T.C. Memo. 1998-173



                      UNITED STATES TAX COURT



    SHIRLEY DEAN EMMONS AND CHARLES W. EMMONS, Petitioners v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 17294-95.                       Filed May 11, 1998.



     Shirley Dean Emmons and Charles W. Emmons, pro sese.

     William I. Miller, for respondent.



                        MEMORANDUM OPINION

     GALE, Judge:   Respondent determined a deficiency in

petitioners' 1991 Federal income tax in the amount of $13,349, an

addition to tax under section 6651(a)(1)1 in the amount of


     1
       Unless otherwise noted, all section references are to the
Internal Revenue Code in effect for the year in issue, and all
Rule references are to the Tax Court Rules of Practice and
                                                   (continued...)
                                 - 2 -

$2,002, and an accuracy-related penalty under section 6662(a) in

the amount of $2,670.

     After concessions,2 the issues for decision are as follows:

(1) Whether petitioners must recognize long-term capital gains

from the foreclosure sale in 1991 of two parcels of real property

held by them; (2) whether petitioners are entitled to a deduction

for ordinary losses for their equity interests in the properties

sold by foreclosure in 1991; (3) whether petitioners are liable

for an addition to tax under section 6651(a)(1); and (4) whether

petitioners are liable for an accuracy-related penalty under

section 6662(a) for substantial understatement of tax.

     Some of the facts have been stipulated and are so found.

The stipulation of facts and the attached exhibits are

incorporated herein by this reference.

     At the time the petition was filed, petitioners resided in

Chicago, Illinois.     In 1991, petitioners owned two rental income

properties that they had owned for more than 1 year.    These

properties were located in Chicago, Illinois, at 5335 South

Honore (Honore property) and 7332 Campbell (Campbell property).

     In 1991, petitioners' adjusted basis for the Honore property

was $32,963, and they were personally liable for a mortgage on

     1
      (...continued)
Procedure.
     2
       Petitioners did not contest and are therefore deemed to
have conceded respondent's determination that they had additional
interest income in 1991. Rule 34(b)(4).
                                - 3 -

the property in the amount of $43,356.   The property was

foreclosed and sold in that year for $54,435.   Of this amount,

$43,356 was used to pay off petitioners' mortgage on the

property.   Petitioners did not receive any other amounts from the

sale.

     In 1991, petitioners' adjusted basis for the Campbell

property was $84,459, and they were personally liable for a

mortgage on the property in the amount of $88,491.   The property

was foreclosed and sold in that year for $106,620.   Of this

amount, $88,491 was used to pay off petitioners' mortgage on the

property.   Petitioners did not receive any other amounts from the

sale.

     On their 1991 Federal income tax return (return),

petitioners did not report any gain with respect to the

foreclosure transactions, but instead claimed a deduction for

ordinary losses on Form 4797 in the amount of $13,600, which

petitioners computed as the excess of the properties' foreclosure

sales prices over the mortgage balances plus depreciation.     In

effect, petitioners claimed a loss for their equity in the

properties less depreciation.

     Petitioners' return was filed on October 16, 1992.

     In the notice of deficiency, respondent disallowed the

$13,600 in claimed losses and determined that petitioners had

long-term capital gains in the amount of $43,633, computed as the
                                - 4 -

difference between the total sales prices from both sales

($161,055) and petitioners' total adjusted basis in both

properties ($117,422).   The parties now stipulate that

petitioners did not receive the sales proceeds that exceeded the

amounts due on the mortgages.    As a result, respondent has

conceded $29,208 of the $43,633 adjustment for capital gains, and

now contends that petitioners only had gain of $14,425, which is

the difference between their total adjusted basis in the two

properties ($117,422) and the combined mortgage liabilities from

which they were relieved ($131,847).    Petitioners continue to

claim that they had no gain because they did not receive any

proceeds from the foreclosure sales.

