64 T.C. 300">*300 Respondent determined the following deficiencies in the Federal income tax of petitioners Gordon I. and Janet C. Hyde in these consolidated proceedings:

Concessions having been made, it remains for us to decide: (1) The value of real estate in which Gordon Hyde acquired1975 U.S. Tax Ct. LEXIS 138">*141 an interest; (2) whether certain deductions claimed by Gordon Hyde for 1968 under sections 163 and 164¹ were excessive; (3) whether a statutory redemption fee is interest within the meaning of section 163; (4) whether Gordon Hyde recognized gain on the sale of certain shares of stock in 1968; (5) whether 64 T.C. 300">*301 Gordon Hyde was entitled to claim a bad debt deduction for 1968; and (6) whether Janet Hyde is entitled to relief under section 6013(e).

FINDINGS OF FACT

Certain facts have been stipulated and are found as stipulated.

Petitioners Gordon I. (Gordon) and Janet C. (Janet) Hyde, formerly husband and wife, filed joint Federal income tax returns for 1967 and 1968 with the District Director of Internal Revenue, Salt Lake City, Utah. They were divorced on June 16, 1971. They were residents of Salt Lake City when the petitions herein were filed.

At all times relevant, Gordon wasa practicing1975 U.S. Tax Ct. LEXIS 138">*142 attorney. Among his clients were UMC Motor Club, Inc. (UMC), and its affiliates. UMC was a corporation organized and existing under the laws of the State of Utah, with its principal place of business in Salt Lake City. All of the outstanding shares of capital stock in UMC were owned by the family of Sam and Donna Arge, husband and wife, until May 1967 when the Arges sold all their shares to Robert Bryson (Bryson) and a group of undisclosed persons represented by him.

At the time of the sale UMC held title to a house at 1955 Bryan Avenue in the El Rey Park subdivision of Salt Lake City. The house had been constructed by the Arges in 1964-65 at a cost well in excess of $ 100,000 and had then been conveyed by them to UMC. The house was a marked overimprovement for the area in which it was located; for in 1964-65 houses in the vicinity of 1955 Bryan Avenue were priced in the $ 35,000 range.

While the Arges retained control of UMC, they maintained the house on Bryan Avenue as their residence. But when Bryson and his associates acquired the capital stock of UMC, they decided to sell the Bryan Avenue property because it served no useful function in the operation of themotor club. 1975 U.S. Tax Ct. LEXIS 138">*143 When Bryson and his associates learned that petitioners were disposed to purchase the house, they agreed to let them occupy it, pending their purchase of the property. The contemplated transaction was never consummated, however, for the property had twice been mortgaged by the Arges; and UMC lacked the funds necessary to discharge the several debts which encumbered it. ² Consequently, 64 T.C. 300">*302 on September 15, 1967, the first mortgagee, the Equitable Life Assurance Society of the United States (Equitable), initiated foreclosure proceedings in the District Court of Salt Lake County. Under these circumstances, UMC agreed to convey its interest in the property to Gordon, gratis; ³ for Gordon still wished to acquire the house, and as UMC's successor in interest he would be accorded the opportunity to redeem it under the law of Utah.

1975 U.S. Tax Ct. LEXIS 138">*144 The conveyance was effected by delivery of a quitclaim deed on December 1, 1967. ⁴ On that date the property was subject to encumbrances in the following amounts:

1975 U.S. Tax Ct. LEXIS 138">*145 On April 16, 1968, the court entered a decree of foreclosure and ordered the Bryan Avenue property to be sold by the sheriff. At the sheriff's sale of May 14, 1968, Equitable purchased the property for the amount of its judgment plus costs: 64 T.C. 300">*303

Within 6 months of the sheriff's sale, Gordon exercised his right of redemption by paying Equitable $ 50,047.99:

1975 U.S. Tax Ct. LEXIS 138">*146 Pursuant to the redemption, he had Equitable assign its interest in the property to Ruth W. Soren (Soren), his secretary and nominee.

