T.C. Memo. 2019-59



                  UNITED STATES TAX COURT



        CHARLES K. BRELAND, JR., Petitioner v.
    COMMISSIONER OF INTERNAL REVENUE, Respondent

           YVONNE S. BRELAND, Petitioner v.
    COMMISSIONER OF INTERNAL REVENUE, Respondent



Docket Nos. 21946-12, 22228-12.             Filed May 29, 2019.


John H. Adams, for petitioner Charles K. Breland, Jr.

Robert M. Galloway, for petitioner Yvonne S. Breland.

Edwin B. Cleverdon and Horace Crump, for respondent.
                                        -2-

[*2]        MEMORANDUM FINDINGS OF FACT AND OPINION


       PUGH, Judge: In separate notices of deficiency issued to petitioners dated

June 4, 2012, respondent determined a deficiency of $1,632,1071 and an accuracy-

related penalty under section 6662(a) of $326,421 for the 2009 tax year. After

concessions,2 the issue for decision is the amount of long-term capital loss that

petitioners are entitled to deduct following the foreclosure of the mortgage on their

property on Dauphin Island in Alabama in 2009.

                               FINDINGS OF FACT

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

facts are incorporated in our findings by this reference. Petitioners were residents

of Alabama when they timely filed their petitions.




       1
       Unless otherwise indicated, all section references are to the Internal
Revenue Code of 1986, as amended and in effect for 2009. Rule references are to
the Tax Court Rules of Practice and Procedure. All monetary amounts are
rounded to the nearest dollar.
       2
        Petitioners conceded adjustments to their Schedule C, Profit or Loss from
Business, of $38,010 and $13,632. The parties stipulated that petitioners are
entitled to deduct $55,442 in long-term capital loss related to a property referred to
as 2470 SHS MDEVERYWHERE. Respondent conceded that petitioners properly
deducted $20,440 in capital loss related to Breland Family LLC and are not liable
for accuracy-related penalties for 2009.
                                        -3-

[*3] I. Petitioners’ Real Estate Transactions

      Before 2003 petitioners owned a shopping center in Alabama called Jubilee

Pointe. On January 7, 2003, they sold Jubilee Pointe for $4,568,600 and deposited

the proceeds with an intermediary. They used part of the proceeds to purchase

three properties: (1) a property in Daphne, Alabama, for $720,000, (2) beachfront

property in Pensacola, Florida, called Lot 52 for $1,400,000, and (3) 27.48% of

the Grand Bay property in Mobile, Alabama, for $742,000.3 In 2003 petitioners

filed a Form 8824, Like-Kind Exchanges, with their Form 1040, U.S. Individual

Income Tax Return, treating these transactions as eligible for deferred recognition

of gain under section 1031.

      Petitioners’ 2003 Federal income tax return was not adjusted or audited by

respondent. On their 2003 Form 8824, petitioners reported carrying over a basis

of $1,894,4364 from Jubilee Pointe to the three properties. They distributed their

reported basis in Jubilee Pointe among the three properties proportionately

according to their fair market values. As relevant here, petitioners report that they



      3
          Petitioners purchased the whole Grand Bay property for $2,650,000.
      4
        Petitioners reported a carryover basis of $1,894,436 on their 2003 Form
8824, but Mark Hieronymus, petitioners’ accountant, testified that petitioners
carried over $1,204,450 in basis from Jubilee Pointe. This difference does not
affect our decision.
                                         -4-

[*4] allocated $618,767 of their carryover basis to Lot 52. They then increased

that basis by $805,200 for assumed liabilities and decreased it by $435,029 for

satisfied liabilities, resulting in a reported adjusted basis in Lot 52 of $988,938.

