                         T.C. Summary Opinion 2013-47



                         UNITED STATES TAX COURT



                DRUCELLA T. MALONZO, Petitioner v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



      Docket No. 11608-12S.                         Filed June 10, 2013.



      Drucella T. Malonzo, pro se.

      Nathan H. Hall, for respondent.



                              SUMMARY OPINION


      GERBER, Judge: This case was heard pursuant to the provisions of section

7463 of the Internal Revenue Code in effect when the petition was filed.1



      1
      Unless otherwise indicated, all section references are to the Internal
Revenue Code in effect for the year in issue.
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Pursuant to section 7463(b), the decision to be entered is not reviewable by any

other court, and this opinion shall not be treated as precedent for any other case.

Respondent determined a $737 income tax deficiency for petitioner’s 2008 tax

year. The sole question for our consideration is whether petitioner realized a

capital gain attributable to her abandonment of, and the subsequent foreclosure of

the mortgage loan securing, her real property.

                                     Background

      Petitioner resided in California at the time her petition was filed. During

2005 she purchased a residence in Sacramento, California (residence). She

resided there until sometime during 2006, when she moved to San Francisco,

California. For some portion of 2007 petitioner rented out the residence, reported

the income from the rental, and claimed $12,118 in depreciation. Later in 2007

petitioner was unable to rent out the residence. At that time, the fair market value

of the residence was less than the outstanding mortgage loan balance and

petitioner stopped making the mortgage payments and in effect abandoned the

residence. Although petitioner stopped making the mortgage payments, she took

no formal steps to transfer title or to provide her lender with notice of her intention

to abandon the residence. After petitioner stopped making mortgage payments,

the lending institution determined that petitioner’s note was in default and the
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mortgage loan securing the residence was foreclosed upon during 2008. The

residence was resold by the lender for $278,314.84 in early 2008.

      Petitioner paid $333,239 for the residence in 2005, and that amount was

considered by respondent to be petitioner’s unadjusted basis in the residence.

During 2008 petitioner’s lender sent her a Form 1099-A, Acquisition or

Abandonment of Secured Property, reflecting that the outstanding balance of her

mortgage obligation was $325,855.06. The same Form 1099-A reflected the fair

market value of the residence to be the resale price of $278,314.84. Finally, the

Form 1099-A reflected that January 22, 2008, was the “date of lender’s acquisition

or knowledge of abandonment”.

      Respondent examined petitioner’s 2008 income tax return and determined

that she had a $4,734 long-term capital gain2 which, in turn, resulted in a $737

income tax deficiency for 2008. Respondent computed the gain as follows:




      2
       Respondent’s determination was that petitioner’s gain was capital as
opposed to “ordinary”. There was no controversy between the parties as to
whether any gain would constitute ordinary or capital income. There is no
evidence in our record providing the rationale for respondent’s determination.
Petitioner’s only contention was that she was entitled to an abandonment loss.
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      Amount realized
      (outstanding mortgage balance)                              $325,855

        Less: basis
         Purchase price                        $333,239
         Recaptured depreciation                (12,118)

      Adjusted basis                                               (321,121)
       Gain                                                           4,734

In response, petitioner submitted an amended 2008 Federal Income Tax Return,

reporting a $313,737 ordinary income loss from the abandonment of the residence.

                                     Discussion

      Respondent contends that petitioner had a long-term capital gain resulting

from the foreclosure of the mortgage loan securing the residence. After

considering depreciation allowed or allowable, respondent’s view is that the

foreclosure resulted in a sale or exchange where petitioner’s indebtedness

exceeded her adjusted basis in the residence. Petitioner contends that she had an

ordinary loss from her abandonment of the residence. Petitioner sees her intended

abandonment as a situation where she lost the value of the residence at a time

when the debt obligation exceeded the value.

      We must decide whether the circumstances of this case result in an ordinary

loss attributable to abandonment or a capital gain attributable to a sale or

exchange. The basic principles that govern these circumstances are to be found in
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a well-established line of cases beginning with the Supreme Court’s opinion in

Crane v. Commissioner, 331 U.S. 1 (1947). In Crane, the taxpayer inherited real

property that was encumbered by a mortgage that had not been assumed by the

taxpayer. For tax purposes the taxpayer claimed depreciation using the value of

the property. When the taxpayer subsequently sold the property, the value of the

property and the mortgage balance were approximately equal and she received a

net amount of $2,500 which she treated as the gain from the sale. The

Commissioner, on the other hand, treated the value of the property less

depreciation as the taxpayer’s basis and the outstanding balance of the mortgage

plus the $2,500 as the sale price, thereby resulting in a larger gain and an increased

tax burden. The Supreme Court, holding for the Commissioner, decided that the

amount of the unassumed mortgage is to be considered part of the proceeds of

sale.

        Some 36 years later, the Supreme Court considered whether the same rule

applies even where the unpaid amount of a nonrecourse mortgage exceeded the

fair market value of the property sold. In that case, it was held that the taxpayer,

although required to include the outstanding mortgage obligation as proceeds of

sale, was not entitled to a loss to the extent that the mortgage exceeded the fair

market value of the property. See Commissioner v. Tufts, 461 U.S. 300 (1983).
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      In a case decided soon after Tufts, the Court of Appeals for the Fifth Circuit

affirmed this Court’s holding that an abandonment of real property subject to a

nonrecourse debt is a “sale or exchange” for purposes of determining whether a

loss is a capital loss. See Yarbro v. Commissioner, 737 F.2d 479 (5th Cir. 1984),

aff’g T.C. Memo. 1982-675. That case involved the question of whether an

individual taxpayer’s loss resulting from the abandonment of unimproved real

estate subject to a nonrecourse mortgage exceeding the fair market value is an

ordinary loss or a capital loss.

      Petitioner’s case presents a similar question to that addressed in Yarbro--

whether her abandonment of real estate subject to a mortgage exceeding the fair

market value is an ordinary loss or a capital gain because of consideration of the

outstanding mortgage. Petitioner purchased the property, depreciated it, and, after

her inability to rent it out, walked away when her mortgage obligation was in

excess of the value of the property and also in excess of her adjusted basis in the

property. Here, like the taxpayer in Crane, petitioner claimed depreciation based

on her basis or cost. Even though she walked away from the property with the

intention of no longer making payments on the mortgage, the subsequent

foreclosure of the mortgage loan securing the property constituted a “sale or

exchange”. See sec. 1.1001-2(a)(1), Income Tax Regs.
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      Petitioner is therefore not entitled to an ordinary loss due to abandonment

that is equal to the value of the property because that would ignore the fact that

she held a capital asset that was subject to a mortgage. Accordingly, we must

sustain respondent’s determination that petitioner had a $4,734 capital gain and

that there is a resulting 2008 income tax deficiency of $737.

      To reflect the foregoing,


                                              Decision will be entered for

                                       respondent.
