect to a deed for real estate—
* * * when the consideration or value of the interest or property conveyed, exclusive of the value of any lien or encumbrance remaining thereon at the time of sale, exceeds $100 and does not exceed $500, 50 cents; and for each additional $500 or fractional part thereof, 50 cents. * * *
Each conveyance was made in consideration of the release of the grantor from liability on the mortgage debt. The tax is measured by the consideration for the transfer or by the value of the interest conveyed or the value of the property
In the five cases in which plaintiff did not give a covenant not to sue, we think the plaintiff was also liable for stamp taxes on the deeds equal to the mortgage debt. These cases do not expressly come within the scope of article 112 of Regulation 71 because liability on the mortgage debt was not expressly extinguished; but, even so, we think the conveyance was made in payment of the debt. Since at the time of the transaction in these five cases no deficiency judgment could have been secured on the mortgage debt, the fair market value of the property, as determined by the New York courts, being more than the debt, the debt as a matter of law was extinguished by the transfer of the property to the mortgagee. The consideration for the transfer was, therefore, the amount of the mortgage debt, and the tax is measured by the amount of the debt.
Section 3482, supra, says the tax on the transfer is measured by the consideration for it or by the value of the interest or property conveyed. It was assessed on the amount of the debt, which was less than the value of the property, as determined by the New York courts.
While a formal covenant not to sue was not given in these five cases, nevertheless the parties treated the debt as having been extinguished. In no instance was any proceeding ever instituted by plaintiff to obtain judgment on the mortgage. The plaintiff, in computing its profit or loss upon a subsequent sale of these properties, used as its cost basis the amount of the mortgage indebtedness, plus costs of acquisition. In other words, plaintiff itself treated the transaction as one in which the consideration paid for the property was the amount of the debt.
As a matter of fact, so far as the stamp taxes are concerned, it would make no difference when plaintiff paid the consideration for the transfer of the property to it. It might
We are of opinion that the tax was properly collected in these five cases as well as in those in which the mortgagee gave a covenant not to sue.
This opinion is in harmony with the decision of the Court of Appeals for the 2d Circuit in the case of Railroad, Federal Savings and Loan Assn., v. United States, 135 F. 2d 290, in which the facts are very much the same. Judge Learned Hand dissented in that case, but we think the opinion of the majority was correct.
It results that plaintiff’s petition must be, and it is dismissed.
findings of fact
The court makes findings of fact, based upon the evidence, the report of Commissioner Richard H. Akers, and the briefs and argument of counsel, as follows:
1. The plaintiff is a New York corporation having its principal ofiice in New York City.
2. The plaintiff is engaged in the business of life insurance and, in connection with this business, invests its funds in first mortgage loans upon real estate.
3. At various times between February 2,1938, and December 31, 1941, the title to forty-six separate parcels of real estate, each subject to a first mortgage held by the plaintiff at the time, was conveyed by deed to the plaintiff. In each and every case, the conveyance of the title was made by a defaulting mortgagor in lieu of foreclosure of the mortgage held by the plaintiff.
4. In some instances where a cash consideration was also paid to the owner of record upon the conveyance of the deed
5. As a result of an investigation made by the General Deputy Collector for the Second District, New York, an additional stamp tax in the amount of $11,820 was determined upon the conveyance to the plaintiff by the owners of the titles to the forty-six separate parcels of real estate. This additional tax liability was computed upon the amount of the mortgage debt, accrued but unpaid interest thereon, and any additional consideration paid to the owners of the property upon which stamp tax had not theretofore been paid. Stamps in the amount of $10,509.90 were purchased by the plaintiff on January 20,1942, and affixed to the schedule prepared by the General Deputy Collector, showing the conveyances of the deeds in lieu of foreclosure on the forty-six parcels of real estate, which stamps were canceled in the presence of the General Deputy Collector on the same date, January 20,1942. Stamps in the amount of $1,310.10 were purchased and affixed to two separate deeds, $848.10 on the deed conveying the property at 1390-98 Sixth Avenue, New York City, and $462 on the deed conveying the property at 1380-88 Sixth Avenue, New York City. These stamps in the amount of $1,310.10 were affixed and canceled in the presence of the General Deputy Collector on January 15, 1942. The schedule prepared by the General Deputy Collector is in evidence as plaintiff’s Exhibit A and it sets out in tabular form the date and number of each loan, the location of the premises and owner of record thereof, the amount of the mortgage debt with accrued interest, the cash consideration, if any, paid to the defaulting mortgagor at the time of the conveyance of the properties to the plaintiff, the total consideration which was computed as the sum of the mortgage debt with accrued interest and cash consideration paid by the defaulting mortgagor, the stamp tax, if any, paid at the time of the conveyances to the plaintiff, as shown in finding 4, and the additional stamp tax due in the amount of $11,820.
