## Facts

- Joseph Y. and Noriyo Aizawa owned rental real property in Oregon.
- In 1981, they purchased the property for $120,000 plus $433 in closing costs and financed it with a $90,000 recourse mortgage note to the sellers.
- The note required interest-only payments of $750 per month, with the full principal due in June 1985.
- The Aizawas made their last interest payment in February 1985 and did not pay the principal when due.
- In 1987, the sellers obtained a foreclosure judgment totaling $133,506.91 (principal, accrued interest, attorney’s fees, and court costs).
- In 1987, the property was sold to the sellers at a foreclosure sale for $72,700; the sale proceeds were applied against the judgment, leaving a deficiency judgment of $60,806.91.
- The parties stipulated that the foreclosure sale was a “sale” for federal income tax purposes and that the Aizawas’ adjusted basis at foreclosure was $100,091.38.
- The remaining dispute concerned the proper computation of the 1987 loss from the foreclosure, specifically what constituted the “amount realized.”

## Issues

1. In a foreclosure of property subject to a recourse mortgage where a deficiency remains, is the “amount realized” under I.R.C. § 1001(a) the foreclosure sale proceeds or the unpaid balance reflected in the foreclosure judgment?

## Decision

- The Tax Court held that, in a recourse-mortgage foreclosure where a deficiency judgment remains, the “amount realized” under § 1001(a) is the proceeds of the foreclosure sale ($72,700).
- The unpaid portion of the recourse liability represented by the deficiency judgment did not increase the amount realized on the foreclosure sale.
- The court rejected petitioners’ reliance on authority addressing the timing of loss recognition rather than the computation of amount realized.
- The Commissioner’s approach to computing the foreclosure loss was sustained, with the final computation to be reflected in a Rule 155 decision.

## Legal Principles

- Gain or loss on a disposition is computed under I.R.C. § 1001(a) as the difference between the amount realized and the taxpayer’s adjusted basis.
- A foreclosure constitutes a sale for tax purposes.
- In a recourse-debt foreclosure, the amount realized from the disposition is limited to the value received in the disposition (typically the foreclosure sale price), because the taxpayer remains personally liable for any deficiency.
- Any continuing recourse liability after foreclosure is not part of the amount realized from the sale; it is a separate obligation that may have separate tax consequences if later discharged.

## Conclusion

The Tax Court determined that when property subject to a recourse mortgage is foreclosed and a deficiency judgment remains, the amount realized for § 1001 purposes is the foreclosure sale proceeds rather than the unpaid debt or judgment amount, so the taxpayers’ loss is computed using the sale price against their adjusted basis.


Aizawa v. Commissioner, 99 T.C. 197 (1992)