On September 24, 1970, Soren executed a trust deed to the property naming Zions First National Bank (Zions) as trustee and beneficiary. The deed secured a note in the amount of $ 55,000, executed by Soren and Gordon. Payments on the note were not made in compliance with its terms; and therefore on November 22, 1971, Zions obtained an order in the District Court of Salt Lake County authorizing a private trust deed sale of the property.

Relying on an estimate as to the value of the property made by their real estate department, the management of Zions listed the house with a real estate broker for $ 75,000. The property was 64 T.C. 300">*304 purchased for this amount in January of 1973. ⁵

1975 U.S. Tax Ct. LEXIS 138">*147 While in residence at 1955 Bryan Avenue, Gordon made improvements to the property at a cost of approximately $ 10,000. These included the installation of carpeting, a dishwasher, and a stereo system. When he vacated the house Gordon removed these items. Subsequently, while the house was unoccupied, it was vandalized. Zions incurred about $ 1,750 in cleaning and repairing the house prior to its being resold, but did not replace the improvements which Gordon had removed.

In the early part of 1968 Gordon was interested in procuring a loan. At the time he was assisting a client, Roy Collard (Collard), in obtaining from Pacific Air Transport, Inc. (Pacific), the release of 13,333 shares of stock in that corporation. Collard agreed to lend Gordon either the Pacific shares or the proceeds of their sale if his efforts to obtain their release proved successful. In May 1968 the shares were released; and Gordon began to sell them through his brokerage account, thereby creating a fund from which he might borrow. Before Gordon's obligation to Collard arising out of this transaction could be discharged, several disputes unrelated to it arose between them. Gordon hoped that a single settlementof1975 U.S. Tax Ct. LEXIS 138">*148 all his dealings with Collard could be effected; Collard, however, proved unwilling to negotiate such a settlement, claiming by way of explanation for his refusal that he was under investigation by the Internal Revenue Service.

On their joint return for 1967, filed on or before April 15, 1968, petitioners reported gross income of $ 50,644.54. On their joint return for 1968, filed on September 15, 1969, they reported gross income of $ 150,595. Statutory notice of deficiency for 1967 was dated November 22, 1972; statutory notice of deficiency for 1968 was dated September 11, 1972.

OPINION

We have first been asked to decide whether Gordon recognized any income on the acquisition of the Bryan Avenue property.

If property subject to an encumbrance is transferred by one not personally liable on the secured indebtedness, then, should the 64 T.C. 300">*305 fair market value of the property exceed the amount of the encumbrance, the transferee may recognize income on the transaction in the amount of the excess. Whether income is in fact recognized will depend upon the circumstances under which the transaction is effected. Cf. 1975 U.S. Tax Ct. LEXIS 138">*149 Crane v. Commissioner, 331 U.S. 1">331 U.S. 1 (1947).

Gordon acquired title to the Bryan Avenue property upon receipt of a quitclaim deed on December 1, 1967. Singleton v. Kelly, 61 Utah 277">61 Utah 277, 212 P. 63">212 P. 63 (1922). The property was then subject to encumbrances of no less than $ 48,102.88. The fair market value of the property at the time of the conveyance is in controversy. In attempting to determine that value, we have considered the following factors: The price at which the property was sold by Zions in 1973; the improvements which were made to the property between the conveyance to Gordon and the sale by Zions; the extent to which the condition of the property deteriorated in that period; the rate at which the value of real estate in Salt Lake City appreciated between 1967 and 1973; and the effect which the location of the house may have had upon appreciation in its value during that period. We have concluded that on December 1, 1967, the fair market value of the property cannot have exceeded $ 60,000.

On their return filed for 1967 petitioners failed to report any income as having been recognized upon Gordon's receipt of an interest in the Bryan Avenue property. 1975 U.S. Tax Ct. LEXIS 138">*150 Whether any was in factrecognized we need not decide owing to the operation of the statute of limitations.

