Reporter's Statement of the Case Same; improper characterization of loss.-Where taxpayer made claim for refund under the heading of "Loss On Acquisition of Real Estate," and under this heading computed its loss by deducting from the amount of its mortgage what it claimed was the value of the property acquired, the Government was fully advised as to the basis of the taxpayer's claim and could not take advantage of the fact that taxpayer improperly characterized it as a "loss on partial bad debt." The Reporter's statement of the case: Mr. John C. Boland for the plaintiff. Mr. John A. Rees, with whom was Mr. Assistant Attorney General Samuel O. Clark, Jr., for the defendant. Messrs. Robert N. Anderson and Fred K. Dyar were on the brief. The court made special findings of fact as follows, upon a stipulation of facts entered into between the parties. 1. Plaintiff is now, and was at all times hereinafter mentioned, a corporation organized and existing under the laws of the State of Massachusetts, engaged primarily in the business of operating quick lunch rooms, but also in buying, leasing and selling improved real property and equipment in and upon and with which its several places of business were operated. One such place of business and property was and is located in Syracuse, New York, in a building known as the Lansing Building. 2. On March 15, 1932, plaintiff filed with the Collector of Internal Revenue for the District of Massachusetts its federal corporation income tax return for the calendar year 1931, made upon the accrual basis, reporting a total gross income of $262,502.03, deductions therefrom amounting to $155,139.92, a net taxable income of $107,362.11, and a tax thereon of $12,883.45. This tax was timely assessed and paid in quarterly installments during 1932. Later the Commissioner assessed against plaintiff additional taxes of $706.50, which was paid to the Collector of Internal Revenue on April 15, 1933. 3. On June 12, 1934, plaintiff filed with the Collector of Internal Revenue its formal claim for refund of $10,369.09 of its 1931 tax and $45.93 of interest, stating as grounds, 253153-40-21 Reporter's Statement of the Case among other things, a claimed deduction of $101,014.32 resulting from repossession of certain mortgaged property, to which particular reference will hereinafter be made. On July 5, 1934, plaintiff filed a further formal claim for refund for the year 1931, claiming deductions not here in controversy. This claim resulted in a refund of $147.43 of tax and $9.58 of interest paid thereon, together with accrued interest of $15.38. A Certificate of Overassessment in the same amount was delivered to the plaintiff together with a Treasury check dated December 15, 1934, in the amount of $172.39. In arriving at the above overassessment of $147.43, the Commissioner of Internal Revenue determined the net income of the plaintiff for 1931 to be $112,021.04, with a resulting net tax liability of $13,442.52. By registered letter dated December 27, 1934, plaintiff was advised of the disallowance and rejection of its refund claim filed June 12, 1934. 4. The facts relating to the claimed deduction of $101,014.32 mentioned in finding 3 above are as follows: Plaintiff acquired from Henry L. Bowles and wife a certain piece of property known as the Lansing Building by deed dated December 22, 1920, at a cost of $380,200. By deed dated March 2, 1928, plaintiff sold said building and the lunch room equipment contained therein to Robert Bersani for a total consideration of $425,000. The plaintiff reported a profit of $41,161:18 on this transaction in its income tax return for 1928, computed by deducting the cost from the selling price of $425,000. 5. Said sale was made subject to a first mortgage of $140,000, which the grantee assumed and agreed to pay. The grantee then secured from the holder of the first mortgage an additional loan of $50,000, secured by a second mortgage on the premises, and paid the entire proceeds thereof to the plaintiff to apply upon the purchase price of said premises. The said first and second mortgages, both being held by the same party, to all intents and purposes then became a first mortgage upon the premises, and hereinafter sometimes are referred to as the first mortgage. Reporter's Statement of the Case The said grantee then gave the plaintiff a third mortgage (hereinafter sometimes referred to as the second mortgage) of $185,000, and paid the plaintiff an additional $50,000 in cash. The said $185,000 mortgage was payable as follows: $2,500 on September 15, 1928, $2,500 semi-annually thereafter until March 15, 1930, $5,000 on March 15, 1930, and $5,000 semi-annually thereafter until March 15, 1945, when the entire balance of said mortgage would become due and payable, with interest on said principal sum or any unpaid part thereof at the rate of 512 percent per annum from March 15, 1928, payable semi-annually thereafter. 