Morton v. Commissioner , 38 B.T.A. 534 ( 1938 )

W. Z. MORTON, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Morton v. Commissioner

Docket No. 87836.

United States Board of Tax Appeals

38 B.T.A. 534; 1938 BTA LEXIS 857;

September 14, 1938, Promulgated

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Litigation arising as the result of foreclosure of a mortgage on petitioner's land held, on the facts, not sufficient to bring into question the finality of the foreclosure sale so that the compromise of that litigation in the tax year rather than the sale in a previous year could fix the time of loss.

Geo. D. Brabson, Esq., for the petitioner.

F. R. Shearer, Esq., and B. M. Brodsky, Esq., for the respondent.

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OPPER

This proceeding involves a deficiency in income tax of $1,057.71 for the fiscal year ending March 31, 1934. The only item in issue is a claimed loss from the foreclosure of certain real estate in which the petitioner owned an interest.

FINDINGS OF FACT.

1. Petitioner is an individual, residing at Greenville, North Carolina. His income tax return for the fiscal year ended March 31, 1934, was filed with the collector of internal revenue at Raleigh, North Carolina.

2. In 1912 the petitioner was dealing in real estate, as was also the Atlantic Coast Realty Co. (hereinafter referred to as Atlantic), a corporation in which petitioner owned 25 percent of the capital stock.

3. In 1912 petitioner and Atlantic jointly purchased a tract of land in Jones and Craven Counties, North Carolina, known as the Trentwood farm, for $45,000. On March 1, 1913, the land was worth as much or more than its original cost. Improvements were made upon the land in 1915 at a cost of $25,000, which had a depreciated cost basis of $10,000.06 at the close of 1931. Since the petitioner owned an undivided one-half interest in the farm and improvements, his total basis at the close of 1931 was $27,500.03.

4. On March 12, 1923, petitioner and Atlantic jointly borrowed $25,000 from the North Carolina Joint Stock Land Bank (hereinafter referred to as the Land Bank), the makers of the note given therefor being Atlantic, petitioner, and his wife. The note, which was a joint and several obligation, was secured by a deed of trust on the Trentwood farm.

5. The note provided for a semiannual payment of interest and principal in the sum of $875, making a total payment of $1,750 annually. In 1927 petitioner and Atlantic, with the consent of the Land Bank, sold some of the timber from the Trentwood farm for $7,500, which was paid directly to the Land Bank. It was the understanding of the owners that this payment to the Land Bank anticipated several of the installments due on the note. Petitioner and Atlantic paid the full amount of the semiannual installments up until 1930. No payments of interest or principal were made thereafter, because of the petitioner's financial condition and the bankruptcy of Atlantic.

6. On December 2, 1931, pursuant to the request of the Land Bank, the property was advertised by the trustee under the deed of trust for sale at public auction on January 9, 1932.

7. When the land was offered for sale on January 9, 1932, only three persons were present - the petitioner; his attorney, J. C. Lanier; and J. B. Warren, attorney for the trustee. Warren conducted the sale and made bids for the Land Bank. After petitioner had bid $9,000, Warren bid $9,500 and told petitioner and Lanier that if they bid again they would get the property because that was as high as he was authorized to go. Thereupon, petitioner and Lanier bid no more and the Land Bank was declared the purchaser.

8. Within the month of January 1932, petitioner brought suit in the Superior Court of Jones County, North Carolina, against the receivers (hereinafter referred to as trustee or trustees or receivers) of the trustee under the deed of trust. The complaint alleges that petitioner has paid or caused to be paid, with his cotenant, Atlantic, all the semiannual installments on the loan from the Land Bank, up to and including the payment due June 1, 1930; that petitioner and Atlantic sold certain timber rights on the lands in question and received therefor $7,500, which was turned over to the Land Bank to be credited against the principal of the loan; that as a result of said credit the amount due to the Land Bank thereafter is $1,225 per annum, payable semiannually, but that the bank has demanded and received $1,750 annually; that as a result of these overpayments petitioner is not in default in his payments to the Land Bank; that no payments have been made since June 1930, because there is nothing due on the loan at this time; that despite these facts the Land Bank has requested the trustee to advertise the lands for sale pursuant to the deed of trust; that the trustee advertised the lands for sale at public auction and purported to sell the lands at the courthouse door in Jones County, where the Land Bank appeared and bid for said lands and was thereby declared the purchaser thereof; that the sale is a fraud on the rights of the petitioner because the loan was not in default at the time; that the lands are reasonably worth far more than the amount of the loan, but petitioner is not in a position to protect himself, and unless the defendants are restrained from making deed to the property, petitioner will suffer irreparable loss; that the land was purported to have been sold for a fraction of its real value and the sale was not bona fide, since the Land Bank bid it in for the nominal sum of $9,500 because the petitioner is not financially able to pay the entire loan at this time.