6. On January 14, 1946, the plaintiff filed a claim for refund of the stamp tax paid in the amount of $11,820 on the following principal grounds:
Taxpayer contends that the documentary stamps above referred to were used in error, since (1) Section 3482 of the Internal Revenue Code and the predecessor provisions thereof, taxing deeds conveying an interest in real property sold, have at no time required payment of stamp tax on deeds in lieu of foreclosure, conveying to taxpayer the legal title to properties previously mortgaged to taxpayer, and (2) such statutes have at no time authorized the requirement of payment of stamp tax on such deeds, measured by the amount of the indebtedness secured by the defaulted mortgages, plus accrued uncollected interest on such indebtedness. More detailed argument appears hereafter.
7. By letter dated March 25, 1947, the Commissioner of Internal Revenue advised the plaintiff by registered mail that its claim for refund was rejected in full. In a letter dated April 1,1947, the plaintiff protested this rejection and requested reconsideration of the claim for refund. The Commissioner answered the plaintiff’s protest by letter dated May 1, 1947, and stated therein that the claim for refund was properly rejected and the previous rejection was thereby sustained. Upon the trial the plaintiff withdrew two of the forty-six cases or transactions (loans numbered 23914 and 28533) upon which the tax of $11,820 was paid and which were included in the petition in this proceeding thereby reducing the number of cases to forty-four and the amount now sought to be recovered to $11,769.
8. Upon the conveyance of the forty-four properties from the defaulting mortgagors to the plaintiff, the deeds to the properties, so given, were immediately recorded in the name of the plaintiff. In each of these forty-four deeds, there was included a non-merger clause which read:
*635 By accepting this deed the parties agree that the mortgage shall not be merged in the fee.
In a number of cases the plaintiff thereafter sold the properties and took back purchase money mortgages. Although these were recognized as new transactions, a new mortgage would not be issued but instead the previous mortgages which the plaintiff had on the properties at the times of the conveyances of the properties to it would be renewed, modified, or extended. The principal reason for proceeding in this manner was to save the New York State mortgage tax imposed upon the issuance of new mortgages.
9. At the time when the plaintiff accepted the forty-four deeds from the defaulting mortgagors, there were moratorium statutes in the State of New York which (a) prevented a mortgagee from getting a deficiency judgment even on default of the mortgagor if the Court found that the fair and reasonable market value of the mortgaged premises exceeded the mortgage debt, and (b) required, if a mortgagee instead of foreclosing decided to sue on the mortgage debt, that the Court should off-set against the debt the fair and reasonable market value of the property.
During the years in question, the assessed valuation of the real estate in and around New York City often exceeded the value of the properties. In the situations which are covered by this action, the assessed valuation of each property exceeded the amount of each mortgage debt thereon.
As a matter of practice, the courts in the area where the forty-four transactions took place generally used the assessed value as the fair and reasonable market value and denied applications for deficiency judgments or personal judgments wherever the assessed valuation exceeded the mortgage debt.
10. During the years in question with so many properties in default, the plaintiff set up an inter-office pattern to be followed in all cases where properties were in default and where no adjustment could be worked out with the owners of such properties. First the real estate department would send a memorandum to the law department advising of the
In computing the profit or loss upon the sales of these forty-four properties after they were conveyed to the plaintiff under the circumstances outlined above, the plaintiff used as the cost basis the amount of the mortgage indebtedness plus any outside costs at the time of acquisition, offset by any sums paid the plaintiff and the reserve value of the property.
