author:
Van Fossan:
      Disney,

text:
    Alamitos Land Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 84807.
    Promulgated July 28, 1939.

      Melvin D. Wilson, Esg., and Thomas B. Irvine, Esq., for the petitioner.

      Byron M. Coon, Esq., for the respondent.
   OPINION.

Van Fossan:

The basic issue in this proceeding is whether or not the petitioner received income of $522,895.11 at the time of the payment of such sum by Shell in 1982.

The petitioner contends that under the stipulated facts it derived no income from the payment because it was not a profit received by the petitioner for its separate use, for its benefit, or for its disposal. The petitioner relies on Eisner v. Macomber, 252 U. S. 189, particularly the following paragraph thereof:

* * * Here we have the essential matter: not a gain accruing to capital, not a growth or increment of value in the investment; but a gain, a profit, something of exchangeable value proceeding from the property, severed from the capital, however invested or employed, and coming in, being “derived”, that is received or drawn by the recipient (the taxpayer) for his separate use, benefit, and disposal; that is income derived from property. Nothing else answers the description.

The respondent’s position is that the petitioner received the title and possession of the payment with no restrictions as to its use, and cites in support thereof North American Oil Consolidated v. Burnet, 286 U. S. 417, as the leading case on the subject.

Reviewing briefly the pertinent facts stipulated in the record, we find that in 1931 suit was brought by the petitioner against Shell for the recovery of royalties alleged to have been withheld by Shell. In April 1932 the trial court gave judgment to the petitioner for additional royalties, interest, and costs, and imposed a forfeiture of the lease unless the judgment should be paid by August 29, 1932. On July 8,1932, Shell paid the judgment, costs, and interest to that date, but specifically stated that payment was made “involuntarily and solely by virtue of duress, coercion and compulsion of said judgment.”

Shell appealed to the Supreme Court of California, which entertained the appeal and on January 9, 1933, denied the petitioner’s motion to dismiss the appeal.

The petitioner deposited the cashier’s check, tendered by Shell, in a term deposit bank account and made an entry on its books “to record the payment” thereof. The petitioner also spread upon its books a comprehensive recital of the conditions under which the payment was made and received. Shepard-Pendleton, which had a 35 percent interest in the judgment, agreed to the disposition of the fund and also consented to the change in the form of the investment of a part of the fund from the deposit account to Treasury notes. The item was not accrued on petitioner’s books nor included in its tax return. On the contrary, petitioner explained in its return how the money was received and held pending determination of appeal of the case.

After reversal, upon appeal, the petitioner tendered to Shell the amount of its original payment, together with all the gains and profits earned by the fund while in the petitioner’s custody, and gave a complete accounting of its transactions relating to the fund.

We have here an unusual situation. The judgment of the trial court imposed the penalty of forfeiture of the lease if payment of the judgment were not made by a given date. For some undisclosed reason, Shell did not appeal from that portion of the judgment, but preferred to pay and then perfect its appeal. Unquestionably, at the time of payment, it was the understanding of the petitioner, Shell, and Shepard-Pendleton that an appeal would be taken. In referring to the harshness of the decree of the lower court, the Supreme Court of California, in Alamitos Land Co. v. Shell Oil Co., 17 Pac. (2d) 998, said:

* * * It is manifest that in the face of the alternative to pay or lose the lease and then pay, it was wise for defendant to advance and pay the money demands. Such a payment, therefore, was under the clearest and most urgent compulsion and should not bar the right of review. Defendant received no benefits by accepting the lighter of the two burdens. It merely adopted the only safe course.

The petitioner’s theory, that it did not have unrestricted use of the fluid but held it for the benefit of the winner of the pending litigation, is borne out by its action in securing an agreement with Shepard-Pendleton to place the fund on time deposit. That company was the owner of 35 percent of the amount, if any, to be recovered from the judgment and before final determination had a property right therein to that extent. If Shell won, the fund and its accretions would go to it; if the petitioner won, it and Shepard-Pendleton would share the fund.

Under similar circumstances, the courts of California have held that a judgment pronounced by a lower court is not final with reference to property or rights affected thereby so long as it is subject to appeal and liable to be reversed. Hills v. Sherwood, 35 Cal. 474; Estate of Blythe, 99 Cal. 472 ; 34 Pac. 108; Cook v. Ceas, 143 Cal. 221; 77 Pac. 65; contra, Costa Water Co. v. City of Oakland, 165 Fed. 518. In Ward v. Sherman, 155 Cal. 287; 100 Pac. 864, the Supreme Court of California said:

There is no dispute between the parties as to the rules of law governing an action of this kind. Where a judgment or decree of an inferior court is reversed by a final judgment on appeal, a party is generally entitled to restitution of all the things lost by reason of the judgment in the lower court; and accordingly, the courts will, where justice requires it, place him as nearly as may be in the condition in which he stood previously. (Cowdery v. London, etc. Bank, 139 Cal. 298 (96 A. St. Rep. 115, 73 Pac. 196) ; Freeman on Judgments, Sec. 482.) The restitution may be directed and provided for in the original action itself (Code Civ. Proc., Sec. 957), or may, as here, be sought in a separate action, instituted for that purpose. (Cowdery v. London etc. Bank, 139 Cal. 298 (96 A. St. Rep. 115, 73 Pac. 196) and cases cited.) In such action the defendant must account for the property received under the judgment which has been reversed and the rule governing the extent of his liability is that applicable to a trustee, which, in 28 Am. & Eng. Ency. of Law, 2d Ed., p. 1059, is stated as follows: “The general doctrine being that trustees ought to conduct the business of the trust in the same manner as an ordinarily prudent man of business would conduct his own, they will not be chargeable with more than they have received nor held responsible for losses that may arise, when they have acted in good faith and with common skill, prudence and diligence.”

Thus it is that, on receipt of the fund, it could not be said that petitioner received it free of limitation and for its unrestricted use.

In Virginia Iron Coal & Coke Co., 37 B. T. A. 195; affd., 99 Fed. (2d) 919, the Board considered a case where payments were made in 1930 and 1931 under an option to purchase, which payments were to be applied to the purchase price in case the option was exercised but were to be retained in case the option was not exercised. The option was surrendered in 1933. In holding that the payments were income in 1933 the Board stated:

Thus it was impossible for either the taxpayer or the Commissioner to determine in 1930 and 1931 whether or not the payments would eventually represent income and how they should be reported. * * *
Thus it is necessary to exclude such payments from the income of the year in which received and to include them for the later year when, for the first time, a satisfactory determination of their character for income tax purposes can be made. The other party to the contract in the taxable year for the first time released and abandoned it's right under the agreements to have the payments applied against the purchase price, and charged off its loss. The recipient then knew for the first time that it could retain the payments without any obligation to apply them against the purchase price.

