OPINION.
Disney, Judge:
The petitioner takes the view that the foreclosure sale described in the facts set forth above resulted in a loss to him in the difference between his stipulated adjusted base, $155,721.05, and $71,833.65, being the fair market value of his 68.413 percent interest in the property purchased by him, based upon a value of $105,000. His view is that the transaction amounted to a mere exchange of notes receivable for land.
The respondent takes the position that under the doctrine of Helvering v. Midland Mutual Life Insurance Co., 300 U. S. 216, income was realized on the accrued interest and “bonus” covered by the petitioner’s bid at the foreclosure sale, and that profit was realized on the foreclosure in the difference between the petitioner’s basis and the amount of principal indebtedness included in the bid at the foreclosure sale.
The Midland Mutual case, supra, unless distinguished, requires the inclusion, in the income of a mortgagee bidding in the property upon sale of the mortgaged property, of accrued interest included in the bid. The principle is not confined, as the petitioner argues, to cases involving insurance companies. The language in the Midland Mutual case is broadly applied to mortgagees. In Manomet Cranberry Co., 1 B. T. A. 706, where a mortgagee, not an insurance company, bid in the mortgaged property at foreclosure sale for the' amount of principal and interest, we held that the mortgagee realized income to the extent of the interest bid. In Ewen MacLennan, 20 B. T. A. 900, wherein a mortgagee, an individual, foreclosed and-purchased the property for a bid price equal to the unpaid principal and accrued interest, the amount of accrued interest paid or applied as a credit was held to be taxable income to the petitioner. We held to the same effect in insurance cases in American Centred Life Insurance Co., 30 B. T. A. 1182; and Missouri State Life Insurance Co., 29 B. T. A. 401; affd., 78 Fed. (2d) 778. In T. Eugene Piper, 45 B. T. A. 280, we expressly followed the Midland Mutual case in a proceeding involving individual petitioners and held that the mortgagees received interest income to the extent of the accrued interest included in their bid in purchasing the property upon foreclosure. We therefore decline to make a distinction between the present case and those involving insurance companies.
In the Piper case, supra, as herein, the property purchased was of a fair market value less than the bid. In Manomet Cranberry Co., supra, evidence was offered as to the value of the property, but in the light of our opinion we considered it unnecessary to make any findings with respect to value. The fair market value of the property foreclosed was less than the bid, in the Midland Mutual case, supra, and in Missouri State Life Insurance Co., supra, and in both cases it was held that the fair market value of the properties acquired was immaterial. It is apparent therefore that the present situation can not be distinguished from those in the Piper case, and the other above cited cases, so far as concerns the element that fair market value is less than the bid at the foreclosure sale.
The petitioner, however, further seeks to distinguish the instant proceeding because of the insolvency of the mortgagor in this matter. Such therefore is the pivotal question here. He argues that insolvency of the mortgagor did not appear in the Midland Mutual case, and that certain statements in the opinion indicate that the lack of such insolvency on the part of the mortgagor was a determinative factor in the opinion. It is true that therein the Court said: “If the bid had been insufficient to allow full payment of the mortgaged debt, principal and interest, the company would have been entitled to a judgment for the deficiency”; also, that a stranger “would be obliged to pay in cash the amount of his bid, while the formality of payment in cash is ordinarily dispensed with when the mortgagee acquires the property on his own bid”; and again that: “The reality of the deal here involved would seem to be that respondent valued the protection of the higher redemption price as worth the discharge of the interest debt for which it might have obtained a judgment.” We can not, however, agree with the petitioner that the above quotations demonstrate that the opinion of the Court in the Midland Mutual case depended upon solvency of the debtor or ability to collect from him to the extent of the amount bid. In our view the opinion there is bottomed upon the theory that the petitioner there shall be taxed on the basis of the legal effect of a sale to him, though made through foreclosure. Although referring to a possible judgment for a deficiency, the Court does not refer to a collectible deficiency, and states that “Income may be realized upon a change in the nature of legal rights held, though the particular taxpayer has enjoyed no addition to his economic worth. Compare Lynch v. Hornby, 247 U. S. 339, 344, 346.” Again, the Court further lays down the principle that “There is nothing unfamiliar in taxing on the basis of the legal effect of a transaction,” and points out in detail that the legal effect of purchase by the mortgagee is the same as that where a stranger purchases. Ledyard v. Phillips, 47 Mich. 305, 308, is cited to the effect that a purchasing mortgagee “enjoys the same rights as purchaser as would a third party.” In Hadley Falls Trust Co. v. United States, 110 Fed. (2d) 887, the court considered the decision in the Midland Mutudl case to depend “upon the circumstance that the price bid by the mortgagee was entirely within its control and that it should accordingly be bound thereby.” The Court in the Midland Mutual case points out that upon purchase by the mortgagee the debt is discharged by means of a credit, and continues:
* * * The amount so credited to the mortgagor as interest paid would be available to him as a deduction in making his own income tax returns. It would be strange if the sum deductible by the mortgagor debtor were not chargeable to the mortgage creditor as income received. Where the legal effect of a transaction fits the plain letter of the statute, the tax is held payable, unless there is clearly revealed in the act itself or in its history a definite intention to exclude such transactions from the operation of its applicable language. * * * [Citing many cases.]
