DocketNumber: Docket No. 29852-82.
Citation Numbers: 48 T.C.M. 902, 1984 Tax Ct. Memo LEXIS 230, 1984 T.C. Memo. 441
Filed Date: 8/15/1984
Status: Non-Precedential
Modified Date: 11/21/2020
MEMORANDUM FINDINGS OF FACT AND OPINION
JACOBS,
FINDINGS OF FACTS
The facts have been fully stipulated and are so found. The stipulation of facts and exhibits attached thereto*232 are incorporated by this reference.
At the time of the filing of the petition herein, the petitioners, Charles R. Kucklick and his spouse Elizabeth T. Kucklick (hereinafter sometimes referred to as "Charles" and "Elizabeth", respectively) resided in Stratford, Connecticut.
In November, 1977, the petitioners purchased improved commercial real estate from William O'Reilly for $100,000. Petitioners paid O'Reilly $25,000 in cash and gave him a $75,000 purchase money mortgage (hereinafter sometimes referred to as "the O'Reilly mortgage") 2. Pursuant to the terms of the O'Reilly mortgage, the entire balance became due and payable, at the mortgagee's election, upon a subsequent conveyance or transfer of the encumbered property. 3
*233 On or before March 8, 1979, Charles investigated the possibility of selling the property to Anton Schadl and/or Julie Kish (hereinafter referred to as "Schadl" and "Kish"), both of whom were then tenants of the property.It was intended that the new purchasers would either assume or take the property subject to the O'Reilly mortgage. Charles wrote to O'Reilly advising him of the contemplated sale of the property to Schadl and Kish, and inquired as to whether O'Reilly would allow the new purchasers to assume the mortgage. O'Reilly indicated that assumption of the mortgage might be possible subject to a review of Schadl and Kish's credit worthiness.
By May 2, 1979, it was determined that Schadl would purchase the property for $150,000 4, with the closing schedled for June 1, 1979. Schadl decided that he would pay the O'Reilly mortgage in full at the closing. Accordingly, petitioners wrote to O'Reilly's attorney on May 2, 1979, requesting a mortgage release and advice as to the amounts required to pay off the mortgage as of June 1, 1979. By letter dated May 24, 1979, O'Reilly's attorney informed petitioners' attorney as to the pay off figures and sent him the requested release. *234 5
The sale of the property closed on June 1, 1979 as scheduled.On that date, the balance of the O'Reilly mortgage was paid in full. 6 The petitioners' adjusted basis in the property at the time of the sale was $97,796.00.
ULTIMATE FINDING OF FACT
Petitioners did not sell the*235 property subject to the O'Reilly mortgage. The purchasers' satisfaction of petitioners' liability on the O'Reilly mortgage constituted a payment in the year of sale to the petitioners.
Petitioners received payments ($73,669.64) totalling more than 30% of the selling price ($150,000) in the year of sale.
OPINION
The controversy herein is governed by
*236 On their return for 1979, petitioners elected the installment basis to report gain on the sale of their property. Petitioners reported no recognized gain for 1979 (on the basis that they received no cash in that year from the sellers 8), but they did report gain in subsequent years as payments were received. Respondent contends that satisfaction of the O'Reilly mortgage by the purchasers at closing constituted a payment to petitioners in the year of sale, and that therefore petitioners are not entitled to report the gain on the installment basis because the amount of the payments received in 1979 exceeded the 30% initial payment limitation.
Generally, when a buyer satisfies the seller's debts in connection with an installment sale of property, the satisfaction of the seller's debts is treated as a payment in the year of sale in determining whether the 30% initial payment*237 limitation applies.
*238 In the present case, petitioners' adjusted basis in the property at the time of sale exceeded the unpaid balance of the O'Reilly mortgage. The petitioners argue that, as a factual matter, the purchasers took the property subject to the O'Reilly mortgage, and that therefore the exclusion provided in the regulation applies (i.e., the amount of the unpaid mortgage balance is not taken into account for purposes of the 30% initial payment limitation), with the result that the sale qualifies for installment reporting treatment. The respondent, on the other hand, contends that installment reporting is not available to the petitioners, because the purchasers neither assumed the O'Reilly mortgage nor took the property subject to the mortgage, and therefore the repayment of the mortgage at closing constituted a payment in the year of sale that exceeded the 30% initial payment limitation.
As this Court pointed out in
Taking property subject to a mortgage means that the buyer pays the seller for the latter's redemption interest, i.e., the difference between the amount of the mortgage debt and the total amount for which the property is being sold, but the buyer does not assume a personal obligation to pay the mortgage debt. The buyer agrees that as between him and the seller, the latter has no obligation to satisfy the mortgage debt, and that the debt is to be satisfied out of the property. Although he is not obliged to, the buyer will ordinarily make the payments on the mortgage debt in order to protect his interest in the property.Where a buyer assumes a mortgage on property, he pays the seller for the latter's redemption interest, and in addition promises the seller to pay off the mortgage debt. This promise of the buyer can ordinarily be enforced by the mortgagee.
In support of their contention that the purchasers took the property subject to the O'Reilly mortgage, the petitioners rely on the fact that the various documents executed in connection with the sale, i.e., the sale contract, the deed, and the purchase money mortgage taken back by the petitioners, all recite that the conveyance of the property was subject to the O'Reilly mortgage. The petitioners' argument is also premised on the facts that neither they nor their attorney ever received the mortgage proceeds at the closing and that the mortgage release was recorded after the deed to the buyers. While unquestionably these facts represent the formal indicia of a transfer of real property subject to an existing mortgage, they are not decisive of the question here of whether or not the property in fact was sold subject*241 to the O'Reilly mortgage.