      On May 15, 2004, petitioners sold Lot 52 for $3,300,000 and deposited the

proceeds with an intermediary. They subsequently purchased two properties--a lot

on Dauphin Island (Dauphin Island 1) for $8 million and (2) a property on Wilmer

Road in Grand Bay for $452,000. Petitioners filed a Form 8824 for 2004 treating

these transactions as like-kind exchanges. Petitioners allocated $751,593 of their

basis in Lot 52 to Dauphin Island 1 and the remaining $237,345 to the Wilmer

Road property. After taking into account increases of $6,720,000 and $322,720,

respectively, for liabilities assumed and cash contributed, and a decrease of

$1,105,200 for liabilities satisfied in the sale of Lot 52, petitioners reported an

adjusted basis in Dauphin Island 1 of $6,689,113.5

      On July 28, 2005, petitioners purchased a second property on Dauphin

Island (Dauphin Island 2) for $5,613,287. They financed the purchase of Dauphin

Island 2 with a recourse mortgage loan from Whitney Bank for $11,200,000.




      5
      In his posttrial briefs, respondent agrees that petitioners’ adjusted basis in
Dauphin Island 1 was at least $5,937,520.
                                        -5-

[*5] Petitioners refinanced Dauphin Island 1 in the same loan agreement so the

loan was secured by both Dauphin Island properties.

II. Foreclosure and Bankruptcy

      On March 9, 2009, petitioners defaulted on the loan secured by the Dauphin

Island properties. The principal balance on the loan was $10,764,262 when they

defaulted. Later that day, Whitney Bank foreclosed on the loan and held a

foreclosure sale. The foreclosure deed provided that, in the case of default on the

mortgage loan:

      Whitney National Bank is authorized and empowered by the
      Mortgage to sell the property described therein to the highest bidder
      for cash at public outcry at the front door of the Courthouse of Mobile
      County, Alabama, after giving notice of the time, place and terms of
      sale by publication once a week for three (3) consecutive weeks in a
      newspaper of general circulation published in Mobile County,
      Alabama.

The foreclosure deed went on to authorize Whitney Bank to “execute, for and in

the name of the mortgagor, a good and sufficient deed conveying the property

described in the Mortgage to the purchaser”. Whitney Bank was the highest

bidder, purchasing the Dauphin Island properties for $7,203,750.

      On March 11, 2009, petitioners filed for chapter 11 bankruptcy protection in

the Southern District of Alabama, and Whitney Bank filed a proof of claim for

$6,254,478. Petitioners filed a joint Form 1040 for January 1 through March 11,
                                        -6-

[*6] 2009, and their bankruptcy estate filed an income tax return for March 12,

2009, through the end of the calendar year. Petitioners initially reported that the

Dauphin Island properties were sold at foreclosure for $10,693,615--close to the

full principal balance on their mortgage loan--and reported a capital loss of

$1,809,090. On January 6, 2012, petitioners filed a Form 1040X, Amended U.S.

Individual Income Tax Return, for 2009 that reduced the sale price of the Dauphin

Island properties to $7,203,750, the bid price paid by Whitney Bank, and reported

an increased capital loss of $5,298,955.6

                                     OPINION

I. Burden of Proof

      Ordinarily, the burden of proof in cases before the Court is on the taxpayer.

Rule 142(a)(1); Welch v. Helvering, 

, 115 (1933). Under section

7491(a), in certain circumstances the burden of proof may shift from the taxpayer

to the Commissioner. Petitioners have not satisfied the requirements under section

7491(a) to shift the burden of proof to respondent as to any relevant factual issue.




      6
      Petitioners amended their 2009 tax return at least twice before 2012. The
amendments made in those Forms 1040X are not relevant here.
                                         -7-

[*7] II. Capital Loss

      Capital loss is the excess of the taxpayer’s adjusted basis in a capital asset

over the amount realized in the sale or disposition of that capital asset. Sec.

1001(a); see also sec. 1222. Therefore, the amount of petitioners’ deductible

capital loss depends on the amount they realized on the foreclosure sale of the

Dauphin Island properties and their aggregate adjusted basis in those properties.

      A. Amount Realized

      The amount realized from the sale or disposition of property equals the

amount of money plus the fair market value of property received. Sec. 1001(b).

