Aizawa v. Commissioner - 99 T.C. 197 (1992)

Rule:

I.R.C. § 1001(a) provides that the gain from the sale or other disposition of property is the excess of the amount realized therefrom over the adjusted basis provided in section I.R.C. § 1011 for determining gain, and the loss is the excess of the adjusted basis provided in such section for determining loss over the amount realized.

Facts:

The taxpayers owned a rental property for which they gave the sellers a $ 900,000 recourse mortgage. Pursuant to a foreclosure, the sellers obtained a judgment of $ 133,506.91, but the property was later sold for $ 72,700, which was applied to the taxpayers' obligation, leaving a deficiency of $ 60,806.91. The taxpayers' basis in the property at the time of the foreclosure was $ 100,091.38. The taxpayers argued that the deficiency should be deducted from the unpaid mortgage principal and that the difference of $ 29,193.09 was the amount realized on the foreclosure sale which, when deducted from their basis, produced a loss of $ 70,898.29 for tax purposes. The commissioner countered that the unpaid mortgage principal was the amount realized on the foreclosure sale which, when deducted from the taxpayers' basis, produced a loss of $ 10,091.38. 

Issue:

In determining the taxpayers’ loss, did the amount of the proceeds of the foreclosure sale constitute the "amount realized" under sec. 1001(a), I.R.C.?

Answer:

Yes.

Conclusion:

The court entered a decision under U.S. Tax Ct. R. 155, holding that the $ 72,700 as the proceeds of the foreclosure sale was the "amount realized" under sec. 1001(a), I.R.C., which should be subtracted from the taxpayers' basis to determine the amount of their loss. Thus, the taxpayers' loss was $ 27,391.38.