-45-
from the fair market values on the date of the subsequent sales
of the properties.
This case is unlike the situation covered by section 1038,
where the seller of real property reacquires his property in
satisfaction of indebtedness to the seller. In that case,
section 1038 provides that no gain or loss shall result to the
seller because the seller/mortgagee is reacquiring that which was
initially sold to the purchaser/borrower. In this case,
petitioners loaned $130,000 and received, through deeds in lieu
of foreclosure, property with a net value in excess of $130,000.
Petitioners have realized ordinary (because there has been no
sale or exchange for purposes of section 1231) income to the
extent that the net fair market value of the properties received
exceeded their adjusted basis in the debt. See Commissioner v.
Spreckels, 120 F.2d 517, 521 (9th Cir. 1941); Pender v.
Commissioner, 110 F.2d 477, 478 (4th Cir. 1940).
In our findings of fact, we found that each of the items
that respondent used to calculate petitioners' income from the
acceptance of the deeds in lieu of foreclosure was paid or
reported by petitioners in the amounts stated above. Petitioners
have not offered any evidence of other items that would reduce
their income from the acceptance of the deeds in lieu of
foreclosure. Respondent's determination, in an amount as
corrected above, that petitioners had ordinary income from the
acceptance of deeds in lieu of foreclosure will be sustained.
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