- 9 -
Under the facts of this case, both parties err by looking to
the fair market value of the property to determine the amount of
interest petitioner is deemed to have paid. Importantly,
respondent concedes that the Wells Fargo note was either
nonrecourse or treated as nonrecourse under California law.6
Therefore, as we shall explain, fair market value is a neutral
factor in the determination of the amount of interest petitioner
is deemed to have paid in the foreclosure of his residence.7
A foreclosure sale, in which the collateral is repossessed
from the debtor, constitutes a taxable sale or exchange by the
debtor of the encumbered property. See Helvering v. Hammel, 311
U.S. 504 (1941); Estate of Delman v. Commissioner, 73 T.C. 15, 28
(1979). The debtor’s gain or loss in the transaction is measured
by the difference between the amount realized in the disposition
of the property and the debtor’s basis in the property. See
Crane v. Commissioner, 331 U.S. 1 (1947). When, as here, a
debtor sells or disposes of property encumbered by a nonrecourse
obligation, the amount realized by the debtor includes the full
outstanding balance of the nonrecourse debt even if the
liabilities exceed the fair market value of the property. See
Commissioner v. Tufts, 461 U.S. 300, 317 (1983); sec. 1.1001-
6California is an antideficiency jurisdiction that prohibits
lenders from seeking a judgment against borrowers with respect to
a purchase money mortgage. See Calif. Civ. Proc. Code sec. 580b
(West 1982); Freeland v. Commissioner, 74 T.C. 970, 971 (1980).
7We thus make no specific finding as to fair market value.
Page: Previous 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 Next
Last modified: May 25, 2011