## Facts

- Evelyn L. Wood purchased New York commercial real estate in 1922 and financed it with mortgages that were refinanced over time.
- By 1931, the property was encumbered by a $400,000 nonrecourse mortgage; neither Wood nor a later corporate owner became personally liable on the debt.
- In 1934, Samuel and Evelyn Wood formed Woodsam Associates, Inc., and transferred the property to the corporation in exchange for stock in a tax-free exchange; the corporation took Wood’s carryover basis.
- By 1943, the mortgage principal had been reduced to $381,000.
- In 1943, the mortgagee foreclosed and acquired the property at the foreclosure sale for a nominal sum.
- Woodsam reported $146,058.10 of gain from the foreclosure on its 1943 return, then sought a refund asserting its adjusted basis had been understated.
- Woodsam’s refund theory rested on the claim that prior refinancing into nonrecourse debt exceeding basis should be treated as a realization event that increased basis before the foreclosure.

## Issues

1. Whether a taxpayer’s basis in property increases when the taxpayer borrows against the property, in excess of adjusted basis, via a nonrecourse mortgage without otherwise disposing of the property.
2. Whether a foreclosure of property subject to a nonrecourse mortgage is a taxable disposition in which the amount realized includes the outstanding mortgage balance.

## Decision

- The Second Circuit affirmed the Tax Court’s decision for the Commissioner.
- The court held that executing or refinancing mortgages, even nonrecourse and even if proceeds exceed adjusted basis, is not a sale or other disposition and does not produce realized gain or increase basis.
- The court held that the 1943 foreclosure was a taxable disposition, and the amount realized included the outstanding nonrecourse mortgage principal ($381,000).
- The resulting gain was the excess of the mortgage balance included in amount realized over Woodsam’s adjusted basis.

## Legal Principles

- Borrowing money secured by property, without transfer of ownership, is not a realization event and does not create taxable gain or increase basis.
- A later sale or foreclosure is a disposition that can trigger realization of gain.
- On disposition of property subject to a nonrecourse mortgage, the amount realized includes the unpaid balance of the mortgage, even if the taxpayer is not personally liable (applying the rule associated with Crane v. Commissioner).

## Conclusion

The court held that nonrecourse refinancing does not step up basis because no gain is realized until a disposition occurs; on foreclosure, the amount realized includes the outstanding nonrecourse mortgage balance, producing taxable gain measured against adjusted basis.


Woodsam Assocs., Inc. v. Comm'r, 198 F.2d 357 (2d Cir. 1952)