Under this language it is incumbent upon the petitioner to demonstrate a definite intention to exclude from the applicable language of the statute as to income (as well as the cases cited above) a transaction where the mortgagor was insolvent. An insolvent mortgagor may have taxable income, and would be entitled to the deduction of interest credited against his debt, under the above language of the Court,. equally with a solvent debtor. In Harold M. Blossom, 38 B. T. A. 1136, we allowed a mortgagor a deduction as for interest paid, to the extent that an amount equal to interest was bid by the mortgagee at foreclosure sale. In National Life Insurance Co. v. United States, 4 Fed. Supp.
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OPINION.
Disney, Judge:
The petitioner takes the view that the foreclosure sale described in the facts set forth above resulted in a loss to him in the difference between his stipulated adjusted base, $155,721.05, and $71,833.65, being the fair market value of his 68.413 percent interest in the property purchased by him, based upon a value of $105,000. His view is that the transaction amounted to a mere exchange of notes receivable for land.
The respondent takes the position that under the doctrine of Helvering v. Midland Mutual Life Insurance Co., 300 U. S. 216, income was realized on the accrued interest and “bonus” covered by the petitioner’s bid at the foreclosure sale, and that profit was realized on the foreclosure in the difference between the petitioner’s basis and the amount of principal indebtedness included in the bid at the foreclosure sale.
The Midland Mutual case, supra, unless distinguished, requires the inclusion, in the income of a mortgagee bidding in the property upon sale of the mortgaged property, of accrued interest included in the bid. The principle is not confined, as the petitioner argues, to cases involving insurance companies. The language in the Midland Mutual case is broadly applied to mortgagees. In Manomet Cranberry Co., 1 B. T. A. 706, where a mortgagee, not an insurance company, bid in the mortgaged property at foreclosure sale for the' amount of principal and interest, we held that the mortgagee realized income to the extent of the interest bid. In Ewen MacLennan, 20 B. T. A. 900, wherein a mortgagee, an individual, foreclosed and-purchased the property for a bid price equal to the unpaid principal and accrued interest, the amount of accrued interest paid or applied as a credit was held to be taxable income to the petitioner. We held to the same effect in insurance cases in American Centred Life Insurance Co., 30 B. T. A. 1182; and Missouri State Life Insurance Co., 29 B. T. A. 401; affd., 78 Fed. (2d) 778. In T. Eugene Piper, 45 B. T. A. 280, we expressly followed the Midland Mutual case in a proceeding involving individual petitioners and held that the mortgagees received interest income to the extent of the accrued interest included in their bid in purchasing the property upon foreclosure. We therefore decline to make a distinction between the present case and those involving insurance companies.
