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Woodsam Assocs., Inc. v. Commissioner - 198 F.2d 357 (2d Cir. 1952)

Rule:

A mortgagee is a creditor and nothing more than a preferred creditor, even though the mortgagor is not liable for the debt. The mortgagee is not any less a creditor because he has recourse only to the land.

Facts:

An individual acquired property subject to mortgage and subsequently borrowed money on the property through mortgage consolidation to which she was not personally liable. The individual then transferred the property to petitioner for stock. Upon sale of the property by foreclosure, petitioner attempted to claim a higher basis in the property than third party individual had when she originally acquired it. Petitioner argued that third party individual's basis increased due to allegedly taxable gain she received from consolidated mortgage to which she was not personally liable, and that was more than her original basis. Thus, petitioner contended, when the third party individual transferred the property, petitioner acquired the "stepped up" basis.

Issue:

Is the mortgaging of a previously acquired property considered a disposition of property that gives rise to a taxable event?

Answer:

No.

Conclusion:

The court rejected this argument, holding the additional mortgage was not considered disposition of the property under tax law, requisite to receiving taxable gain and increasing basis in the property. Thus, petitioner acquired the third party individual's original basis in the property. The mortgagee is a creditor, and in effect nothing more than a preferred creditor, even though the mortgagor is not liable for the debt. He is not the less a creditor because he has recourse only to the land, unless we are to deny the term to one who may levy upon only a part of his debtor's assets. Petitioner merely augmented the existing mortgage indebtedness when she borrowed each time and, far from closing the venture, remained in a position to borrow more if and when circumstances permitted and she so desired.

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