Aizawa v. Commissioner
United States Tax Court
99 T.C. 197 (1992)
The Aizawas (plaintiffs) financed a property purchase with a $90,000 recourse loan secured by collateral in which they had a $100,091.38 basis. After they defaulted, the sellers obtained a default judgment covering principal, interest, fees, and costs, and the collateral was sold at foreclosure for only $72,700. The Aizawas claimed a loss deduction of $70,898.29 using a formula incorporating the full default judgment, while the Commissioner (defendant) instead subtracted only the loan principal from the collateral basis, allowing just a $10,091.38 loss.
Whether, when collateral securing a recourse debt is sold for less than the taxpayer's basis in that collateral, the taxpayer may claim the difference as a deductible loss.