     Section 1001(a) defines gain or loss from the sale or other

disposition of property as the difference between the "amount

realized" and the taxpayer's adjusted basis in the transferred

property.   The amount realized is the sum of any money received

plus the fair market value of the property (other than money)

received.   Sec. 1001(b).   The amount realized from a sale or

disposition of property includes the amount of liabilities from

which the transferor is discharged as a result of the sale or

disposition, including a sale in foreclosure.    Crane v.

Commissioner, 

(1947); United States v. Hendler, 

(1938); Chilingirian v. Commissioner, 

(6th

Cir. 1990), affg. T.C. Memo. 1986-463; sec. 1.1001-2(a)(1),

Income Tax Regs.
                                - 5 -

       As a result of the foreclosure sales, petitioners were

relieved of personal liabilities totaling $131,847, and it has

been stipulated that they received no other amounts from the

sales.    Accordingly, the amount realized by petitioners was

$131,847.    The parties have stipulated that petitioners' adjusted

basis in the properties totals $117,422, and that both properties

were held for more than 1 year.    Petitioners, therefore,

recognized a long-term capital gain in the amount of $14,425 from

the foreclosure transactions, measured as the difference between

the amount realized and their adjusted basis.

       Petitioners argue that they could not have had any capital

gain from the foreclosures because they lost the properties and

even though the foreclosure proceeds exceeded their mortgage

liabilities, none of the proceeds was received by them.      We note

first that respondent is no longer attempting to tax petitioners

on the proceeds that exceeded the mortgage payoffs.    But as to

the proceeds used to pay off the mortgages, petitioners

apparently believe that they must have actual receipt of money or

property in order to have taxable gain for income tax purposes.

This contention has been rejected by the Supreme Court.      Crane v.

at 13; United States v. 

at

566.    Rather, a taxpayer is treated as having gain when he

benefits from having his debts paid off, as if the money were

first paid to the taxpayer and then paid over by him to his

creditors.    Crane v. 

; United States v.
                               - 6 -

.   Therefore, a taxpayer who transfers mortgaged

property, whether to the mortgagee or another third party, and is

discharged from his liability on the mortgage debt in

consideration for the transfer, realizes a benefit in the amount

of the liability discharged.   In the instant case, this reasoning

dictates that petitioners have taxable capital gain to the extent

that their personal mortgage indebtedness, paid off with the

foreclosure proceeds, exceeded their basis in the properties.

Crane v. 

; United States v. 

;

Chilingirian v. 

.

     Petitioners' claim that they are entitled to a deduction for

ordinary losses equal to their equity in the properties less

depreciation is without merit because, as discussed above, their

amount realized as a result of the foreclosures exceeded their

adjusted basis in the properties.

     Respondent determined an addition to tax under section

6651(a)(1) for the late filing of petitioners' return.    The

return was due on April 15, 1992, and filed on October 16, 1992.

There is no evidence of an extension to file.   Section 6651(a)(1)

imposes an addition to tax for failure to file timely Federal

income tax returns unless the taxpayer shows that such failure

was due to reasonable cause and not willful neglect.     United

States v. Boyle, 

, 245 (1985).   Petitioners have not

addressed the late filing or offered any reasonable cause
                                - 7 -

therefor.   Accordingly, we find petitioners liable for the

addition to tax under section 6651(a)(1).

     Respondent also determined that petitioners are liable for

the accuracy-related penalty for substantial understatement of

tax under section 6662(b)(2).   In this regard, petitioners have

not provided substantial authority for the positions taken on

their return.   In fact, Mrs. Emmons testified that the accountant

who prepared the return informed her that the foreclosure

transactions resulted in taxable gain to petitioners and that she

nonetheless insisted that the return be prepared showing losses

on these transactions.   Furthermore, petitioners did not make

disclosures within the meaning of section 6662(d)(2)(B)(ii).

Therefore, due to the concessions made by the parties and the

findings herein, the penalty will be sustained in the event the

Rule 155 computation indicates that petitioners' understatement

of tax exceeds the greater of $5,000 or 10 percent of the amount

of tax required to be shown on the return.

     To reflect the foregoing and concessions,

                                        Decision will be entered

                                  under Rule 155.