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Petitioner’s Basis in the Atascadero Property
Petitioner contends that his basis in the Atascadero
property, for the purpose of computing his loss on its sale to
Bryan Dunnivan was $339,328; this is the sum of the outstanding
balances of the two notes secured by the property, the $168,957
note held by Great Western and the $170,371 note received by
petitioner as a distribution from his profit-sharing plan.
Petitioner is mistaken.
Section 1012 sets forth the fundamental proposition that
“the basis of property shall be the cost of such property”. It
is well settled that the cost of property to a mortgagee who
receives a voluntary conveyance on account of a debt is the
property’s fair market value. See Commissioner v. Spreckels, 120
F.2d 517, 520 (9th Cir. 1941); Kohn v. Commissioner, 16 T.C. 960,
962 (1951), affd. 197 F.2d 480 (2d Cir. 1952); Sargent v.
Commissioner, T.C. Memo. 1970-214. It is as if the debtor had
sold the property to an outsider for cash, and then used the cash
to reduce the debt. Commissioner v. Spreckels, supra. Any
portion of the debt not satisfied by the conveyance may be
deducted under section 166 to the extent the taxpayer can prove
worthlessness. Id.; Kohn v. Commissioner, supra.
The case at hand differs slightly from the cited cases
because it involves a junior lienholder’s acquiring property
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