11. In twelve of these forty-four cases this plaintiff was paid money to accept deeds to twelve separate parcels. These twelve cases may be divided into the following categories:
*637 (a) Loan No. 19728 — 414 Grand Street, owner of
record M. O. Carroll. The attorneys for the estate of the deceased owner voluntarily offered plaintiff $1,000 if it would accept a deed to the property and covenant not to sue the estate. The voluntary tender of $1,000 by the attorneys for the estate was predicated in a material part upon their desire to distribute the assets, which could not be done while the contingent liability on the mortgage existed. Of the amount received by the plaintiff, $850 was treated as a reduction of the mortgage indebtedness and the Commissioner used the debt as so reduced in computing the stamp tax. Tax paid_______ $15.00
(b) Loan No. 28214 — 2000-10 Broadway, owner of record Rhinelander Real Estate Company. The owner paid plaintiff $65,000 to accept the deed to the property and covenant not to sue the corporate owner. The Rhinelander people had stated the value of their property to be less than the assessed value in an action brought by them for the purpose of reducing the real estate taxes assessed against this parcel. This admission against interest was a factor in connection with Rhinelander’s offer of $65,000 to plaintiff to permit it to abandon the property. Of the amount so received by the plaintiff, $15,000 was to cover interest in arrears and taxes, and $50,000 was treated as a reduction of the mortgage debt from $400,000 to $350,000. The Commissioner computed the stamp tax on the reduced amount. Tax Paid______$385.00
(c)
Premises Owner of Record
28,361 116 E. 68th St______A Hearst Subsidiary Corporation $276.00
28,471 782 Madison Ave.......do — ..................... 362.00
28,141 62 W. 67th St...........do.......................... 148.60
27,802 1824-50 Broadway_______do........................ 1,540.00
27,697 1360-8 Sixth Ave........do.......................... 451.00
27,649 36 W. 68th St — .........do.......................... 55.00
27,648 33 W. 58th St...........do.......................... 55.00
27,470 1390-98 Sixth Ave.......do-......................... 848.10
27,996 1380-88 Sixth Ave.......do.......................... 462.00
28,308 515 Park Ave______615 Park Ave. Corp............. 574.75
- $4,761.35
Total tax paid on the twelve cases referred to In this finding______ $5,161.35
In connection with the settlement of the ten properties referred to under subheading (c) above, the Hearst interests, which were owners of these properties, paid to the plaintiff between $195,000 and $200,000 to accept deeds to the properties in lieu of foreclosure in all except the 515 Park Avenue property and to give covenants not to sue the various Hearst
In these Hearst transactions, Mr. and Mrs. William Randolph Hearst were personally liable on collateral bonds as guarantors and both of them wished to terminate their contingent liabilities. In addition, the New York Evening Journal, Inc., a Hearst corporation incorporated under the laws of New York, was at that time involved in a proposed merger under which it would become a Delaware corporation. Since that corporation was liable for some of the mortgage indebtedness involved in these Hearst transactions, some question arose as to whether, when it became a Delaware corporation and these mortgage liabilities remained, it might be subject to suit in Delaware where there were no moratorium statutes similar to those heretofore referred to in the State of New York which might be used as a defense against these liabilities.
Of the total amount paid of $195,000 to $200,000, a substantial amount thereof was on account of taxes on the properties involved, accounting for profits from the operation of buildings, security deposits of tenants, rentals collected in advance, interest, and other items of a similar character. Two amounts of $55,000 each were treated as direct reductions of two of the loans and the Commissioner recognized such reduction in computing the stamp tax which was assessed.
12. In each of the following cases which are included in the forty-four cases on which the tax in question was computed, the plaintiff accepted a deed to the listed parcels of property in lieu of foreclosure and paid no cash consideration to the grantors:
*639 Loan No. Premises 28,655____ 21,774____ 26,873____ 28,397____ 26,902____ 27,330-29. 27,064____ 27,676____ 26,578____ 28,500____ 28,205____ 28,558____ 25,949____ 27,621____ 28,086____ 27,473____ 27,453____ 28,218____ 27,631____ 27.608 ____ 27,604____ 28,272____ 24,955____ 28.608 ____ 28,018____ 28,260____ 27,242____ 26,069____ 38 Pine Street______ 342 W. 89th St..... 69 E. 80th St....... 142 W. 57th St..... 29 Rockland Ave___ 1800 Ocean Ave____ 7 E. 76th St........ 1385 Park Lane____ 2170-7 Broadway-119 E. 80th St...... 45 E. 72nd St....... 335 E. 115th St..... 69-61 E. 79th St-132 W. 77th St..... 915 St. Marks Ave. 44 Water St........ 1705 Lex. Ave______ 24 E. 61st St....... 22 Siegel St_________ 62 E. 80th St....... 50-2 Ave. D________ 244 W. 56th St_____ 681 Union St_______ 63 W. 83rd St...... 19 Sutton PI_______ 43-7 Broad St______ 1789 Broadway_____ 299 Broadway._____ Tax paid $131.00 24.00 45.50 119.50 12.00 8.00 72.00 27.50 504.00 36.50 65.50 9.50 90.60 17.50 12.00 16.00 15.50 56.00 10.50 49.00 19.80 45.10 5.50 14.85 40.70 988.35 498.85 1,339.80 $4,274.95
13. In thirteen of the forty-four cases the plaintiff, in accepting deeds in lieu of foreclosure, gave a covenant to the owner not to seek a deficiency judgment, but there were others liable for the same debt who were not given such a covenant. The thirteen cases together with the amount of tax paid for each were as follows:
Loan No. Premises Tax paid 28,351____ 27,697____ 27,453____ 27,330-29. 24,955____ 28,500____ 28,471____ 28,558____ 27,473____ 28,397____ 27,631____ 28,308____ 26,578____ 116 E. 58th St..... 1350-8 Sixth Ave.. 1705 Lex. Ave_____ 1800 Ocean Ave... 681 Union St______ 119 E. 80th St..... 782 Madison______ 335 E. 115th St.... 44 Water St....... 142 W. 57th St.... 22 Siegel St........ 515 Park Ave...... 2170-7 Broadway.. $275.00 451.00 15.50 8.00 5.50 36.50 352.00 9.50 16.00 119.50 10.50 574.75 504.00
14. There were ten cases among the total of forty-four in which the plaintiff gave a covenant not to seek a deficiency judgment against the grantor but there were other persons
28,018. 28,260. 25,949-27,470-28,608. 28,141. 27-,621. 21,774. 28,216. 26,873. 19 Sutton PI...... 43-7 Broad St_____ 59-61 33. 79th St... 1390-98 Sixth Ave. 63 W. 83rd St..... 62 W. 57th St..... 132 W. 77th St____ 342 W. 89th St____ 24 E. 61st St...... 69 E. 80th St...... $40.70 988.36 90.50 848.10 14.86 148.50 17.50 24.00 56.00 45.50
15. In one case, loan No. 27064 on premises at 7 East 76th Street, on which a tax of $72 was collected, the person to whom a covenant not to seek a deficiency judgment was given had been released from such liability three years before the conveyance of the property to the plaintiff in 1938.