The petitioner's prayer was, first, that the trustees be enjoined and restrained from proceeding further with the sale and from making a deed to the property; second, that an accounting be had between the petitioner and the Land Bank; third, that a day be set for showing cause why a restraining order should not be continued until the issue could be heard by a jury; fourth, that the complaint be treated as an affidavit for the purposes of the action; fifth, for such other and further relief to which he might be entitled.

9. Upon the foregoing complaint the court issued a temporary restraining order, enjoining the trustee from proceeding further with the sale or from making or delivering a deed conveying the land. Subsequently, upon the hearing on the rule to show cause why the order should not be continued until the allegations of the complaint could be tried, the court dissolved the preliminary restraining order on the grounds that no irreparable damage would be done and that recovery could be effected against the Land Bank for any damages that petitioner had sustained, and on the further ground that the note contained a provision to the effect that upon the application of the proceeds of timber sales to the note, they shall be applied to the last installments due and not to those currently due, wherefore the current payments were in default. Thereupon, the case was placed on the regular civil docket to be tried on the merits when reached.

10. Pursuant to the court's disposition of the temporary restraining order, a deed was executed by the trustees to the Land Bank on March 3, 1932.

11. On March 29, 1932, the Land Bank brought suit against petitioner and his wife in the Superior Court of Durham, North Carolina, for the sum of $11,143.38, the amount of the deficiency due on the note. The summons in that suit was served on the defendants on April 2, 1932. The bill of complaint alleged the borrowing from the plaintiff and execution of a note payable according to the amortization tables of the Farm Loan Board; the default; the request by the plaintiff that the trustee foreclose; the sale of the land after due advertising in accordance with the terms of the deed of trust and the law; the failure to raise the bid during the ten days that the sale was left open by law for that purpose; and the execution of a deed to the purchaser. It further alleged that, after application of the purchase price to the expenses of the sale and the note, there remained a deficit of $11,143.38, plus county taxes for 1929, 1930, and 1931, in accordance with the final accounting of the trustee; that plaintiff has made demand on defendants for the unpaid balance, but no part of it has been paid; and prayed judgment therefor.

12. On April 27, 1932, petitioner and his wife filed their answer, admitting the borrowing, the execution of the note and the purported sale, but denying the indebtedness, the correctness of the trustee's account, and that the sale was held according to law or according to the terms of the trust deed. "And further answering the complaint * * *", the petitioner alleged his understanding that the proceeds of the timber sales were to be applied on the installments next due, and that if that had been done there would be no default, and that there is no default; and finally "that the purported sale of the land under the power contained in the trust deed was void, and a fraud upon the right of this defendant." The prayer of the defendants is as follows:

1. That the action be dismissed as to each of them.

2. That the purported sale of the lands by the Receivers be declared null and void.

3. That they each be allowed to go without day, and that the action be dismissed as to each of them, and that they be allowed to recover their costs.

13. Thereafter, both suits lay dormant for some time because of the congestion of court dockets.

14. Petitioner's attorney did not believe that any further cause of action remained in the suit filed by petitioner in Jones County (finding No. 8, supra ), after the deed was executed by the trustees, but he considered that petitioner had the right to recover the land on the ground that the sale was voidable since the same person cried the sale for the trustees and bought the land as agent for the Land Bank. He so advised the petitioner in good faith and further advised him against settling the litigation.