In the Piper case, supra, as herein, the property purchased was of a fair market value less than the bid. In Manomet Cranberry Co., supra, evidence was offered as to the value of the property, but in the light of our opinion we considered it unnecessary to make any findings with respect to value. The fair market value of the property foreclosed was less than the bid, in the Midland Mutual case, supra, and in Missouri State Life Insurance Co., supra, and in both cases it was held that the fair market value of the properties acquired was immaterial. It is apparent therefore that the present situation can not be distinguished from those in the Piper case, and the other above cited cases, so far as concerns the element that fair market value is less than the bid at the foreclosure sale.
The petitioner, however, further seeks to distinguish the instant proceeding because of the insolvency of the mortgagor in this matter. Such therefore is the pivotal question here. He argues that insolvency of the mortgagor did not appear in the Midland Mutual case, and that certain statements in the opinion indicate that the lack of such insolvency on the part of the mortgagor was a determinative factor in the opinion. It is true that therein the Court said: “If the bid had been insufficient to allow full payment of the mortgaged debt, principal and interest, the company would have been entitled to a judgment for the deficiency”; also, that a stranger “would be obliged to pay in cash the amount of his bid, while the formality of payment in cash is ordinarily dispensed with when the mortgagee acquires the property on his own bid”; and again that: “The reality of the deal here involved would seem to be that respondent valued the protection of the higher redemption price as worth the discharge of the interest debt for which it might have obtained a judgment.” We can not, however, agree with the petitioner that the above quotations demonstrate that the opinion of the Court in the Midland Mutual case depended upon solvency of the debtor or ability to collect from him to the extent of the amount bid. In our view the opinion there is bottomed upon the theory that the petitioner there shall be taxed on the basis of the legal effect of a sale to him, though made through foreclosure. Although referring to a possible judgment for a deficiency, the Court does not refer to a collectible deficiency, and states that “Income may be realized upon a change in the nature of legal rights held, though the particular taxpayer has enjoyed no addition to his economic worth. Compare Lynch v. Hornby, 247 U. S. 339, 344, 346.” Again, the Court further lays down the principle that “There is nothing unfamiliar in taxing on the basis of the legal effect of a transaction,” and points out in detail that the legal effect of purchase by the mortgagee is the same as that where a stranger purchases. Ledyard v. Phillips, 47 Mich. 305, 308, is cited to the effect that a purchasing mortgagee “enjoys the same rights as purchaser as would a third party.” In Hadley Falls Trust Co. v. United States, 110 Fed. (2d) 887, the court considered the decision in the Midland Mutudl case to depend “upon the circumstance that the price bid by the mortgagee was entirely within its control and that it should accordingly be bound thereby.” The Court in the Midland Mutual case points out that upon purchase by the mortgagee the debt is discharged by means of a credit, and continues:
* * * The amount so credited to the mortgagor as interest paid would be available to him as a deduction in making his own income tax returns. It would be strange if the sum deductible by the mortgagor debtor were not chargeable to the mortgage creditor as income received. Where the legal effect of a transaction fits the plain letter of the statute, the tax is held payable, unless there is clearly revealed in the act itself or in its history a definite intention to exclude such transactions from the operation of its applicable language. * * * [Citing many cases.]
Under this language it is incumbent upon the petitioner to demonstrate a definite intention to exclude from the applicable language of the statute as to income (as well as the cases cited above) a transaction where the mortgagor was insolvent. An insolvent mortgagor may have taxable income, and would be entitled to the deduction of interest credited against his debt, under the above language of the Court,. equally with a solvent debtor. In Harold M. Blossom, 38 B. T. A. 1136, we allowed a mortgagor a deduction as for interest paid, to the extent that an amount equal to interest was bid by the mortgagee at foreclosure sale. In National Life Insurance Co. v. United States, 4 Fed. Supp. 1000, involving a bid of accrued interest, and where the Court held such bid to result in income to the mortgagee, it appears that although there was no specific finding of .insolvency, the mortgagee “concluded that there was little likelihood of its being able to collect principal or interest without foreclosures, and that in many cases the mortgagors had moved away from the lands leaving them idle.”