16. In the following cases of the group of forty-four cases involved in this proceeding, the plaintiff received a deed to the property in lieu of foreclosure and did not give a covenant of any kind to any person:
28,272. 27,604. 26,631. 28,619. 26,069. 244 W. 66th St______ 50-2 Ave. D________ 147-21 Sanford Ave.. 168 W. 50th St...... 299 Broadway______ $45.10 19.80 5.65 1,772.65 1,339.80
Loan No. 28619, which is explained more fully in finding 18, involved payment on a collateral bond for a covenant. The bond comprised about one-thirtieth of the debt.
17. In loan No. 25740 at 1212 Dean Street, which was owned by the Church Charity Foundation, the plaintiff paid that organization $150 for a deed in lieu of foreclosure. That organization, however, was not obligated to pay the mortgage debt. In loan No. 28249 at 1171 York Avenue which was owned by the New York Medical College, the plaintiff gave $250 to that institution for a deed in lieu of foreclosure and also gave it a covenant not to sue. Duo
18. In loan No. 28619 at 168 West 50th Street owned by the Apro Realty Company, on which there was a mortgage of approximately $1,600,000 in 1940, the representatives of the owner approached the plaintiff at that time with a proposition for the improvement and rehabilitation of the property. They represented that the property would never be able to earn enough to pay the mortgage because of its obsolete character but stated that with expensive improvements in order to meet the demands of prospective new tenants enough could be realized to carry the property. The plaintiff at first agreed with the owner to take title to the property, improve it so that it would suit the specifications of the prospective tenants, and then reconvey it to the owner subject to the lien of the then mortgage and all arrears, all advances and expenses and whatever was imposed on the transaction. Because of objections by the title company, which insisted that there be an absolute conveyance from the Apro Realty Company to the plaintiff, a deed was given by the owner to the plaintiff on October 10, 1940, in lieu of foreclosure and that deed was recorded on October 16, 1940. In connection with the transaction the plaintiff received $48,000 from collateral bondsmen on account of arrears of interest on the mortgage. Thereafter the plaintiff proceeded to make the improvements in accordance with its understanding with the owner. After the improvements were completed, the property was reconveyed to the original owners, subject to the original mortgage plus all the additional monies spent in rehabilitation, plus certain additional amounts on account of arrears in interest, and subject to other adjustments in connection with the transaction. The
Stamps in the amount of $77 were placed on the original deed by the plaintiff to cover expenditures which the plaintiff paid at the direction of Apro Realty Company. In the schedule prepared by the General Deputy Collector and referred to in finding 5, the amount of tax assessed and collected on account of this transaction was $1,772.65, which was computed on the original mortgage debt of $1,623,358.48 plus the accrued interest remaining of $58,034.19 after credit for the $48,000 paid by collateral bondsmen.
19. Since the plaintiff is an insurance company, it is required by the laws of the State of New York to sell within a limited period of time all real estate acquired through foreclosure proceedings or in lieu of foreclosure.
20. In every instance the mortgages which were outstanding at the time deeds were accepted in the forty-four cases in lieu of foreclosure, continued to be outstanding. In some instances, the plaintiff sold the mortgage as such long after acquiring the properties. In other instances, the plaintiff sold the property subject to the continuing lien of the mortgage existing prior to the conveyance to the plaintiff in lieu of foreclosure. New York title insurance companies insured the lien of the mortgage composed of such pre-existing mortgages.
CONCLUSION OF LAW
Upon the foregoing special findings of fact, which are made a part of the judgment herein, the court concludes that as a matter of law the plaintiff is not entitled to recover, and its petition is therefore dismissed.
Judgment is rendered against the plaintiff in favor of the United States for the cost of printing the record herein, the amount thereof to be entered by the clerk and collected by him according to law.