So it is .here, in 1932, when the fund was received and set apart by taxpayer it was impossible for either the taxpayer or the court to determine when, if ever, the payment would be income. Here, as in the cited case, there was a limitation attached at the time of receipt, a limitation fixed by California law and incident to the right of the losing party to appeal, that is, that the fund be held intact pending appeal and if necessary restitution be made. As it worked out in the instant case it was necessary for taxpayer to make restitution in full. In the light of such fact the payment in 1932 was never true income. Clearly also, in the light of such fact, it would be a gross injustice to tax petitioner with income in 1932, depending for equalization on the uncertainty of a deduction from income later. Where possible, tax cases should be decided on realities and not on abstract hypotheses.

The conclusion we have reached, that petitioner was not taxable in 1932, is supported also by the decision of the Board in Sara R. Preston, 35 B. T. A. 312, where two attorneys who had performed services for clients received a check in payment payable to order of both, but could not agree on the amount to which each was entitled. They deposited the check in a bank in a joint account and in the taxable year each drew down such amount as the other conceded, agreeing that the balance should be drawn only on settlement of the dispute. Taxpayer reported only the amount actually received. Respondent held the entire fund constructively received. We sustained the taxpayer, citing, among others, Eisner v. Macomber, 252 U. S. 189; Commissioner v. Cleveland Trinidad Paving Co., 62 Fed. (2d) 85; Stoner v. Commissioner,, 79 Fed. (2d) 75. In the last cited case the court held that a stockholder’s share of an amount deposited, out of proceeds of the sale of corporate stock by a stockholder who acted on behalf of all the stockholders, as an indemnity fund to insure buyer of the fulfillment of the seller’s obligations, was not taxable income of the year so deposited, since such stockholder had only qualified possession and control of the whole fund, and was not entitled to his share until the terms of the contract were fulfilled. Certiorari was denied, 296 U. S. 650.

The facts here present distinguish this case from North American Oil Consolidated v. Burnet, supra. Here it can not be said that the taxpayer received the fund without restriction as to its disposition. The law of California imposed a restriction. Petitioner here recognized that it held the money subject to very positive limitations. It did not set it up on its books as its own, nor did it claim it as its own in its tax return. On the contrary, it explained its true character. Its treatment of the fund was, of itself, a disclaimer of a present right to unrestricted use. In the cited case the funds were unquestionably income, the matter in dispute being the year of accounting. Here, as determined by the Supreme Court of the state, petitioner never had a right to the fund and accordingly it never possessed the character of true income.

We are of the opinion that the fund of $522,895.11 paid in 1932 and the accretions thereto in 1932 and 1933 were not income to petitioner in those years.

In view of our decision on the first, and major, issue, it is unnecessary to discuss the second and third issues. The interest paid on the fund of $522,895.11 during 1932 and 1933 and received by the petitioner was accounted for and paid to Shell and, hence, is not taxable to petitioner. The amount of $182,205.76, representing the interest of Shepard-Pendleton in the proceeds of the judgment, is claimed by the petitioner as a deduction only in the event that it is held taxable on the trust fund. It was not deducted in the petitioner’s income tax return for 1932 and, consequently, no question is raised for us to decide.

Reviewed by the Board.

Decision will be entered v/nder Rule 50. •

Disney,

dissenting: I can not see why the very language of North American Oil Consolidated v. Burnet, 286 U. S. 417, does not preclude the correctness of the majority opinion, for it is in that case said that if the taxpayer receives earnings under a claim of right without restriction as to its disposition, they are income “even though it may still be claimed that he is not entitled to retain the money, and even though he may still be adjudged liable to restore its equivalent.” Thus, the matter of a reversal of judgment seems particularly in the mind of the Supreme Court of the United States. Therein money was received from oil lease in 1917. The United States, the other party to the litigation, appealed, without supersedeas. In 1920 the Circuit Court, to which appeal was taken, affirmed the decree, and in 1922 further appeal to the Supreme Court was dismissed by stipulation. It was held that the money was income not for 1922, but for 1917, and the Court said in addition to what has been above quoted:

* * * If in 1922 the government had prevailed, and the company had been obliged to refund the profits received in 1917, it would have been entitled to a deduction from the profits of 1922, not from; those of any earlier year. * * »

The majority opinion seems based upon the fear that there is injustice in the taxpayer’s paying taxes “depending for equalization on the uncertainty of a deduction from income later.” I think, on the contrary, that the Government should be allowed to collect the tax when taxpayer receives the money, and that it is only fair for him to get his credit, so to speak, when he pays it out again, for the simple reason that otherwise he may receive the money, may go bankrupt, or otherwise never restore the money, and thus receive income upon which he is never taxed. It seems to me that the uncertainty of his repaying the money is greater than the uncertainty of the Government allowing him a just deduction when he in fact makes restitution. I do not think that the United States should be forced to depend upon the uncertainties of the fortunes of a taxpayer who has received money with no restriction as to disposition, when there is available a simple method of giving him credit in later years, if it turns out that he returns the money.

There was no restriction upon taxpayer’s use of the money. Shell had no lien upon it. In fact, taxpayer used it in part to purchase securities, and it might have bought yachts or used it in riotous living. It had to put up no bond for the receipt of the money, and was obligated only as a common debtor to return it. If other creditors had judgments against it at the time of restitution, I think they might well, in some circumstances, have prevented the restitution of this money to the Shell Oil Co. as a preference among creditors. It did receive it under a claim of right, as is shown by the notice to the Shell Co. that, if the money was paid, petitioner would move to dismiss the Shell appeal — which it did, although it was unsuccessful. It received it under a claim of right, for the money was merely what it sued for. The taxpayer here was not forced to segregate this money, but did so voluntarily.

Sara R. Preston, 35 B. T. A. 312, does not help, but rather bears out my conclusion, because there was a restriction, that is, the restriction of the other party to whom a joint check was made and who disagreed with the petitioner about the use thereof; whereas the petitioner was charged with income of that money which he received by agreement with the other party, out of the check. It is plain that there was a positive restriction in that case upon the use of the money in that he could not use it at all, whereas here petitioner had the unrestricted use of the money. The only restriction was a voluntary one on its part for its future financial protection. I think the restriction involved in these cases is in its nature not a voluntary one, but some matter of law or other force which restricts or prevents the use of the money by the possessor.

In National City Bank v. Helvering, 98 Fed. (2d) 93, holding that O’ÍSTeil had income on bonds received by him, even though he received them surreptitiously, with liability to account for them later, it was said:

* * * Although taxes are public duties attached to the ownership of property, the state should be able to exact their performance without being compelled to take sides in private controversies. Possession is in general prima facie evidence of ownership, and is perhaps indeed the source of the concept itself, though the time is long past when it was synonymous with it. It would be intolerable that the tax must be assessed against both the putative fortfeasor and the claimant; collection of the revenue cannot be delayed, nor should the Treasury be compelled to decide when a possessor’s claims are without legal warrant. If he holds with claim of right, he should be taxable as an owner, regardless of any infirmity of his title; no other doctrine is practically possible, and no injustice can result. We think therefore that O’Neil was taxable upon the bonds for the years 1922 and 1923.