Ordinarily, the amount a taxpayer realizes from the sale or disposition of property

includes the amount of any liabilities from which the taxpayer is relieved as a

result of that transaction. Sec. 1.1001-2(a)(1), Income Tax Regs. We apply this

general rule in the case of nonrecourse debt--the amount realized includes all

remaining debt in excess of the sale proceeds. Commissioner v. Tufts, 

, 310-312 (1983); Simonsen v. Commissioner, 

, 211-212 (2018);

Frazier v. Commissioner, 

, 245 (1998).

      Because this debt is recourse, however, the amount realized from the

transfer of the property is the fair market value of the property. Frazier v.

Commissioner, 

. In addition, “[t]he amount realized on a sale or
                                        -8-

[*8] other disposition of property that secures a recourse liability does not include

amounts that are (or would be if realized and recognized) income from the

discharge of indebtedness under section 61(a)(12).” Sec. 1.1001-2(a)(2), Income

Tax Regs.; see also Frazier v. Commissioner, 

; Aizawa v.

Commissioner, 

, 199 (1992), aff’d, 

(9th Cir. 1994). To

determine petitioners’ tax liability we then must answer two questions regarding

their loan: (1) what was the fair market value of the property transferred by the

foreclosure, and (2) what happened to the remaining loan balance. And as to the

remaining loan balance, the regulation contemplates two possibilities--(a) the

entire loan was extinguished so petitioners have income from discharge of

indebtedness to the extent the loan exceeded the property’s fair market value; or

(b) the loan was not extinguished, so petitioners later may have discharge of

indebtedness income to the extent that the loan is not repaid in full. See Aizawa v.

Commissioner, 

.

      Typically, the fair market value of property is the price at which the

property would change hands between a willing buyer and willing seller, neither

being under any compulsion to buy or sell and both having reasonable knowledge

of relevant facts. United States v. Cartwright, 

, 551 (1973).

Respondent contends that the bid price for the Dauphin Island properties at
                                        -9-

[*9] foreclosure does not meet our typical definition of fair market value: The

properties did not change hands between a willing buyer and willing seller

because petitioners were compelled to sell. See Frazier v. Commissioner, 

. However, in the case of mortgaged property sold at a foreclosure

sale, we presume fair market value to be the bid price, absent clear and convincing

evidence to the contrary. Sec. 1.166-6(b)(2), Income Tax Regs.; see Frazier v.

Commissioner, 

(citing Cmty. Bank v. Commissioner, 

,

792 (1982), aff’d, 

(9th Cir. 1987)); see also Aizawa v.

Commissioner, 

(“It cannot be gainsaid that the property was sold

for $72,700 (an amount which we have no reason to conclude did not represent the

fair market value of the property) and that petitioners received, by way of a

reduction in the judgment of foreclosure, that amount and nothing more.”).

Respondent points out that neither petitioners nor Whitney Bank obtained an

objective appraisal of the Dauphin Island properties in connection with the

foreclosure sale. But in the absence of an appraisal or other reliable evidence of

fair market value, no clear and convincing proof overrides the presumption that

Whitney Bank’s bid price was the fair market value. Therefore, we conclude that

the fair market value at the time of the foreclosure sale was the $7,203,750

Whitney Bank bid price.
                                       - 10 -

[*10] Respondent further contends that if the amount realized was the bid price,

petitioners would have recognized discharge of indebtedness income under section

61(a)(12) or reduced their tax attributes under section 108(b). Because petitioners

did not recognize section 61(a)(12) income or reduce their tax attributes,

respondent argues, the amount realized could not have been the bid price.

Petitioners argue that the discharge of indebtedness argument was new. They also

maintain that it is not relevant because petitioners were in a chapter 11 bankruptcy

proceeding and in that proceeding Whitney Bank was paid in full. We do not have

before us the record of the bankruptcy proceeding, but we may take judicial notice

of filings in a bankruptcy proceeding. See, e.g., Klein v. Commissioner, 

, 167 n.1 (2010); Bunch v. Commissioner, T.C. Memo. 2014-177, at *6 n.3;

Powers v. Commissioner, T.C. Memo. 2013-134, at *16 n.6 (taking judicial notice

of the bankruptcy court’s proceedings, docket entries relating to the proceedings,

and the underlying documents); Jeffries v. Commissioner, T.C. Memo. 2010-172,

, at *3; Pitts v. Commissioner, T.C. Memo. 2010-101, 

, at *2. We take notice that Whitney Bank filed a proof of claim in the

bankruptcy proceeding.

