(a) Where any part of the principal in possession of the tenant consists of an obligation for the payment of money secured by a mortgage or other hypothecation of real or personal property, and by reason of the enforcement of such obligation or by agreement in lieu of enforcement the tenant acquires any property, real or personal, of whatsoever kind, including a money judgment, such property shall be treated as a single substituted asset, and thereafter all income therefrom, expenses incident thereto and proceeds received upon sale, satisfaction, or transfer thereof, not a leasing or letting, excepting gain or profit on such sale, satisfaction or transfer, shall be apportioned in the same manner as provided by this chapter for property of like character acquired by purchase or held as a part of the estate at the time the principal was established.

Gain or profit realized on sale, satisfaction, or transfer, not a leasing or a letting, of property referred to in this section shall be credited to the income in an amount up to, but not exceeding, the accrued unpaid interest on the original obligation secured by such property as of the date of its acquisition by enforcement of the obligation or agreement in lieu thereof, and the balance shall be credited to principal. Such credit to income on account of accrued interest shall be in addition to any and all other credits due income by the terms of any other section of this chapter. Should any portion of such credit to income on account of accrued interest be in a form other than cash, then, and in that event, the full amount of such credit to income shall be paid first out of any sums received from the conversion of such asset into cash whether by payment, sale, or transfer before any sums so received shall be paid to principal.

As between successive tenants or a tenant and a remainderman, all sums paid hereunder on account of accrued interest shall be apportioned in the same manner as provided for income by Section 731.06.

The cost price of the property shall be the unpaid balance of the principal sum of the debt secured by such property, plus all sums whenever paid on any of the following items:

(1) All costs, charges, and expenses incident to the acquisition of such property;

(2) All taxes, bonds, and assessments, or any of them, which were payable at the date of the acquisition of such property by the tenant, excepting, however, interest accruing thereon from the date of the acquisition of such property by the tenant; and all such sums shall be a charge against the principal.

(b) Upon the sale, surrender, or other disposition of a bond, debenture, note, or other evidence of an indebtedness, voluntarily created, or of a certificate of deposit evidencing the deposit of any such instrument with a protective or reorganization committee, or of stock or other security received through paricipation in the enforcement of such obligation or the foreclosure of the security therefor, upon which bond or other obligation there is overdue unpaid interest which accrued after the establishment of the principal, the proceeds realized upon such sale, surrender, or other disposition, after repayment (1) of expenses incurred in connection therewith and (2) of any sums paid to protect or preserve such security, shall be divided pro rata between income and principal, computing interest at the rate specified in such obligation. The amount allocable to income shall in no case exceed the interest accrued and unpaid on the original obligation up to the time of such sale or other disposition or, where another security has been received in lieu of the original obligation, the income which would have accrued on the latter up to such time, less income received from the original or the substituted security. The terms sale, surrender, or other disposition, as above used, shall include compromise, settlement, accord and satisfaction, and similar arrangements.

(Added by Stats. 1968, Ch. 193.)