In Champlin v. Commissioner, 78 Fed. (2d) 905, the Tenth Circuit, in a case as to income from a lease subject to litigation, said:

* * * It is stated in the briefs and not denied that petitioner in 1923 requested the Commissioner to treat the income from the lease as impounded pending the litigation over the title, and that the taxes be assessed when ownership was determined. Whether this be so or not, the law is that petitioner was liable for the tax on the income received despite the uncertainty of the litigation.

In Victoria Paper Mills, 32 B. T. A. 666; affd., 83 Fed. (2d) 1022, the petitioner obtained judgment against the city of Fulton, assigned the judgment to a bank, and received the money thereon in 1931, the samp year in which he received the judgment. The judgments have never been paid by the city of Fulton “and the question of the city’s liability for the amounts thereof is still in litigation in the courts of the State of New York.” The petitioner guaranteed the payment of the judgments by the city of Fulton, and we held that the amount received constituted income. The only difference between that case and the present case is that the Shell Go. paid the money instead of it being raised by assignment of the judgment against Shell. Certainly there was the same liability for repayment of the judgment.

In D. H. Byrd, 32 B. T. A. 568, petitioner received funds subject to an unliquidated claim then pending liquidation. Petitioner denied the claim, asserting his right to the whole amount throughout the taxable year 1981, and until October 1933, when the litigation was determined. We said that until that time it was not “known whether petitioner’s right to receive the money would ever be disturbed, or whether he would ever be required to pay over any part of it to the Owen-Sloan Oil Co.”, and held that he was taxable on the entire amount. The Owen-Sloan Oil Co. had instituted a suit in the United States District Court for Texas, claiming that it had a contractual right to one-half of the moneys. In 1933 judgment against petitioner was announced, but was settled pending a hearing on the amount. Petitioner apparently received the money before the Owen-Sloan Oil Co. had brought the suit.

I therefore dissent.

Tyson agrees with this dissent.


source: Caselaw Access Project

author: Van Fossan:

license: Public Domain

text:
    Godfrey L. Cabot, Inc., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 91665.
    Promulgated July 28, 1939.

      Fred O. Fernald, Esq., and Warren F. Rideout, Esq., for the petitioner.

      L. S. Pendleton, Esq., for the respondent.
   OPINION.

Van Fossan:

The instant question is that of tax accrual. The statute allows, with certain exceptions, deductions of tax paid or accrued within the taxable year. The petitioner concedes that, if and when a lien attaches to property for the taxes assessed thereon, the date of such lien is the date of the accrual of the taxes, but contends that in the present case, since no such lien accrued on the property in question and since it made its return according to scientific accounting principles and pursuant to the requirement of the Public Service Commission of West Virginia by charging against income earned during the taxable period the expense incurred in producing such income, the deduction was accordingly proper.

The respondent’s position is that the taxes in question accrued on January 1, 1933, because the ownership of property on that date is the event upon which tax liability depends and because, so he contends, a lien for such taxes attached on that date.

The question whether or not a lien for the taxes attached to the property will be discussed first. The statute under which this property was assessed is chapter 11, article 6, section 1, ox the Code of West Virginia, 1931. Section 5 of the same article and chapter relates to pipe line companies. Section 18 thereof governs the payment of the assessment. Section 23 provides for the collection of taxes by suit, and section 24 distinguishes real estate used for purposes connected with the property from that not so used. Minor amendments, having no bearing on the issue, were enacted later.

Article 6 applies to the assessment of public service corporations. In that article there is no provision which imposes a lien on the petitioner’s property for the taxes assessed thereunder. However, the respondent relies on the general provisions of chapter 11, article 10, section 1, which states in part:

There shall be a lien on all real estate for the taxes assessed thereon, from the day fixed by law for the commencement of the assessment of such taxes, in each year, and the interest upon such taxes, at the rate and for the period provided by law. After the expiration of two years from the last named day, the auditor may institute a suit in equity, in the name of the State, to enforce the lien before mentioned, for any taxes unpaid, or for which no sale for taxes has been made. Such suit shall he brought and prosecuted in the circuit court of the county in which the real estate, or the greater part thereof, is situated, or in which it has been theretofore assessed for taxes, and in such suit the land on which the taxes were assessed may be sold, and all taxes thereon, to the day of sale, with the interest accrued thereon, paid from the proceeds of sale. * * *

Chapter 11, article 10, section 1, is the immediate successor of similar provisions in prior acts of the West Virginia Legislature, extending back to the Code of 1868. Chapter 31, section 1 of that code recites that “there shall be a lien on all real estate from April 1 * * *55 -*-5

In State v. Baltimore <& Ohio Railroad Go., 41 W. Va. 81; 23 S. E. 677, decided in 1895, the Supreme Court of West Virginia had before it the same question as applied to railroad companies. There the court said:

* * * It is believed, however, that neither the statute cited, nor any other statute, gives a lien on any real estate owned by a railroad company, for the taxes assessed thereon, except only such as is used or occupied by the company for purposes not immediately connected with its road, or is rented or occupied for any purpose to or by individuals. Code, c. 29, § 67. * * *

The petitioner points out that all of its property was assessed as an entirety and not by the statutory methods controlling the assessment of property as ordinarily held by its owner. There is no specific segregation of kind or amount. Section 24 makes the distinction clear. All real estate against which a lien might be imposed to insure the collection of tax, would be subject to that lien only on the condition that it was not used in connection with the petitioner’s property normally devoted to public service purposes.

We are of the opinion that no lien upon the petitioner’s property assessed under chapter 11, article 6, was imposed by the statutes of West Virginia. This conclusion is inferentially substantiated by the fact that chapter 21 of the Acts of 1937 specifically created the very lien which the respondent claims already existed. If his theory were correct such legislation would have been wholly superfluous.

Inasmuch as no lien attached to the petitioner’s property, we must examine the sequence of tax events to determine when the liability for the tax first was imposed upon it. We find that it was not until October 11,1932, that the petitioner was notified of an estimated tax liability of $32,000, by the letter of the state auditor. It may be doubtful that such an informal notice constituted an “assessment and charge” as contemplated by chapter 11, article 6, section 16, but the petitioner seems to have accepted it as such and acted accordingly. On February 6, 1933, it received its statutory notice of the correct amount of tax, mailed by the auditor on February 3, 1933. In any event, the dates October 11, 1932, and February 3, 1933, are both within the petitioner’s fiscal year.

We find in none of the successive statutory steps taken by the taxing authorities of West Virginia, prior to the notice of October 11, 1932, any definite action of the tax officials which fixes and determines the petitioner’s liability to pay the taxes for the year 1932. All events prior to October 11, 1932, were but incidents precedent to establishing that liability and were only parts of a process which accomplished that end. The date of assessment is not automatically the date of accrual. Minnie M. Coward, 39 B. T. A. 1158.

