FORECLOSURE; CAPITAL GAIN: Taxpayers recognize capital gain on farmland where the price obtained at foreclosure sale exceeds their adjusted basis in the property.

Berglund v. Commissioner, T.C. Memo. 1995-536.

Although the taxpayers sought a reversal of the foreclosure in various state and federal court actions, these efforts were unsuccessful. Accordingly, the gain realized from the foreclosure sale had to be included in the taxpayers' gross income. Note, however, that the taxpayers also received deductions in substantial amounts for the interest component of the foreclosure proceeds applications. These deductions, in the end, substantially reduced their tax liability.

Also see, Cox v. Commissioner, 68 F.3d 128 (5th Cir. 1995) (foreclosoure results in gain for price bid in excess of basis even where debt foreclosed upon is unrelated business debt - taxpayer received credit against the debt as a consequence of the sale.)

Comment: None of this is news, of course. It's just the old Crane doctrine still lurking out there. But many lawyers fail to take tax consequences into account in negotiating workout contingencies. Whether there is foreclosure or deed in lieu of foreclosure, there will be tax consequences to the borrower. If the borrower knows of offsetting gains or has other tax considerations that would determine whether to take the foreclosure loss in one year or another, the borrower ought to take these considerations into account in structuring any "paydowns" or even "workouts," since workouts often turn out to be paydowns. And don't neglect application of the deductions for payment of the interest component of mortgagee's claim.

FORECLOSURE; DEFICIENCY; GAIN OR LOSS: Where a valid deficiency judgment was entered against a taxpayer following foreclosure sale of investment property, the taxpayer realizes a loss if his basis in the property exceeds the sale price.

Webb v. Commissioner, T.C. Memo. 1995-486.

Although the deficiency judgment had not been properly docketed and the balance of the deficiency was later discharged in bankruptcy, a valid deficiency existed following the sale, entitling the taxpayer to take the loss.

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