In Bingham v. Commissioner, 105 Fed. (2d) 971, the court, in deciding whether there was a sale or exchange (of capital assets) within the Revenue Act of 1932, section 101 (c) (2), where a mortgagor transferred the mortgaged property in payment of the debt, held that it was immaterial whether the mortgagor was financially able to pay. Conversely, by this logic it appears to follow that the fact that there was a sale through mortgage foreclosure, with the effect given to it by the Midland Mutual case, is not to be considered affected by inability of the mortgagor to pay. It is a sale none the less, a mortgage foreclosure sale, Helvering v. Hammel, 311 U. S. 504, and purchase price was in legal effect paid — by the mortgagee as purchaser.
The petitioner further relies upon Hadley Falls Trust Co. v. United, States, supra, where it was held, under Regulations 74, article 193, that there was a right to a deduction lor loss equal to the difference between mortgage obligations applied to purchase price and the fair market value of the property at the time of sale. In that case, however, as is shown from the opinion rendered by the District Court, 22 Fed. Supp. 346, the obligations owned by the mortgagee and applied upon the bid price included only principal amount, so that the present question as to whether accrued interest bid constitutes realization of income was not there involved. We declined to consider the Hadley Falls Trust Co. case as controlling in T. Eugene Piper, supra, wherein, although insolvency of the mortgagor is not discussed nor found as a fact, the evidence showed that the petitioner considered the mortgagor would have nothing with which to pay, that there was no possibility of his being “financially rehabilitated” and did not think that the payment of interest could be obtained. We therefore found that market value was immaterial, as aboye noted, and held the petitioner taxable upon interest bid. West Production Co., 41 B. T. A. 1043, also relied upon by the petitioner, likewise involved no bid of accrued interest, and therefore is not authority upon the present question.
After examination of the authorities submitted and others, we are of the opinion that the fact of insolvency on the part of the mortgagor herein does not constitute a material distinction from the •situation in T. Eugene Piper, supra, nor require a different conclusion from that which we reached therein. Moreover, as to the petitioner’s argument that reality must be so considered as to require us to discern simply that he had an investment which was exchanged for real estate of a lower value, resulting in loss, we point to the answer of the Supreme Court to the same argument in the Midland Mutual case:
The company argues that taxation is a practical matter; that we should be governed by realities; that the reality is, that all the company got was the property; and that the property was worth less than the principal of the debt. The “reality” of the deal here involved would seem to be that respondent valued the protection of the higher redemption price as worth the discharge of the interest debt for which it might have obtained -a judgment. * * *
In tbe present case, the record does not clearly show the reason for the bid higher than actual value. Though the petitioner testified that there was no connection between market value and bid and that neither the possibility of redemption nor deficiency judgment was considered by the mortgagees at the time, he further stated that the subject was informally taken up among the three mortgagees, that the amount of the bid was the amount due, but that they neglected to add extra interest at the time of foreclosure. He and the other mortgagees drove together to the town where the sale was held and were in attendance at the sale and “We just said bid the purchase price.” All this obviously fails to show that there was no reason for the bid higher than actual value. On the contrary, it indicates intent to prevent anyone else from securing the property at a price less than the investment therein. It thus appears that the mortgagees agreed, in substance, not to let anyone else acquire the property for less than the indebtedness,, including interest. That there was only one bid proves little or nothing. The mortgagees’ high bid may have been the opening bid, made at once, precluding even a slightly less offer by any other bidder. It did in fact protect against redemption at any lower value, affected the mortgagor’s right to deduction of interest, and therefore affected the tax consequences. Nor do we think that the evidence negatives the idea that the law as to redemption at bid price was considered, in spite of the petitioner’s testimony, for a representative of the attorneys foreclosing was present at the sale. It is plain that the matter was in the hands of the attorneys, and the petitioner did not know who actually made the bid. We are unable to conclude that the possibility of redemption at bid price was not contemplated in the consummation of the foreclosure sale, as it was in the Midland Mutual case. The realities of the instant situation do not preclude, in our opinion, the theory of realization of income by the bid of accrued interest by the mortgagee.
We conclude and hold that the respondent did not err in including interest bid in the income of the petitioner. We do not include in such interest the $5,000 accrued upon $255,000 principal at the time of the change from a land contract to a mortgage in 1926, or the $45,000 “bonus” added to the then indebtedness. The parties at that time entered into a new transaction, and we regard as interest only that which.accrued upon the $305,000.