The statute requires that the auditors must assess and charge the petitioner’s property, not only with the whole amount of its taxes for state and school purposes, if any are levied, but also their whole amount for county purposes, for road and other district purposes other than free school and building purposes (in each magisterial district) and in each municipal corporation for all proper municipal purposes. It is obvious that no such assessment and charge was made before October 11, 1932, and probably not until much later in the petitioner’s fiscal year. See New Orleans Cold Storage & Warehouse Co., Ltd., 40 B. T. A. 121. Until that official duty was performed the petitioner could not be charged with the responsibility of paying a tax which up to that time was uncertain, indefinite, and problematic.

In United States v. Anderson, 269 U. S. 422, the Supreme Court said that the departmental regulation authorizing the use of the accrual method of accounting was in order to enable “taxpayers to keep their books and make their returns according to scientific accounting principles, by charging against income earned during the taxable period, the expenses incurred in and properly attributable to the process of earning income during that period.” See Patrick Cudahy Family Co., 36 B. T. A. 1147; affd., 102 Fed. (2d) 930.

The Public Service Commission of West Virginia compelled the petitioner to keep its books of account in accordance with the uniform classification of accounts for natural gas utilities as prescribed by the commission. That classification required the petitioner to credit its account “Taxes Accrued” during each accounting period of one month with taxes accrued during such period. The petitioner complied with the Public Service Commission’s order by so accruing the taxes in question. Petitioner’s position here squares with the requirements of the Public Service Commission and with its own books.

In New Orleans Gold Storage & Warehouse Co., Ltd., supra, we stated: ‘‘The pertinent question here is whether the method of bookkeeping employed by the petitioner correctly reflected the income of the petitioner for 1936 and prior years.” In that case we found that the respondent had not questioned the petitioner’s method of accounting for prior years and that the taxes accrued on its books correctly reflected its income. So here, for all years since October 1, 1922, the petitioner has made its accruals and its income tax returns exactly as it did for the year before us. We consider its treatment of tax accruals to be good accounting practice, in accord with the regulations and orders of the Public Service Commission of West Virginia and the principles set forth in United States v. Anderson, supra. We hold that petitioner’s books correctly reflected its income for its fiscal year ended September 30,1933.

Decision will he entered v/nder Bule BO.

         Public Service Corporations; Returns of Property to Board, of Public WorTes. — On or before the first day of April in each year a return ill, writing to the board of public works shall be delivered to the tax commissioner by the owner or operator of every railroad, wholly or in part within this State; by the owner or operator of every railroad bridge upon which a separate toll or fare is charged ; by the owner or operator of every car or line of cars used upon any railroad within the State for transportation or accommodation of freight or passengers, other than such owners or operators as may own or operate a railroad within the State; by the owner or operator of every express company or express line, wholly or in part within this State, used for the transportation by steam or otherwise of freight and other articles of commerce; by the owner or operator of every pipe line, wholly or in part within this State, used for the transportation of oil or gas or water, whether such oil or gas or water be owned by such owner or operator or not. or for the transmission of electrical or other power, or the transmission of steam cr heat and power or of articles by pneumatic or other power; and by the owner or operator of every telegraph or telephone line, wholly or in part within this State, except private lines not operated for compensation; and by the owner and operator of every gas company and electric lighting company furnishing gas or electricity for lighting, heating or power purposes; and hydro-electric companies for the generation and transmission of light, heat or power: water companies furnishing or distributing water, and all other public service corporations or persons engaged in public service business whose property is located wholly or in part within this State. * * * The return required by this section of every such owner or operator shall cover the year ending on the thirty-first day of December, next preceding, and shall be made on forms prescribed by the board of public works, which board is hereby invested with full power and authority and it is hereby made its duty to prescribe such forms as will require from any owner or operator herein mentioned such information, as in the judgment of the board, may be of use to it in determining the true and actual value of the properties of such owners or operators. And the board of public works shall give due consideration to any return filed in compliance with this section, but any such return shall not necessarily constitute the sole base for assessment purposes, it being the intention of this article that the board’s rights, duties, methods and sources of information as regards returns to be filed hereunder or as regards any additional information or as regards the ascertainment of the value of or the assessment of any property shall be limited only by the provisions contained in the whole of this chapter. * * *

         Pipe Line Companies. — In the case of a pipe line, such return shall show for each owner or operator: (a) The number of miles of pipe line owned, leased or operated within this State, the size or sizes of the pipe composing such line, and the material of which such pipe is made; (b) if such pipe line be partly within and partly without this State, the whole number of miles thereof within this State and the whole number of miles without this State, including all branches and connecting lines in and out of the State: fc) the length, size and true and actual value of such pipe line in each county of this State, including in such valuation the main line, branches and the connecting lines, and stating the different values of the pipe separately ; (d) its pumping stations, machine and repair shops and machinery therein, tanks, storage tanks and all other buildings, structures and appendages connected or used therewith, together with all real estate, other than its pipe line, owned or used by it in connection with its pipe line, including telegraph and telephone lines, and the true and actual value of all such buildings, structures, machinery and appendages and of each parcel of such real estate, including such telegraph and telephone lines, and the true and actual value thereof in each county in this State in which it is located; and the number and value of all tank cars, tanks, barges, boats and barrels ; (e) its personal property of every kind whatsoever, including money, credits and investments, and the amount thereof wholly held or used in this State, showing the amount and value thereof in each county; (f) an itemized list of all other real property within this State, with the location thereof; (g) the actual capital employed in the business of such owner or operator, the total amount of the bonded indebtedness of such owner or operator with respect to such lino, and of indebtedness not bonded; and, if such owner or operator be a corporation, its capital stock, the character, number and amount and the market value of the shares thereof, and the amount of capital stock actually paid in; its bonded indebtedness and its indebtedness not bonded. The board of public works shall have the right to require such owner or operator to furnish such other and further information as, in the judgment of the board, may be of use in determining the true and actual value of the property to be assessed to such owner or operator. * * *