15. Petitioner, however, decided to negotiate for settlement of the controversy with the Land Bank. His position was that there were a good many cases in eastern North Carolina where people were getting their land back. He went to see a representative of the Land Bank to see if he could not do something like that, and he could have redeemed it if he had raised sufficient money, but he could not. So in the fall of 1933 he had a lawyer associated with Lanier take up the matter of obtaining a compromise of the pending litigation. The negotiations were orally consummated in August 1933, the agreement being that petitioner would pay the Land Bank $2,500 in settlement. On September 12, 1933, the Land Bank wrote to petitioner and his wife as follows:

On behalf of The North Carolina Joint Stock Land Bank, I desire to acknowledge receipt of Deed of Trust together with three several notes which were secured thereby in the amount of $1000.00 and two in the sum of $750.00 respectively. The first of said notes in the amount of $1000.00 due on October 15, 1933, and the remaining two notes due and payable at yearly intervals thereafter. It is understood and agreed upon the part of the Land Bank that said notes upon presentation and due payment shall operate as a full settlement and discharge of the suit now pending in which The North Carolina Joint Stock Land Bank is plaintiff and you are defendants. It is further understood and agreed that upon the payment of the first note at its maturity date in the amount of $1000.00 that said action now pending in the Superior Court of Durham County will be voluntarily nonsuited by the plaintiff corporation without prejudice to any of its rights thereunder or any compromise settlement thereof.

Petitioner paid the $1,000 note several days before its maturity date.

16. At the time the settlement was effected the Land Bank was still the owner of the property acquired under the deed of March 3, 1932.

17. The amount of loss claimed on the return was $17,250. All but $1,000 of this was disallowed in the deficiency letter, leaving the amount in dispute as originally claimed $16,250, but this has now been increased to $27,500.03. The $1,000 allowed by the Commissioner was the amount paid by the petitioner on the note given in settlement of the litigation, as set forth in finding No. 15.

OPINION.

OPPER: The issue in this proceeding may be briefly stated as follows: Did the pendency of certain litigation relating to the mortgage prevent a foreclosure sale held in a prior year from being the closed and completed transaction which fixes the time of loss?

Counsel for both sides have cited numerous authorities, petitioner contending that this is similar to the cases holding that a foreclosure sale does not fix the event of loss until any redemption period has expired; ¹ and respondent urging as controlling those authorities establishing that the mere possibility of future recoupment, compensation, or deduction remaining to a taxpayer does not prevent or reduce his loss in the year the loss actually occurs. ²

It seems to us neither principle disposes of the contentions advanced in this case, the former because petitioner's right to avoid the sale was at best doubtful and has in fact never been settled, whereas in the cases cited the right of redemption is clear and absolute while it remains; and the latter because petitioner urges this, not as a case of recoupment or compensation for a loss indisputably occurring in the tax year, but rather as a situation where the loss of the property itself was uncertain and depended upon the result of the pending litigation. It is with this contention that we feel required to deal first, for, unless the facts warrant petitioner's position in this respect, his entire claim is without foundation.

The first action commenced was one in which petitioner was plaintiff and the trustees under the deed of trust were defendants. The relief prayed was that the latter be enjoined from executing a deed to the mortgagee, which was the purchaser, and that the mortgagee account for sums already received. As to the second request for relief, it is apparent not only that it was purely ancillary to the first, but that it could not, by itself, be effective to avoid the sale, and that it was directed against a stranger to the action. The application to enjoin the delivery of the deed is in a different category and might have been sufficient to sustain petitioner's contention. The difficulty is that a preliminary restraining order was almost immediately vacated, and the trustees proceeded to convey the property - all this prior to the fiscal year before us. After that had been done it is difficult to see what further effect the action could have had. True, the case is said to have taken its place on the calendar and could have been reached for trial. But, supposing it had, the plaintiff would have been in no position to benefit. Not only will equity decline to do a vain thing, ; ; , but even if a decree were issued in accordance with the prayer for relief, it would merely mean that no deed could thereafter be made by the trustees. That was immaterial because, presumably, they had no intention of giving a further deed, and the mortgagee's title was not there in litigation. So much is in effect conceded on petitioner's brief and by the testimony ³ of the attorney who represented petitioner at that time. We think this action did not and could not have the effect of casting doubt upon the finality of the sale.