The fact that we hold petitioner to have received income to the extent of accrued interest bid, is not decisive of the whole case; for there remains the question as to whether the provisions of Regulations 77, article 193,1 here apply, requiring examination of the question of gain or loss to the mortgagees to the extent of the difference between amount bid and fair market value of the property purchased.
Eespondent argues in effect that the effect of the Midland Mutual case is to require use of bid price as setting fair market value and he regards as gain the amount by which the principal amount bid exceeded the petitioner’s base. Such view disregards the regulation, for the regulation on its terms particularly provides that the bid price is only presumptively fair market value. It has been in effect since 1926, during which time the-statute upon which it is based has been repeatedly reenacted by Congress. It has received the approval of the courts, Hadley Falls Trust Co. v. United States, supra; Malden Trust Co. v. Commissioner, 110 Fed. (2d) 751; Helvering v. New President Corporation, 122 Fed. (2d) 92. The Treasury Department, in G. C. M. 19573, C. B. 1938-1, p. 214, approved it, pointing out the right to both a deduction for worthless debt and to a loss, where the mortgagee purchases; and I. T. 3121, C. B. 1937-2, p. 138, is to the same tenor. In Vancoh Realty Co., 33 B. T. A. 918, 926, we quoted the regulation and considered it to require allowance of deduction both for bad debt and loss between fair market value and face value of obligations applied to mortgage purchase. We have held that the Midland Mutual case does not preclude inquiry as to the fair market value of the property foreclosed. West Production Co., supra; Huey & Philp Hardware Co., 40 B. T. A. 781. We therefore hold that the regulation must be applied here, and proceed to ascertain loss or gain to the mortgagees accordingly.
We have above held the mortgagees to have received income to the extent of accrued interest bid. The regulation provides clearly for gain or loss of the difference between fair market value of the property and the amount of obligations applied to purchase or bid price “(to the extent that such obligations constitute capital or represent an item the income from which has been returned by him).” The face amount of such obligations bid herein was $435,000, but they constituted, as to the petitioner’s share, capital of only $155,721.05, the stipulated adjusted cost basis of petitioner’s interest in the principal amount of the notes. With reference to such base, Eegulations 77, article 193, says: “Accrued interest may be included as part of the deduction only when it has previously been returned as income.” Only the original cost base may be deducted. We hold that there was gain or loss to the petitioner of the difference between such $155,721.05 and the fair market value of petitioner’s interest in the property. Considering all of the evidence, we conclude and hold that the petitioner’s interest in the property had, on the date of sale, a value of $133,405.35, the value ascribed to it by the petitioner in his return filed March 15, 1934. The petitioner was in the business of real estate.
The question then arises as to whether the loss (thus ascertained) is capital or ordinary, under section 101 (c) (2), Revenue Act of 1932. I. T. 3121, supra, calls it a capital loss, as does I. T. 3159, C. B. 1938-1, p. 188. The respondent, in his contention that the gain computed by him is ordinary, relies on Bingham v. Commissioner, 105 Fed. (2d) 971. John H. S. Lee, 42 B. T. A. 920; and Joseph A. Guthrie, 42 B. T. A. 696. Those cases did not involve mortgage foreclosure, the Bingham and Lee cases involving compromises and surrender of property for cancellation of obligations prior to foreclosure sale, and the Guthrie case collection of an undivided interest purchased in an estate, upon distribution by the executor after sale of the property. No case squarely applicable is cited and we find none.
We think the effect of Regulations 77, article 193, so far as concerns the gain or loss there allowed, contemplates capital gain or loss. The property has been acquired'through the application of capital upon purchase price, and in that sense an exchange of capital assets has taken place. The apparent intent and the effect of the regulation is to permit adjustment of base in the taxable year when foreclosure takes place. We hold that the petitioner’s loss is capital and limited under section 117 (a) (2) of the Revenue Act of 1932, to capital gains.
Reviewed by the Court.
Decision will be entered under Rule 50.