        Payment of Assessment by Owner or Operator. — The auditor shall, as soon as possible after such assessment is completed, make out and transmit by mail or otherwise, to such owner or operator, a statement of all taxes and levies so charged, and it shall be the duty of such owner or operator, so assessed and charged, to pay the whole amount of such taxes and levies into the treasury of the State by the twentieth day of January next after the assessment thereof, subject to a deduction of two and one-half per cent upon the whole sum, if the same be paid on or before that day. If such owner or operator fail to pay sueh taxes and levies by the said twentieth day of January, the auditor shall add ten per cent to the amount thereof to pay the expense of collecting the same, and shall certify to the sheriff of each county the amount of such taxes and levies assessed within his county; and it shall be the duty of every sheriff to collect and account for such taxes and levies in the same manner as other taxes are levied or collected and accounted for by him. The payment of such taxes and levies by any such owner or operator shall not prejudice or affect the right of such owner or operator to obtain relief against the assessment or valuation of its property in proceedings now pending or hereafter brought under the provisions of section twelve of this article, or in any suit, action or proceeding in which such relief may be obtainable; and if under the provision of said section twelve (§738) or in any suit, action or proceeding, it be ascertained that the assessment or valuation of the property of such owner or operator is too high and the same is accordingly corrected, it shall be the duty of the auditor of the State to issue to the owner or operator a certificate showing the amount of taxes and levies which have been overpaid, and such certificate shall be receivable thereafter for the amount of such overpayment in payment of any taxes and levies assessed against the property of such owner or operator, its successors or assigns. It shall likewise be the duty of said auditor to certify to the county courts, school districts and municipalities, the amounts of the respective overpayments distributable to such counties, school districts and municipalities. * * *

        Oollection by Suit of Taxes against Public Service Corporations. — The taxes and levies assessed against any such owner or operator shall constitute a debt to the State or county, district or municipal corporation entitled thereto, and may be collected by action of assumpsit or other appropriate judicial proceedings, which remedy shall be in addition to all other existing remedies. The right of the State or of any county or district, or municipal corporation, to enforce by suit or otherwise the collection of taxes or levies heretofore assessed, or the right to which has heretofore accrued, shall not in any manner be affected or impaired by anything in this chapter contained. * * *

        Assessment of Buildings and Beal Estate of Public Service Corporations.- — All buildings and real estate owned or held by such owner or operator, and used or occupied for any purpose immediately connected with the property, shall be included in such assessment by the board of public works; but all real estate owned or held by any such owner or operator, and not used or occupied for purposes immediately connected witli the property, shall be assessed as otherwise provided in this chapter. * * *

         Section 28. Lien of Taxes; Notice of; Collection by Suit. — The amount of taxes and levies assessed under this article shall constitute a debt due the state or county, district or municipal corporation entitled thereto, and shall be a lien on all of the property and assets of the taxpayer within the state. The lien shall attach as of the date fixed by law for the commencement of the assessment year, and shall be prior to all other liens and charges. The auditor shall, between the first and fifteenth day of July of each year, prepare a list of the taxpayers delinquent in the payment of such taxes and levies, setting forth their respective addresses and the amount of state, county, district and municipal taxes due from each, which said list shall be certified by the auditor to the board of public works and filed in the office of the secretary of State. * * 4
      The attorney general may also enforce the lien created by this section on the real estate of such delinquent taxpayer by instituting a suit, or suits, in equity in the circuit court of Kanawha county, in the name of the state, in which such delinquent taxpayers shall be made defendants. * * *


author: Steknhagen :

text:
    Estate of Josephine Palmer Taylor, Dean Palmer and Theodore D. Palmer, Executors, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 93289.
    Promulgated August 8, 1939.

      John A. Gordin, G. P. A., for the petitioner.

      Harold F. Noneman, Esq., for the respondent.
   OPINION.

Steknhagen :

The Commissioner determined a deficiency of $2,958.02 in estate tax. The proceeding was submitted entirely upon a stipulation of facts.

The decedent died February 24, 1936, leaving a will which contained the following provision :

Second: I give and bequeath unto my executors and trustees hereinafter named, and to the survivor or survivors of them, the sum of three thousand dollars, in trust, nevertheless, for the purpose of establishing a memorial to my dearly beloved father and mother. I also give and bequeath unto my said executors and trustees, and to the survivor or survivors of them, the sum of three thousand dollars, in trust, nevertheless, for the purpose of establishing a memorial to my late husband, Charlie, unless I shall have attended to it during my lifetime, giving to them, and to the survivor or survivors of them, full discretion as to the character of the memorials.

The executors, acting under this article of the will, paid to the rector, wardens, and vestry of Grace Church, Orange, New Jersey, two sums of $3,000 each, and it is stipulated that Grace Church is organized and operated exclusively for religious purposes. The petitioners contend that the $6,000 is properly deductible under Revenue Act of 1926, section 303 (a) (3), which provides for the deduction of bequests:

* * * to a trustee * * * but only if such contributions or gifts are to be used by such trustee or trustees * * * exclusively for religious, charitable, scientific, literary, or educational purposes, or for the prevention of cruelty to children or animals. * * *

There is nothing in the will which restricts the trustees in their use of the bequest as to the nature, kind or type of “memorial” which they are to establish for either the decedent’s parents or her husband. The word “memorial” does not itself connote any limitation within the language of the statute. It means only something to perpetuate a memory. Conceivably and reasonably a memorial might have been adequately and satisfactorily established without any religious, charitable, scientific, literary, or educational purpose. It happens that the trustees, in their discretion, contributed the legacies to a religious organization; but this was not by virtue of any limiting mandate of the will. Mississippi Valley Trust Go. v. Commissioner, 72 Fed. (2d) 197, affirming 28 B. T. A. 387; certiorari denied, 293 U. S. 604; rehearing denied, 293 U. S. 631.

John Markle et al., Executors, 28 B. T. A. 201, is not controlling because it was held there that the language of the will itself, to say nothing of the extrinsic evidence, gave a sufficient indication of the intention of the testator to justify recognizing the bequest as one for a charitable use. Here there is nothing whatever in the will from which any qualification could be inferred as to the memorial to be established.

The determination of the Commissioner is sustained.

Decision will he entered for the respondent


author: Black: Turner, DisNey,

text:
    Sherwin A. Hill, Special Administrator of the Estate of John R. McNaughton, Deceased, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 92195.
    Promulgated August 9, 1939.

      Thomas H. Adams, Esq., for the petitioner.

      Stanley B. Anderson, Esq., for the respondent.
   OPINION.

Black:

The loss which the taxpayer deducted on his income tax return for the year 1934 was $10,748.48. The Commissioner in his determination of the deficiency allowed $3,045.58 of this loss as a capital loss under section 117 (a) of the Revenue Act of 1934. The Commissioner in his deficiency notice stated as follows:

A deduction of $10,748.48 claimed on your original return, representing loss resulting from your surrender of property to the mortgagee on a quit claim deed, has been disallowed and a capital net loss of $3,046.58, (30% of $10,151.94, revised loss claimed on amended return), has been allowed for the reasons stated herein.

The parties now agree that the taxpayer’s loss from the transactions in question was $9,355.95, instead of the amounts which he deducted in his original return and his amended return.

We think that, under decisions of the Board and the courts which we shall cite hereinafter, petitioner must prevail in his contention that the loss in question was an ordinary loss and deductible in full under section 23 (e).

