Aizawa v. Commissioner

99 T.C. 197 (1992)

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Nature of the Case

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Facts

Ps owned rental property which they purchased in 1981 for $120,000 plus $433 in closing costs. At the time of purchase, they gave the sellers a $90,000 recourse mortgage note with interest only payable at the rate of $750 monthly, and the entire principal due and payable in June 1985. They made their last payment of interest in February 1985. P did not make any payment on the principal when due. The sellers obtained a judgment of $133,506.91 against Pa in a foreclosure action, consisting of $90,000 mortgage principal, $18,000 accrued and unpaid interest, $25,000 in attorney's fees and $500 in court costs. The property was sold to the sellers at a foreclosure sale for $72,700, which was applied to Ps' obligation leaving a deficiency judgment of $60,806.91. Ps suffered a loss, and P's basis in the property at the time of the foreclosure sale was $100,091.38. Their dispute is with respect to the calculation of the 'amount realized' on the foreclosure sale which should be applied against Ps' basis, under section 1001(a), in order to determine the amount of their loss. Ps contend that the deficiency judgment should be deducted from the unpaid mortgage principal and that the difference of $29,193.09 ($90,000 minus $60,806.91) constitutes the amount realized on the foreclosure sale which, when deducted from their basis, produces a loss of $70,898.29 ($100,091.38 minus $29,193.09). D claims the $90,000 unpaid mortgage principal constitutes the amount realized on the foreclosure sale which, when deducted from petitioners' basis, produces a loss of $10,091.38 ($100,091.38 minus $90,000).