Although the evidence shows that O'Reilly, the mortgagee, would have allowed a conveyance of the property subject to the mortgage if the purchasers qualified as credit worthy, there is no suggestion in the record that the purchasers submitted to a credit review. The evidence indicates, rather, that as early as May 2, 1979, the date on which petitioners' attorney requested a release from O'Reilly's attorney, the purchasers sought a transfer of the property unencumbered by the mortgage. The fact that petitioners' attorney requested the release and the mortgage pay-off figures from O'Reilly's attorney establishes that the petitioners, prior to the closing, were aware of, and acquiesced in, the purchasers' intention. We find therefore that there was no mutual intention that the property would be transferred subject to the O'Reilly mortgage, and that in fact an unencumbered transfer occurred.
We find support for our conclusion here in our decisions in
The issue in
In the present case, the petitioners' liability on the O'Reilly mortgage was extinguished on the date of closing. Thus, under
Given our finding that the property was not conveyed subject to the O'Reilly mortgage, it follows that the cancellation and payment of the O'Reilly mortgage in the year of sale constitutes a payment to the petitioners for the purposes of
Finally, petitioners maintain that a decision in their favor is warranted on the ground of equity. Without question the purpose of
*245
*. By order from the Chief Judge this case was reassigned from Judge Darrell D. Wiles to Judge Julian I. Jacobs↩.
1. All statutory references are to the Internal Revenue Code of 1954, as amended, and as in effect in 1979, unless otherwise indicated.↩
2. Although Charles contracted to purchase the property, title to the property was taken in Elizabeth's name. Both Charles and Elizabeth were liable on the purchase money mortgage note given to O'Reilly. ↩
3. The pertinent provision in the mortgage provided:
The Grantee, at his option, may elect to declare the entire indebtedness secured hereby to be immediately due and payable if the borrower, or any successor in title to all or part of its interest in the Premises, shall convey or suffer any conveyance or transfer of all or any portion of its interest in the Premises.↩
4. On May 10, 1979, Schadl (and not Kish) signed the contract of sale. Title to the property was ultimately taken in the names of Schadl, Maria Schadl and Margaret Gross. ↩
5. Both O'Reilly's attorney and petitioners' attorney agreed that the latter would hold the release in trust until the mortgage balance was paid in full.↩
6. The outstanding principal balance of the O'Reilly mortgage as of June 1, 1979 was $73,091.00. Interest accrued to the date of closing amounted to $578.64.
The adjusted purchase price of the property was $150,999.64. The closing statement reflected the following credits to the purchaser:
Deposit | $1,500.00 |
Purchase Money Mortgage | 75,000.00 |
Assumption of O'Reilly Mortgage | 73,669.64 |
Tenant Security Deposit | 830.00 |
TOTAL | $150,999.64 |
The parties did not stipulate as to whether the O'Reilly mortgage was paid off before, during or after closing.↩
7.
(1) GENERAL RULE.-Income from-
(A) a sale or other disposition of real property, or
(B) a casual sale or other casual disposition of personal property (other than property of a kind which would properly be included in the inventory of the taxpayer if on hand at the close of the taxable year) for a price exceeding $1,000, may (under regulations prescribed by the Secretary) be returned on the basis and in the manner prescribed in subsection (a).
(2) LIMITATION. - Paragraph (1) shall apply only if in the taxable year of the sale or other disposition-
(A) there are no payments, or
(B) the payments (exclusive of evidences of indebtedness of the purchaser) do not exceed 30 percent of the selling price.
(3) PURCHASER EVIDENCES OF INDEBTEDNESS PAYABLE ON DEMAND OR READILY TRADABLE. - In applying this subsection, a bond or other evidence of indebtedness which is payable on demand, or which is issued by a corporation or a government or political subdivision thereof (A) with interest coupons attached or in registered form (other than one in registered form which the taxpayer establishes will not be readily tradable in an established securities market), or (B) in any other form designed to render such bond or other evidence of indebtedness readily tradable in an established securities market, shall not be treated as an evidence of indebtedness of the purchaser.↩
8. Apparently since the selling expenses ($2,173), which are not specifically set forth in the record, exceeded the $1,500 deposit paid to the petitioners upon signing of the contract for sale, petitioners take the position that they received no payments in the year of sale for purposes of
9.
(c) Determination of "selling price". In the sale of mortgaged property the amount of the mortgage, whether the property is merely taken subject to the mortgage or whether the mortgage is assumed by the purchaser, shall, for the purpose of determining whether a sale is on the installment plan, be included as a part of the "selling price"; and for the purpose of determining the payments and the total contract price as those terms are used in
10. The amount of the mortgage however is taken into account for purposes of determining the selling price.↩
11. As we stated in
R. A. Waldrep and Ruby Waldrep v. Commissioner of Internal ... , 428 F.2d 1216 ( 1970 )
floyd-j-voight-and-marion-c-voight-v-commissioner-of-internal-revenue , 614 F.2d 94 ( 1980 )
Commissioner v. South Texas Lumber Co. , 68 S. Ct. 695 ( 1948 )