The second suit was brought by the mortgagee against petitioner and his wife to recover the deficiency remaining after the proceeds of sale had been applied on the mortgage debt. In his answer in that litigation petitioner sets up certain affirmative allegations, and prays:

1. That the action be dismissed * * *.

2. That the purported sale of the lands by the Receivers [of the Trustee] be declared null and void.

Petitioner is on a fiscal year basis ending March 31. The summons in that suit was dated March 29, 1932, so that if the latter date is conclusive, the proceeding was pending at the end of the taxable year in which the sale took place. There is some doubt whether the service of the summons several days later, or the date of petitioner's answer, would not more accurately fix the time of pendency. But whether that be true and, if true, whether it be material, we need not discuss, for in our view this action, like the first one, seems wholly insufficient to raise any real issue as to the validity of the sale. The suit was brought at law to recover a money judgment. Nothing characterized as a counterclaim or cross-bill appears in the answer, and the new matter to which we have already referred is merely set forth as "further answering the complaint." But aside from this, petitioner's answer would at most be a collateral assault upon a proceeding ostensibly conducted under due form of law, and an attempt to invoke, in a law action, the powers of a court of equity. Neither appears to be permissible in North Carolina. ; . That this litigation was not regarded as affecting the sale, but only as a means of negotiation for repurchase or settlement, is borne out by the testimony of petitioner ⁴ and by the form of the compromise agreement.

And we may not assume the possibility of later amendment or other alteration of petitioner's position. For petitioner's whole claim is founded upon the pendency of litigation which in and of itself has the effect of making uncertain what would otherwise appear to be certain, of keeping open and incomplete what would otherwise be closed and completed. Nor are we concerned with any right petitioner may have had to compensation in money damages, ⁵ or by way of set-off or recoupment in the mortgagee's action for a deficiency, for that would not impair the finality of the sale nor postpone the loss of the property. ⁶ Petitioner's brief states his position to be that a sale does not close a transaction "where the validity of the sale itself is in question, for if it should be determined later that the sale is invalid, then it is a nullity and being a nullity it can not be the identifiable or determinative event"; and at another point: "The purchase of the land, the sale and the law suits attacking its validity, involve the same property * * *. These things must of necessity all be determined before a loss can be ascertained and allowed." The "validity of the sale itself was in question" if at all only by reason of "law suits attacking" it. The sale and the subsequent vesting of title were on their face closed and completed transactions fixing the time of loss. ⁷ On petitioner's own argument it must be the actual pendency of litigation capable of nullifying them which, if anything, would alter that apparent finality. As we have seen, no such litigation was actually pending on the evidence before us. Whether on more appropriate facts such a claim could ever be sustained we find it unnecessary to decide.

Decision will be entered for the respondent.

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Footnotes

• 1. ; . See also . ↩

• 2. ; ; ; ; ; ; ; ; ; . ↩

• 3. "After the trustee had completed the conveyance of the land, as his formal duty, I may say then our cause of action would be against the bank for damages for having ordered this sale." ↩

• 4. "Q. Did you consider that you had a right to redeem the property?

  "A. Yes, sir. It was being done in eastern North Carolina at that time. A good many people lost their farms just like I did this, and they would go into court and the court would see that you got your farm back. In other words, pay whatever it was sold for and make the proper arrangements, and you could get back your land. There were a good many cases like that in eastern North Carolina.

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  "Q. * * * In other words, such attempt at redemption as you made was simply through the medium of this suit against the Joint Stock Land Bank?

  "A. The fact that I went up to Durham and conferred with those people and made two trips up there, trying to come to some kind of trade so that we could get the land back, and failed in it. I could not borrow any money then. I needed money, and you could not borrow money then." ↩

• 5. The attorney who represented petitioner at the time the litigation was pending, on being asked why the North Carolina Court in dissolving the temporary restraining order in the first action reached the conclusion that no irreparable injury would result to petitioner replied: "I could not say why he reached that conclusion. That is what he said, thinking that there was a money consideration that we could recover against the bank for any damages we had sustained." And see footnote 3, supra.↩

• 6. See footnote 2, supra.↩

• 7. In ,↩ page 920, we said: "* * * where the loss is in reference to real estate, it has been held in a long line of cases that a sale of the real estate alone satisfies the requirement. * * * And, that conveyance must be absolute."