(a) Deficiency deductible as bad debt—(1) Principal amount. If mortgaged or pledged property is lawfully sold (whether to the creditor or another purchaser) for less than the amount of the debt, and the portion of the indebtedness remaining unsatisfied after the sale is wholly or partially uncollectible, the mortgagee or pledgee may deduct such amount under section 166(a) (to the extent that it constitutes capital or represents an item the income from which has been returned by him) as a bad debt for the taxable year in which it becomes wholly worthless or is charged off as partially worthless. See § 1.166-3.
(2) Accrued interest. Accrued interest may be included as part of the deduction allowable under this paragraph, but only if it has previously been returned as income.
(b) Realization of gain or loss—(1) Determination of amount. If, in the case of a sale described in paragraph (a) of this section, the creditor buys in the mortgaged or pledged property, loss or gain is also realized, measured by the difference between the amount of those obligations of the debtor which are applied to the purchase or bid price of the property (to the extent that such obligations constitute capital or represent an item the income from which has been returned by the creditor) and the fair market value of the property.
(2) Fair market value defined. The fair market value of the property for this purpose shall, in the absence of clear and convincing proof to the contrary, be presumed to be the amount for which it is bid in by the taxpayer.
(c) Basis of property purchased. If the creditor subsequently sells the property so acquired, the basis for determining gain or loss upon the subsequent sale is the fair market value of the property at the date of its acquisition by the creditor.
(d) Special rules applicable to certain banking organizations. For special rules relating to the treatment of mortgaged or pledged property by certain mutual savings banks, domestic building and loan associations, and cooperative banks, see section 595 and the regulations thereunder.
(e) Special rules applicable to certain reacquisitions of real property. Notwithstanding this section, special rules apply for taxable years beginning after September 2, 1964 (and for certain taxable years beginning after December 31, 1957), to the gain or loss on certain reacquisitions of real property, to indebtedness remaining unsatisfied as a result of such reacquisitions, and to the basis of the reacquired real property. See §§ 1.1038-1 through 1.1038-3.
[T.D. 6500, 25 FR 11402, Nov. 26, 1960, as amended by T.D. 6814, 30 FR 4472, Apr. 7, 1965, T.D. 6916, 32 FR 5923, Apr. 13, 1967]
Notes of Decisions
Cmty. Bank v. Comm'r, 79 T.C. 789 (Tax Ct. 1982).
· cites it 26× “Held , for purposes of determining gain or loss under sec. 1.166-6, Income Tax Regs.”
Cmty. Bank v. Comm'r, 62 T.C. 503 (Tax Ct. 1974).
· cites it 32× “The bank determined that the bid price made by it at the foreclosure sales represented fair market value of the real property acquired.”
Sec. Mortg. Co. v. Comm'r, 58 T.C. 667 (Tax Ct. 1972).
· cites it 8× “The petitioner contends that under section *100 1.166-6(b)(1) of the Income Tax Regulations , the Tacoma Mall loss was deductible in 1966; that by clear and convincing evidence it has shown that the fair market value of Tacoma Mall was lower than the bid price of the property;…”
Hatcher v. Comm'r, 2016 T.C. Memo. 188 (Tax Ct. 2016).
· cites it 2× “A bad debt deduction on account of accrued interest ($170,347 in this case) would be allowed only if that interest had previously been "returned as income.”
Marcaccio v. Comm'r, 69 T.C.M. 2420 (Tax Ct. 1995).
· cites it 4× “Commissioner , supra at 792 . According to petitioners, this is true because the bank did not give notice of the foreclosure to petitioners as required by Texas law.”
Morris v. Comm'r, 59 T.C. 21 (Tax Ct. 1972).
· cites it 2× “In addition, the respondent contends that the notes were, in part, worthless and that even under the Crane rule there should be excluded any liabilities which exceeded the value of the property.”
Granger v. Comm'r, 37 T.C.M. 1849-20 (Tax Ct. 1978).
· cites it 2× “However, in this case, because the foreclosure sale prices were so far below what would have been the minimum cost bases had petitioner actually expended all of the loan proceeds in the respective jobs, such sale prices are persuasive evidence that the loan proceeds were not so…”
First Teachers Inv. Corp. v. Comm'r, 40 T.C.M. 892 (Tax Ct. 1980).
· cites it 2× “After the corporations sold the properties which had secured the Great States mortgages they had no other assets (since they had been formed only as holding companies to obtain the mortgages) with which they could pay off their remaining obligations on the notes.”
Weber v. Comm'r, 68 T.C.M. 172 (Tax Ct. 1994).
· cites it 2× “To determine whether a particular guaranty is proximately related to the taxpayer's trade or business, we measure the taxpayer's dominant motivation for becoming a guarantor at the time of entering into the guaranty rather than the date upon which a payment in discharge is made.”
Heath v. Comm'r, 30 T.C.M. 545 (Tax Ct. 1971).
· cites it 6× “It is well recognized that a person may realize gain or loss when he buys in property on which he holds a mortgage.”
Mcfadden v. Comm'r, 2002 T.C. Memo. 166 (Tax Ct. 2002).
· cites it 2× “In the case at hand, when petitioner accepted the deed in lieu of foreclosure, the Atascadero loan, the balance of which was $ 170,371, was satisfied to the extent of $ 38,543, the amount Stephanie would have received had she sold the property for cash subject to the Great…”
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