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Stokes v. Commissioner of Internal Revenue

November 28, 1941

STOKES
v.
COMMISSIONER OF INTERNAL REVENUE; BENSON ET AL. V. SAME; STRAWBRIDGE V. SAME; LOW V. SAME.



Petitions for Review of Decisions of United States Board of Tax Appeals.

Author: Goodrich

Before BIGGS, MARIS, CLARK, JONES, and GOODRICH, Circuit Judges.

GOODRICH, Circuit Judge.

These cases, consolidated for review in this court, involve the question whether a loss on the disposition of a capital asset was an ordinary loss or a capital loss subject to the limitations of ยง 117(b) of the Revenue Act of 1934, 26 U.S.C.A. Int. Rev. Acts, page 708.

In 1927 the taxpayers, together with two other persons, purchased certain real estate in Philadelphia, subject to a $500,000 mortgage, and took title in the name of a straw man. Part of the purchase price was paid by giving a second mortgage for $250,000 on the property. In 1929 a new mortgage was given for $650,000, which, together with $100,000 contributed by the owners, was used to pay the two old mortgages. The new mortgage was executed in the name of a straw man and the taxpayers did not become personally liable thereon. On December 15, 1932, the taxpayers had decided to invest no more money in the property and wrote to the mortgagee offering either to surrender the property to the mortgagee giving it a deed to be recorded in 1932, or to retain title upon the following terms:

"(a) All of the net rents now on hand and all net rents received by the agents for the property during the year 1933 over and above the actual cost of operating the building, and cost of fire and liability insurance, shall be turned over to you, to be applied to payment of taxes and water rent, and any surplus to mortgage interest.

"(b) You will pay the 1933 water rent and taxes, and fire and liability insurance, and hereby indemnify us from any liability for the payment thereof.

"(c) You will write a letter to H. LeRoy Webb and Thomas Evans, who now hold title to the premises, agreeing to indemnify them from any liability for payment of 1933 taxes and water rent.

"(d) If at any time during the year 1933 we desire to surrender the property to you, you will accept a deed for it and have it recorded during the year 1933.

"(e) If we do not surrender the property to you during the year 1933, the extension agreement of November 17, 1931 shall remain in force, unless modified by mutual agreement, but all arrears of mortgage interest due May 17, 1933 and November 17, 1933, will be waived by you.

"(f) This agreement shall not be construed in any way as imposing any personal liability on us or any of us for payment of either principal or interest of said mortgage, all such personal liability being hereby expressly disclaimed by us and by you."

The mortgagee accepted the second alternative.

When the same proposition (except, of course, for change of dates) was renewed on December 5, 1933 for the coming year 1934, the mortgagee again chose the second alternative. In ...


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