      While the parties stipulated that the debt was recourse, neither party

addressed whether the loan was extinguished. The preponderance of the evidence
                                       - 11 -

[*11] suggests that the balance of the recourse loan survived the foreclosure sale.

There is no evidence that Whitney Bank forgave the balance of the mortgage loan

as part of the foreclosure sale or issued to petitioners a Form 1099-C, Cancellation

of Debt. The foreclosure deed merely provides that Whitney Bank was

empowered to sell the Dauphin Island properties for cash, not that the sale was in

satisfaction of the entire loan. The fact that Whitney Bank filed a proof of claim in

petitioners’ bankruptcy proceedings supports that conclusion. Therefore, we

conclude that petitioners realized $7,203,750 from the sale of the Dauphin Island

properties at foreclosure.

      B. Adjusted Basis

      Generally, a taxpayer’s basis in a property is the cost of that property. Sec.

1012(a). When property is acquired through a like-kind exchange under section

1031, the taxpayer’s basis in the property acquired carries over from his basis in

the property exchanged. Sec. 1031(d). The basis is increased by the amount of

any gain realized on the exchange and by any liabilities assumed and is decreased

by the amount of money received by the taxpayer and any loss realized on the

exchange. Id.; secs. 1.1031(d)-1, 1.1031(j)-1(c) (regarding multiple properties),

Income Tax Regs. Any liabilities of the taxpayer assumed by another party in

consideration for the exchange are considered money received by the taxpayer.
                                        - 12 -

[*12] Sec. 1031(d); sec. 1.1031(d)-2, Income Tax Regs. When multiple properties

are received in a like-kind exchange, the basis carried over is allocated among the

properties proportionately according to their fair market values. Sec. 1.1031(j)-

1(c), Income Tax Regs.

      Respondent does not dispute that petitioners paid $322,720 in cash and

borrowed $6,720,000 for their acquisition of Dauphin Island 1 or that their cost

basis in Dauphin Island 2 was $5,613,287. Respondent contends that petitioners

have not substantiated their $751,953 basis in Dauphin Island 1, carried over from

Jubilee Pointe through two successive like-kind exchanges. The only evidence of

petitioners’ basis in Jubilee Pointe is an excerpt of a depreciation schedule from

petitioners’ 2003 Form 1040; they did not offer a settlement statement or deed.

But taxpayers cannot rely on tax returns to substantiate a tax item. See Wilkinson

v. Commissioner, 

, 639 (1979). The parties’ stipulation also expressly

noted that the 2003 return was not audited; thus, this is not a situation where

respondent has already reviewed the underlying transaction. We conclude that

petitioners have not adequately substantiated their basis in Jubilee Pointe or, in

turn, the basis that they carried over to Dauphin Island 1.

      Therefore, petitioners’ basis in Dauphin Island 1 is $5,937,520, consisting

of the cash they spent and the indebtedness they incurred in purchasing the
                                        - 13 -

[*13] property, less the liabilities satisfied as part of the transaction. Along with

their $5,613,287 basis in Dauphin Island 2, their aggregate basis in the Dauphin

Island properties at the time of the foreclosure sale was $11,550,807.

      Because petitioners realized $7,203,750 from the sale of the Dauphin Island

properties at foreclosure and their basis in the properties was $11,550,807, we,

therefore, conclude that petitioners’ resulting long-term capital loss is $4,347,057.

      We have considered all of the arguments made by the parties; and, to the

extent they are not addressed above, we find them to be moot, irrelevant, or

without merit.

      To reflect the foregoing,


                                                 Decisions will be entered under

                                        Rule 155.