We think that, under the facts which we have recited in our findings, this case falls within the purview of our decisions in C. Griffith Warfield, 38 B. T. A. 907; H. L. Bust, Jr., 38 B. T. A. 910 (petition for review dismissed May 29, 1939, C. C. A., 4th Cir.); and Lloyd Jones, 39 B. T. A. 531.

There is one fact in the instant case which was not present in either of the three cases cited. In the instant case, several months after the mortgage foreclosure sale, the taxpayer and his wife executed a quitclaim deed to the parties who were the purchasers at the sheriff’s sale. But we think this fact is without controlling significance, in view of the fact that the taxpayer received no consideration for the execution of the quitclaim deed.

It is the general law of mortgages that, where the mortgaged property is sold for an amount equal to the debt, the debt is extinguished and the mortgagor after such sale has no personal liability on the debt. See 2 Jones on Mortgages, sec. 1216. Not only is this the general law of mortgages, but it is also the law in Michigan, where this property was located and this mortgage was made. See Moore v. Smith, 95 Mich. 71 (1893), in which case the court, at page 65, said:

While it is true that a sale on statutory foreclosure satisfies the debt secured by the foreclosed mortgage to the extent of the proceeds of the sale and thus far releases the personal obligation, yet any party redeeming gets such an interest in the land as is necessary to protect him.

Therefore, it seems clear that, when on January 10, 1934, the mortgaged property was sold at a sheriff’s sale for $6,610.18, which amount equaled the balance due on the mortgage note at the time of sale, plus interest due, taxes, and costs of sale, taxpayer was no longer personally liable on the debt. The debt itself was extinguished.

But under Michigan law the taxpayer, notwithstanding the sheriff’s deed to the purchasers, dated January 10, 1934, retained legal title to the land until his right of redemption expired, which was one year thereafter. A purchaser on foreclosure sale, therefore, acquires no legal title to the realty, but only a right to be vested with legal title when the deed executed at the time of the foreclosure sale becomes finally effective at the end of the redemption period. The relevant provisions of the statutory law of Michigan on foreclosure of mortgages and the extinction of the right of redemption after foreclosure are sections 14433, 14434, and 14435, Michigan Compiled Statutes, 1929.

As to the nature of the interest which the mortgagor holds after the foreclosure sale and before the period of redemption has expired, the Michigan courts have held that it is a right of redemption which takes the place of his former equity of redemption held before the foreclosure sale. The court said in Roff v. Miller (1915), 189 Mich. 558; 155 N. W. 517, at pages 518, 519:

* * * It is now settled that the purchaser, at a foreclosure by advertisement, ordinarily acquires an equitable interest in the land which he may, during the period given for redemption, transfer in full to another. And that his assignee, if there is no redemption, will take the legal title when it matures exactly as the original bidder himself would have taken it. Gage v. Sanborn, 106 Mich. 269; 64 N. W. 32. * * * Such legal title does not vest at once upon the auction sale on statutory foreclosure (Jones on Mortgages, par. 1884), but only at the expiration of the period allowed for redemption. Until the end of that period the foreclosure proceedings may be abandoned, if the parties choose to do so, (Dodge v. Brewer, 31 Mich. 277), or a subsequent mortgagee may still demand an assignment of the mortgage. * * *

Therefore, the effect of the quitclaim deed which the taxpayer and his wife executed to Elizabeth S. Merritt and Ruth Sherrill on July 31, 1934, was simply to place the legal title in those who already held the equitable title by reason of the purchase which they made at the sheriff’s sale. No consideration passed from Elizabeth S. Merritt and Ruth Sherrill to taxpayer in exchange for the execution of the quitclaim deed. It is true that the quitclaim deed recites, among other things, that it is given “by John! R. McNaughton and Edna T. McNaughton, his wife in consideration of their release from all liability under a certain mortgage * *

But as we have already pointed out, McNaughton had already been released from all liability under the mortgage by reason of the fact that the mortgaged property sold for sufficient to pay off and satisfy in full the mortgage indebtedness, plus taxes, costs, etc. In view of this fact, the above quoted recital in the deed is without controlling effect. The effect of the execution of the quitclaim deed in question was simply to ripen the equitable title of the purchasers into legal title by ending the possibility of the exercise of the taxpayer’s right of redemption. It fixed definitely his time for taking the loss which had resulted from the foreclosure sale but which he could not take as a deductible loss until his right of redemption had expired. Cf. J. C. Hawkins, 34 B. T. A. 918; affd., 91 Fed. (2d) 354. It seems to us that the situation with reference to the execution of this quitclaim deed by the taxpayer and his wife is no different in its effect from that which we had before us in Commonwealth, Inc., 36 B. T. A. 850. In that case, the corporate owner of realty, subject to a mortgage upon which the owner was not personally liable, deeded the property to the mortgagee without consideration and thereby fixed its loss. We held that the loss so sustained was an ordinary loss, deductible in full, and was not a capital loss subject to the limitation under section 117 of the Revenue Act of 1934.

In the instant case, as we have already endeavored to point out, after the foreclosure sale on January 10, 1934, taxpayer had no personal liability on the mortgage debt and his only interest was a right of redemption which interest was similar in its consequences to the rights of the taxpayer in the Commonwealth case to secure title to the land by the payment of the mortgage subject to which the corporation had purchased the land.

We hold in the instant case, as we held in the 0ommowwealth case, that “Inasmuch as there was in fact no consideration to the petitioner the transfer of title was not a sale or exchange. The execution of the deed marked the close of a transaction whereby petitioner abandoned its title” (citing authorities). Cf. also C. G. Ganopuls, 39 B. T. A. 1120.

The case of Betty Rogers, 37 B. T. A. 897; affd., 103 Fed. (2d) 790, is distinguishable from the instant case for the reason that in the Rogers case, at the time the grant deed was executed by Will Rogers and his wife, Betty Rogers, in exchange for the surrender and cancellation of their promissory note for $38,000, the mortgage had not been foreclosed and the taxpayers had a personal liability upon the mortgage note and consequently the release and cancellation of that liability constituted valuable consideration to the taxpayers for the deed which they executed.

On the strength of the authorities cited above, we hold for petitioner on the only issue submitted to us for decision. The facts show a smaller loss than the taxpayer deducted on his income tax return.

Reviewed by the Board.

Decision will he entered v/nder Rule 50.

Turner,

dissenting: In my opinion the conclusion of the Board that the loss herein was not a loss sustained “upon the sale * * * of a capital asset” and therefore not subject to the limitations of section 117 of the Revenue Act is directly contrary to the plain wording of the statute. Although I have previously expressed my dissent to such a conclusion, in C. Griffith Warfield, 38 B. T. A. 907, and H. L. Rust, Jr., 38 B. T. A. 910, which on this point appear to be indistinguishable from the instant case, I trust that a restatement and amplification of my views may not be regarded as out of place inasmuch as the question is present in such a great number of undecided cases and is so clearly and pointedly presented here.

