DocketNumber: Docket No. 39917-85
Judges: Sterrett,Pate
Filed Date: 12/23/1986
Status: Precedential
Modified Date: 10/19/2024
*5 When petitioners sold their residence, they made the sale contingent upon receiving a discount from the mortgagor upon the prepayment of their recourse mortgage. They subsequently purchased a new residence costing more than the one sold. Petitioners included the discount in the gain realized on the sale, but deferred recognition of the gain under
*1412 The parties' cross-motions for summary judgment*7 filed herein were assigned to Special Trial Judge Joan Seitz Pate pursuant to the provisions of section 7456(d) (redesignated as sec. 7443A(b) by the Tax Reform Act of 1986, Pub. L. 99-514, 100 Stat. 2755), and Rules 180 and 181. 1 After a review of the record, we agree with and adopt the opinion of the Special Trial Judge which is set forth below.
OPINION OF THE SPECIAL TRIAL JUDGE
Pate,
The parties have either agreed to or conceded, for purposes of our ruling on their motions, the following facts. John Albert Michaels and Rebecca Hooper Michaels (hereinafter petitioners) are husband and wife and filed a joint income tax return for 1982. They resided in Raleigh, North Carolina, at the time their petition was filed.
In March 1978, petitioners purchased a residence for $ 36,639, including closing costs. The property was encumbered by a mortgage payable to Perpetual Federal Building & Loan of Anderson, South Carolina (hereinafter Perpetual). Petitioners sold this home in 1982 when they moved to Raleigh, North Carolina. The sale took place on June 30, 1982, for a stated sales price of $ 40,000.
In addition, the contract of sale specifically provided that the "Sale [was] contingent upon Seller receiving 25% discount on mortgage balance at Perpetual." Consequently, at settlement, petitioners' first mortgage loan was prepaid for an amount $ 6,378 less than the then principal balance of the loan. All of the benefit of this discount accrued to petitioners. In February 1983, petitioners purchased a new residence for*9 $ 65,000.
Petitioners did not report this discount as income on their 1982 Federal income tax return. Instead, they included the discount as part of the gain on the sale of their residence, all of which they deferred pursuant to the provisions of
*1414 Generally, funds a taxpayer borrows are not includable in his gross income, even though they increase his assets, because the taxpayer has a corresponding liability to repay the loan. See
Petitioners do not dispute these general rules, but rather contend that they do not apply in the instant case. They reason that because: they sold their residence during 1982; the prepayment of their mortgage was a consequence of that sale; and the buyer's funds were used*11 for the prepayment; the resulting discount should be taken into account in computing the gain realized but not recognized under the provisions of
In general,
Looking to
However,
The amount realized on a sale or other disposition of property that secures a recourse liability does not include amounts that are (or would be if realized and recognized) income from the discharge of indebtedness under
*13 This regulation effectively bifurcates the instant transaction by removing the amount of the discount from the computation of the amount realized and recognizing it as a separate income item. Therefore, although the prepayment of petitioners' mortgage was an integral part of the sale, the regulation treats it as a separate transaction for tax purposes. 4
The term "amount realized" is also defined in
(4) "Amount realized" is to be computed by subtracting
(i) The amount of the items which, in determining the gain *14 from the sale of the old residence, are properly an offset against the considerations received upon the sale (such as commissions and expenses of advertising the property for sale, of preparing the deed, and of other legal services in connection with the sale); from
(ii)
[Emphasis supplied.]
In this regulation, the term "amount realized" has a slightly different meaning. First, for purposes of computing "gain realized" (defined in
Second, this regulation provides that "the [entire] amount of liability" shall be included in computing the amount of the consideration when the buyer assumes the liability of the seller or acquires the property subject to the liability. Consequently, under those circumstances, the transaction is not bifurcated even if, immediately thereafter, the buyer pays off the liability on the purchased property. However, this scenario is distinguishable from the instant transaction because (1) the buyer would receive the benefit of the discount instead of the seller, and (2) the buyer would have to recognize discharge of indebtedness income when he prepaid the liability. It appears, therefore, that in a sales transaction under
Our finding that the discount on the prepayment of the mortgage is not part of the amount*16 realized on the sale is also determinative of the second issue before us. Income taxed under the capital gain provisions must result from the "sale or exchange" of a "capital asset."
Alternatively, petitioners argue that the discount reduces their basis in their residence, thereby increasing gain realized.
Petitioners do not point to any other statutory or judicial exception supporting their argument. 5 They do argue, however, that Congress intended
*18 Accordingly,
1. Unless otherwise stated, all section references are to the Internal Revenue Code of 1954 as amended, and all rule references are to the Tax Court Rules of Practice and Procedure.↩
2. The record is silent as to whether petitioners' first mortgage was, in fact, a recourse or nonrecourse liability. However, this fact is presumed to be the basis of respondent's determination, and petitioner has not contended otherwise. See
3. The regulation then refers to
4. The bifurcated approach was adopted in analyzing a transaction involving discharge of indebtedness income in
5. But see
6. See H. Rept. 586, 82d Cong., 1st Sess. (1951),
Osenbach v. Commissioner of Internal Revenue ( 1952 )
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National-Standard Company v. Commissioner of Internal ... ( 1984 )
Fairbanks v. United States ( 1939 )
Vukasovich, Inc. v. Commissioner of Internal Revenue, ... ( 1986 )
United States v. Kirby Lumber Co ( 1931 )
Crane v. Commissioner ( 1947 )