6. Said Bersani sold and conveyed an undivided one-half interest in and to said premises to N. Edward Rosenberg and Leah Rosenberg, his wife, as tenants by the entirety, by deed dated October 26, 1928, which recited that the premises were thereby conveyed "subject to the existing leases now on said premises" and also "subject to a first mortgage in the amount of $190,000 held by the First Trust & Deposit Company and a mortgage for $182,500 held by Bowles Lunch, Inc., both of which said mortgages parties of the second part assume and agree to pay.' Title to the undivided one-half interest then remaining in said Bersani was subsequently vested, after several transfers by warranty deeds, all duly recorded, in 115 Salina Corporation, a New York corporation, by warranty deed dated July 7, 1930. Title to the undivided one-half interest then remaining in the said Rosenbergs was subsequently vested, after several transfers by warranty deeds, all duly recorded, in Ge-Ro Realty Corporation, a New York corporation, by warranty deed dated June 21, 1930. None of the grantees in the deeds subsequent to the Rosenberg deed, dated October 26, 1928, became personally obligated to pay the mortgages above mentioned upon said premises. 7. The said Ge-Ro Realty Corporation and 115 Salina Corporation met the payments upon the plaintiff's mortgage above mentioned until September 15, 1930, when the payment of principal then due was defaulted. 8. Upon threat of foreclosure, 115 Salina Corporation conveyed title to its one-half interest in said premises to Reporter's Statement of the Case Caleb W. Bowles, plaintiff's nominee, by deed dated February 19, 1931. This latter deed recited that the premises were thereby conveyed, "Subject to mortgages, taxes and all existing leases. The party of the first part reserves the right to collect, receive and retain the February 1931 rents. This conveyance is made further subject to an unpaid oil bill of not to exceed $200, which bill the second party assumes and agrees to pay." Ge-Ro Realty Corporation also conveyed its undivided one-half interest in said premises to Caleb W. Bowles, plaintiff's nominee, by warranty deed dated February 19, 1931. This latter deed recited that the premises were thereby conveyed "subject to mortgages, taxes and all existing leases." No consideration was passed for the last two mentioned deeds except that the parties personally liable on plaintiff's mortgage were released from their obligation thereon. The plaintiff during 1931 became, ever since has been, and still is, the owner of said premises. 9. The said Robert Bersani and Mary Bersani, his wife, and the said N. Edward Rosenberg and Leah Rosenberg, his wife, were all insolvent and execution proof at the time of these transactions in 1931 and they all subsequently filed petitions in and were discharged of their debts in bankruptcy. No dividend was paid in any of said four bankruptcy cases. 10. The unpaid balance of the principal of plaintiff's second mortgage was $172,500 and accrued interest thereon was $4,058.53 when said property was repossessed by plaintiff. The fair market value of the property at the time of its reacquisition in 1931 was $300,000. Plaintiff reacquired title to said property subject to prior encumbrances and costs of acquisition aggregating $205,414.32 as follows: First mortgage. Accrued interest thereon_. City, County and State taxes_ $190,000.00 1, 561. 65 10, 802, 32 3,050. 35 $205, 414. 32 Opinion of the Court 11. As of December 31, 1930, the ledger of Bowles Lunch, Inc., included the second mortgage of $172,500 in an account called "Mortgage Receivable-Second Mortgage," with a debit balance of $172,500. The ledger also included as of December 31, 1930, in an account called "Accrued Interest Receivable" a debit of $2,767.19, which represented accrued interest receivable on the second mortgage of $172,500 for the period September 15, 1930, to December 31, 1930, inclusive. During 1931 the amount of $2,767.19 was charged to profit and loss and deducted in plaintiff's 1931 Federal income tax return. This deduction was disallowed by the Treasury Department. The accrued interest receivable on the second mortgage of $172,500 for the period January 1 to February 19, 1931, in the amount of $1,291.34 was included by the Commissioner as part of the plaintiff's net income of $112,021.04 for 1931. Under date of May 31, 1931, an entry was made on the journal of Bowles Lunch, Inc., as follows: Lansing Building-Real Estate. $172, 500.00 $172,500.00 The credit entry was posted to the account in which the $172,500.00 mortgage was recorded, thus closing the account, which was balanced and ruled off. The debit entry was posted to a new account entitled "Lansing Building-Real Estate." The court decided that the plaintiff was entitled to recover. WHITAKER, Judge, delivered the opinion of the court: On March 2, 1928, the plaintiff, a Massachusetts corporation, sold a piece of real estate and certain other property for a certain consideration, a part of which was secured by a mortgage on the property. Later, in 1931, the plaintiff repossessed the property. The question presented is whether or not it is entitled to a deduction of a loss or of a bad debt arising out of the transaction. The essential facts are as follows: The plaintiff on the date stated sold to Robert Bersani a piece of real estate known as the Lansing Building and |