There is no contention on the part of the petitioner that to McNaughton the real estate or his interest therein did not constitute a capital asset, nor that the loss sustained by him did not result from the disposition of or parting with that capital asset. The issue, accordingly, is narrowed to the single question as to whether or not the loss was sustained “upon the sale or exchange” of the said property.

McNaughton and Palmer purchased the real estate in question from Marjorie B. Moreland for $28,000, which amount was paid in full on or before June 9, 1925. Of the final payment, however, $16,500 was procured by a loan from the Detroit Trust Co., and McNaughton and Palmer gave a mortgage on the said real estate as security for that loan. After the principal amount of the loan had been reduced to $5,263.10, McNaughton and the Palmer Co., assignee of Palmer, defaulted and by virtue of a power granted in the mortgage and in accordance with the provisions of the Michigan statutes governing such transactions, the property was sold by the sheriff at public auction to the owners of the mortgage for $6,610.18. The selling price of the property was exactly equal to the balance due on the loan plus interest, costs, and charges and was applied in full satisfaction of the indebtedness of McNaughton and the Palmer Co. The amount of McNaughton’s loss was $9,855.95, but if the loss falls within the provision of section 117 (a), as the respondent contends, the deduction to which the petitioner is entitled in respect of that loss is limited to 80 percent of the total loss sustained.

Any provision of the statute which limits the deduction in respect of a loss to an amount substantially less than the amount of loss actually sustained is admittedly a harsh rule and it is human nature to construe the statute, if at all possible, so as to permit the deduction of the full amount of the loss. Assuming, however, that this is the type of case in which doubts are to be resolved in favor of the taxpayer and against the Government, an assumption extremely doubtful in itself since the question to be determined is the amount of a deduction, New Colonial Ice Co. v. Helvering, 292 U. S. 435, that rule of construction has no applicability here because the wording of the statute is plain and no ambiguity is involved. According to the statute the deduction in respect of a loss sustained “upon the sale of * * * a capital asset” is to be limited in the manner prescribed. In the instant case we have an admitted sale of a capital asset belonging to the decedent and it is obvious that the said sale completed or closed the transacted entered into by the decedent for profit, so that it may properly be said that the loss was sustained “upon the sale” of the decedent’s property. It is true that in Sol Greisler, 102 Fed. (2d) 787, affirming 37 B. T. A. 542, the opinion of the court does contain some discussion as to the intent of Congress and the view is expressed that the term “sale” as used in section 117 (a) does not include “judicial sales made by the sheriff in execution of a judgment in a proceeding for the foreclosure of a mortgage given by a prior owner.” Obviously we do not have such a situation here. In this case, as previously pointed out, the property was bought and paid for in full by McNaughton and Palmer, who then, as owners of the property, gave a mortgage to secure a cash loan made to them by the Detroit Trust C'o. The liability so secured was their liability, not that of a prior owner. The subsequent sale was made under and by virtue of the power granted by them in the mortgage instrument. Further in its opinion the court, in the Greisler case, takes particular pains to point out that the title conveyed on the sale in that case was the title of the mortgagor and not the title of the taxpayers, who had merely bought the property subject to the mortgage. Here McNaughton, the petitioner’s decedent, and Palmer were the mortgagors and it was their title and property which was sold. I am unwilling to assume that the court, in a case so obviously distinguishable and with respect to which the court itself has drawn a distinction, would apply its holding in Sol Greisler, supra. If Congress had intended to exclude sales of the character here dealt with, it would surely have inserted some qualifying or modifying words, but, as the court itself points out, “no modifying words are used.” Cf. White v. United States, 305 U. S. 281, and Helvering v. Weaver Co., 305 U. S. 293. In those cases the language of the congressional committee reports just as strongly indicate that Congress, when it enacted the provisions of the statute there in question, did not have specifically in mind the particular type of transaction there involved, but, even so, the Supreme Court held that the plain language of the statute was controlling. I can see no reason why the rule there expressed is not equally applicable here.

In some quarters the conclusion here sought by the petitioner seems to be justified by the mistaken impression that the mortgagee is an owner of the parcel of real estate and when the value of the real estate drops below the amount due under the mortgage the mortgagor’s interest in and ownership of the property is simply extinguished and the mortgagee then has the right to possession and thereby becomes the legal owner of the mortgagor’s interest in the property, the sale under foreclosure being a mere matter of form. Such might be the result where the land is sold under a land purchase contract and the statutory requirements with respect to forfeiture are complied with by the vendor, C. G. Ganopuls, 39 B. T. A. 1120, but the situation and rights of the parties in the instant case are quite different. See excerpts from the Michigan statutes previously quoted in the margin. The purposes sought to be accomplished may be the same, but the processes for enforcing the mortgage lien are inherently different. The mortgagee under his mortgage has no right to take over the real estate itself, as in C. G. Ganopuls, supra, and he may become the owner of the property only by one of two methods— by direct negotiation with the mortgagor, as in Betty Rogers, 37 B. T. A. 897; affd., 103 Fed. (2d) 790, or by purchase at the foreclosure sale. He can not take the property to satisfy his debt, but has only the right under the provisions of the mortgage contract and the applicable statutes to cause the sale of the property at public auction and to require the application of so much of the proceeds from the sale as may be required in satisfaction of his debt. It is true a mortgagee may and very often does buy the property, but such ownership does not result from any rights acquired by him under the mortgage but solely from the fact that he has bid' the highest price for the property at the sale. If then the mortgagee can acquire and does acquire the property of the mortgagor only by purchase, how can it be said that the mortgagor has parted with the said property by any method other than sale? It is not enough to say with respect to the mortgagor, as we did in Lloyd Jones, 39 B. T. A. 531, that “the debt was merely paid or his obligation extinguished”, and certainly in this case it would be inaccurate to say, as we did there, “that petitioner received no price or consideration” for his property. Here it is stipulated that the property of the decedent was sold and that the selling price was $6,610.18, and the Michigan statutes quoted in the margin directed that the sheriff apply the proceeds of the sale to the satisfaction of the personal and direct obligations of McNaughton and the Palmer Co., and the stipulation and documentary evidence further show that the sheriff performed his duty. Accordingly the decedent in the instant case did receive a price or consideration for his property and the consideration so received was used to satisfy his debt to the mortgagee.

The general tenor of much of the argument being currently advanced in support of the claim that sales made pursuant to mortgage foreclosure proceedings should not be considered as “sales” in determining the income tax consequences of such transactions is that a “common sense view” of the situation should be taken or consideration should be given to the “reality” of the transactions and that “highly technical processes of reasoning” should not be indulged nor the “decisions based on tenuous legalistic grounds.” The Supreme Court, in Helvering v. Midland Mutual Life Insurance Co., 300 U. S. 216, has already passed on the reality of such transactions and has indicated that the income tax consequences are no different with respect to sales and purchases of property under foreclosure and the satisfaction of liabilities with the proceeds of such sales than with respect to sales of property and the payment of outstanding liabilities with the proceeds in the ordinary course of business. Congress has enacted a plain statute and the Supreme Court has held that the transaction involved in a mortgage foreclosure proceeding should be regarded as real. Regardless therefore of inclination or desire, the granting of relief to taxpayers in such cases as the one now before us is the function of Congress and not that of the Board.