Ordinarily, a deficiency in Federal income tax must be assessed within 3 years after the return is deemed to have been filed. Sec. 6501(a). If a notice of deficiency is mailed to the taxpayer within that 3-year period pursuant to section 6212, this will suffice to suspend the running of the period of limitations. Sec. 6503(a). Petitioners' return for 1967 is deemed to have been filed on April 15, 1968. Sec. 6513(a). Statutory notice respecting that year was not mailed until November 22, 1972. The assessment and collection of any tax which may be owing for 1967 are therefore time-barred. ⁶

64 T.C. 300">*306 When Gordon redeemed the Bryan Avenue property1975 U.S. Tax Ct. LEXIS 138">*151 in 1968, the following itemswere included in the amount which he paid Equitable:

Petitioners claim that Gordon is entitled to deductions in the full amount of these items for 1968. The items are in fact deductible by Gordon only to the extent they accrued on or after December 1, 1967. To the extent they accrued prior to that date, they must be capitalized. Sec. 164(d); Holdcroft Transp. Co. v. Commissioner, 153 F.2d 323">153 F.2d 323 (8th Cir. 1946), affg. a Memorandum Opinion of this Court.

Petitioners also claim that Gordon is entitled to a deduction under section 163 in the amount of a statutory fee of $ 2,861.22, paid to Equitable in connection with the redemption of the property. 1975 U.S. Tax Ct. LEXIS 138">*152 ⁷ We agree.

A mortgagor or his successor in interest is generally privileged to discharge a secured indebtedness on its maturity or at any time thereafter prior to foreclosure. Moreover, in Utah, he or his successor in interest is privileged to redeem the property within 6 months of the foreclosure sale by paying the purchaser the amount of his bid, plus1975 U.S. Tax Ct. LEXIS 138">*153 a fee fixed by statute. As this statutory fee 64 T.C. 300">*307 is essentially the consideration paid for an effective extension of the mortgage loan, ⁸ it constitutes interest within the meaning of section 163. Court Holding Co., 2 T.C. 531">2 T.C. 531, 2 T.C. 531">536 (1943), revd. on other grounds 143 F.2d 823">143 F.2d 823 (5th Cir. 1944), revd. 324 U.S. 331">324 U.S. 331 (1945); Western Credit Co., 38 T.C. 979">38 T.C. 979 (1962), affd. per curiam 325 F.2d 1022">325 F.2d 1022 (9th Cir. 1963). ⁹

Under the terms of his agreement with Collard respecting the latter's Pacific shares, Gordon was authorized to sell the shares on Collard's behalf and then to borrow from the proceeds. None of the indebtedness to Collard which Gordon incurred by reason of this transaction was forgiven in 1968. Therefore Gordon recognized no income on the transaction in1975 U.S. Tax Ct. LEXIS 138">*154 that year. Cf. Allen Tobey, 26 T.C. 610">26 T.C. 610, 26 T.C. 610">616-617 (1956).

Petitioners maintain that obligations of $ 7,124.37, purportedly owed to Gordon by UMC and affiliated corporations, became worthless in 1968. It is a matter of controversy whether the cash advances alleged to underlie these obligations were in fact made. The burden of proving that they were made is upon petitioners.

The testimony relevant to this issue given by the various witnesses is rife with contradictions. The relevant documentary evidence is inconclusive. ¹⁰ Of singular significance to the Court is that no note attesting to the alleged indebtedness was introduced at trial. We are reluctant to conclude that an attorney advanced over $ 7,000 in cash to a client without insisting upon the execution of a note, especially in a case suchas this where the client was in difficult financial straits. We therefore hold that petitioners have failed to sustain their burden of proof on this issue.

1975 U.S. Tax Ct. LEXIS 138">*155 Finally we are asked to decide if Janet is entitled to relief under section 6013(e). ¹¹ Clearly she is not; for items of gross 64 T.C. 300">*308 income in excess of 25 percent of the gross income reported were not improperly omitted from either of the returns filed for the years in issue.

Decisions will be entered under Rule 155.