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after the sale is wholly or partially uncollectible,
the mortgagee or pledgee may deduct such amount under
section 166(a) (to the extent that it constitutes
capital or represents an item the income from which has
been returned by him) as a bad debt for the taxable
year in which it becomes wholly worthless or is charged
off as partially worthless. See � 1.166-3.
(2) Accrued interest. Accrued interest may be
included as part of the deduction allowable under this
paragraph, but only if it has previously been returned
as income.
(b) Realization of gain or loss--(1) Determination
of amount. If, in the case of a sale described in
paragraph (a) of this section, the creditor buys in the
mortgaged or pledged property, loss or gain is also
realized, measured by the difference between the amount
of those obligations of the debtor which are applied to
the purchase or bid price of the property (to the
extent that such obligations constitute capital or
represent an item the income from which has been
returned by the creditor) and the fair market value of
the property.
(2) Fair market value defined. The fair market
value of the property for this purpose shall, in the
absence of clear and convincing proof to the contrary,
be presumed to be the amount for which it is bid in by
the taxpayer.
Petitioner argues that it is entitled to increase its
regular adjusted cost basis in its mortgages to account for
unpaid interest which accrued during the period in which it was
tax exempt. Respondent argues that section 1.166-6(a)(2), Income
Tax Regs., requires as a condition precedent to such a basis
increase that petitioner “returned as income”, i.e., reported as
taxable income, its accrued interest. Since petitioner was tax
exempt when the interest at issue accrued, respondent contends
that petitioner has not met the requirements for deductibility
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