As to the effect of the quitclaim deed, it is my opinion that little need be said. The sale of the property and the delivery of the deed both occurred in the taxable year. It has been held that a loss sustained by the mortgagor under such circumstances is not deductible until the period of redemption has expired. J. C. Hawkins, 34 B. T. A. 918; affd., 91 Fed. (2d) 354, and Derby Realty Corporation, 35 B. T. A. 335. In this instance the giving of the deed merely terminated the period of redemption. Upon the sale of property under foreclosure, the Michigan statutes, section 14433 previously quoted in the margin, require the sheriff to give a deed to the purchaser, the deed to become effective upon termination or falling in of the redemption period, but when the redemption period comes to an end the title so acquired relates back to the date of the purchase. Stout v. Keyes, 2 Doug. (Mich.) 184. Cf. Johnson v. Ballou, 28 Mich. 379; Busch v. Donahue, 31 Mich. 481; and Flint & Pere Marquette Railway Co. v. Gordon, 41 Mich. 420, 430; 2 N. W. 648. Regardless, therefore, of the point of time at which the sustained loss became deductible, the event which passed the title and gave rise to the loss was the sale of the property.

For the reasons stated above I am of the opinion that the previous decisions of the Board in G. Griffith Warrfteld, supra; H. L. Rust, Jr., supra, and Lloyd Jones, supra, are in error and should be reversed and respectfully note my dissent to the conclusions reached by the majority in the instant case.

Leech and Harroh agree with the above dissent.

DisNey,

dissenting: I dissent. The mortgage foreclosure sale alone gave no right to deduction for loss in the taxable year because in Michigan the mortgagor has a 12-month period of redemption. Derby Realty Corporation, 35 B. T. A. 335. Any loss allowed in the taxable year must, therefore, be predicated upon the quitclaim deed from the mortgagor to the mortgagee-purchaser at foreclosure sale. The majority opinion states that there was no consideration for the quitclaim deed. If so, the mortgagor could set it aside at any time within the period of redemption, and would have suffered no loss within the taxable year. Such a release or acquittance as contained in the quitclaim deed here involved must be based upon consideration, 53 C. J. 1,200, and it seems obvious that, in the absence of such consideration, the mortgagor at any time within the 12-month period could have tendered the necessary amount of money to the mortgagee-purchaser and redeemed the land. Until his right so to do had terminated, it seems clear that he had suffered, and should be allowed, no loss, the identifiable event establishing same, to wit, termination of redemption period, not having yet occurred. The respondent in the deficiency notice seems to rely only upon the quitclaim deed as constituting the sale or exchange, within the purview of section 117. The petition likewise concerns itself only with the quitclaim deed and not with the mortgage foreclosure sale itself as constituting “sale or exchange” within the intendment of the statute; and the respondent upon brief contends that any deductible loss must be based upon the quitclaim deed, and not upon the foreclosure proceedings, and that the loss is not allowable in 1934, prior to termination of tbe period of redemption.

It is apparent, therefore, that the question as to which is the year when loss occurred was a very real one in this proceeding. Without going into the question as to whether the quitclaim deed was by way of sale or exchange, I merely point out the anomalous situation of allowing loss in 1934, when the foreclosure itself did not become operative in that year, yet branding the quitclaim deed as without consideration. Under the Michigan statute, the mortgagor retains legal title and right to possession, throughout the year of redemption, the sheriff’s deed upon foreclosure is recorded only “for the better preservation thereof,” becomes “operative” only at termination of the 12-month period, in case of redemption becomes “void and of no effect”, and is destroyed by the register of deeds. I can not conceive of the holder of such right, which is subject only to an inchoate right on the part of the mortgagee, not yet operative, divesting himself thereof by a quitclaim deed, wholly without consideration so as to preclude himself from asserting right to redeem, and accelerate the incidence of his loss. Until he had lost the right to redeem, his claim to tax loss is as inoperative as the statute brands the foreclosure deed; and if there was consideration for the quitclaim deed there was sale or exchange, as respondent contends. I think the majority opinion poses a quandary, without answering the question propounded.

       [Compiled Laws of Michigan, 1920.]
      14425. Foreclosure of mortgages containing ‘power of sale; right. Section 1. Every mortgage of real estate, containing therein a power of sale, upon default being made in any condition of such mortgage, may be foreclosed by advertisement, in the cases and in the manner hereinafter specified.
      14426. Same; prerequisites; installments as separate mortgages; redemption. Sec. 2. To entitle any party to give a notice as hereinafter prescribed, and to make such foreclosure, it shall be requisite,
      1. That some default in a condition of such mortgage shall have occurred, by which the power to sell became operative;
      2. That no suit or proceeding shall have been instituted, at law, to recover the debt then remaining secured by such mortgage, or any part thereof; or if any suit or proceeding has been instituted, that the same has been discontinued, or that an execution upon the judgment rendered therein has been returned unsatisfied, in whole or in part; and
      3. That the mortgage containing such power of sale has been duly recorded; and if it shall have been assigned that all the assignments thereof shall have been recorded. * * *
      14427. Notice of foreclosure; publication. Sec. 3. Notice that said mortgage will be foreclosed by a sale of the mortgaged premises, or some part of them, shall be given by publishing the same for twelve (12) successive weeks at least once in each week in a newspaper published in the county where the premises included in the mortgage and intended to be sold, or some part of them, are situated * * *.

      14429. Sale; time, place. Sec. 5. The sale shall be at public vendue between the hour of nine (9) o’clock in the forenoon and the setting of the sun, at the place of holding the circuit court within the county in which the premises to be sold, or some part of them, are situated, and shall be made by the person appointed for that purpose in the mortgage, or by the sheriff, under sheriff, or a deputy sheriff of the county, to the highest bidder.

      14433. Deed of sale; endorsement, deposit with register, recording; entry upon redemption. Sec. 9. The officer or person making the sale shall forthwith execute, acknowledge, and deliver, to each purchaser a deed of the premises bid off by him; * * * And he shall endorse upon each deed the time when the same will become operative in case the premises are not redeemed according to law. * * *

      14438. Surplus proceeds of sale, distribution. Sec. 14. If after any sale of real estate, made as herein prescribed, there shall remain in the hands of the officer or other person making the sale, any surplus money after satisfying the mortgage on which such real estate was sold, and payment of the costs and' expenses of such foreclosure and sale, the surplus shall be paid over by such officer or other person on demand, to the mortgagor, his legal representatives or assigns * * *.