Estate of Mann v. Commissioner , 14 T.C. 555 ( 1950 )

Estate of Frank Mann, Blanche M. Hessner, Executrix, Petitioner, v. Commissioner of Internal Revenue, Respondent

Estate of Mann v. Commissioner

Docket No. 15851

United States Tax Court

14 T.C. 555; 1950 U.S. Tax Ct. LEXIS 235;

April 5, 1950, Promulgated

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Decision will be entered under Rule 50.

Decedent acquired title to seven parcels of real estate, each subject to a first mortgage issued for monetary consideration. Subsequently, the decedent paid the outstanding balance due on the seven mortgages and caused six of them to be assigned to his wife and one to a daughter. The wife and daughter then assigned the mortgages to the decedent, who assigned them to another daughter. Decedent filed a Federal gift tax return reporting the seven mortgages as a gift to the daughter for the consideration of "love and affection" and paid the gift tax thereon. The mortgages, although paid, were not released of record. Held, the first mortgages are not deductible in computing the decedent's net estate.

Benjamin Mahler, Esq., for the petitioner.

Conway Kitchen, Esq., for the respondent.

Van Fossan, Judge.

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VAN FOSSAN

The respondent determined a deficiency of $ 41,851.84 in the estate tax liability of the estate of Frank Mann, deceased. The petitioner claims an overpayment of estate tax.

The primary issue is whether or not the amounts of certain first mortgages on realty owned by decedent at his death are deductible in computing the decedent's net estate under section 812 (b) of the Internal Revenue Code.

The subordinate issue is, in the event that the first mortgages are not deductible, whether or not the gift tax paid by decedent on the gift of the mortgages should be allowed as a credit, under section 813 (a) of the Internal Revenue Code, against the estate tax due.

The case was submitted on a stipulation of facts, exhibits, and a deposition.

FINDINGS OF FACT.

The facts stipulated are so found. The other facts are found from the evidence.

The petitioner is the executrix of the estate and the daughter of the decedent, Frank Mann, who died on August 28, 1943.

In the years 1924 and 1925 A. A. Matthews Co. was the owner of the following seven parcels of realty located in Astoria, Queens County, New York: parcel 1, 3045 33d Street; parcel 2, 3049 33d Street; parcel 3, 3054 33d Street; parcel 4, 3058 33d Street; parcel 5, 3060 33d Street; parcel 6, 3061 33d Street; and parcel 7, 3064 33d Street.

In the years 1924 and 1925, the A. A. Matthews Co. mortgaged these seven parcels of land as follows:

Date mortgage
executed	Mortgagee	Property covered	Amount
9/17/24	Metropolitan Life Ins. Co.	Parcel 1, 3045 33d St	$ 18,750
9/17/24	do	Parcel 2, 3049 33d St	18,750
8/6/24	do	Parcel 3, 3054 33d St	18,750
8/6/24	do	Parcel 4, 3058 33d St	18,750
8/6/24	do	Parcel 5, 3060 33d St	18,750
5/5/25	First Mortgage Guarantee Co	Parcel 6, 3061 33d St	12,000
8/6/24	Metropolitan Life Ins. Co.	Parcel 7, 3064 33d St	18,750

These were 6 per cent first mortgages and were duly recorded with the Register of Queens County, New York.

The decedent, Frank Mann, acquired fee simple title to and ownership of the seven properties. The dates of acquisition and the outstanding balances due on the mortgages were as follows:

		Balance due on
	Date acquired	first mortgage
Property	by decedent	outstanding
Parcel 1, 3045 33d St	May 8, 1933	$ 15,000
Parcel 2, 3049 33d St	May 8, 1933	15,000
Parcel 3, 3054 33d St	Oct. 22, 1926	17,250
Parcel 4, 3058 33d St	Oct. 22, 1926	17,250
Parcel 5, 3060 33d St	May 22, 1939	14,625
Parcel 6, 3061 33d St	Aug. 5, 1932	12,000
Parcel 7, 3064 33d St	Dec. 22, 1933	14,625

Sometime subsequent to May 5, 1925, and prior to May 11, 1928, the First Mortgage Guarantee Co. assigned the first mortgage of $ 12,000 covering parcel 6 to the trustees of Masonic Hall and Asylum Fund. On May 11, 1928, the decedent, upon the payment of $ 12,000 to trustees of Masonic Hall and Asylum Fund, caused it to assign the first mortgage covering parcel 6, premises 3061 33d Street, to his daughter, Lillian J. Leffler. Said $ 12,000 represented the total unpaid balance due on said first mortgage. On May 12, 1928, Lillian J. Leffler assigned the mortgage to decedent. The assignments of May 11 and May 12, 1928, were duly recorded in the office of the Register of Queens County, New York, on June 1, 1928, and November 16, 1939, respectively.

On or about January 4, 1935, the decedent paid balances due on the mortgages on parcels 1, 2, 3, 4, and 7 and the mortgagee assigned the mortgages to the decedent's wife, Justina Mann. On June 11, 1940, Justina Mann assigned to the decedent the said first mortgages covering parcels 1, 2, 3, 4, and 7. The assignment of January 4, 1935, to Justina Mann and the assignments by her of June 11, 1940, to the decedent were all duly recorded in the office of the Register of Queens County, New York, on July 18, 1941.

On June 21, 1939, the decedent paid to the Metropolitan Life Insurance Co. the outstanding balance of $ 14,625 due on the first mortgage outstanding on parcel 5 and thereupon that mortgage was assigned to Justina Mann. On October 28, 1939, Justina Mann assigned the mortgage on parcel 5 to the decedent. Both assignments were recorded in the office of the Register of Queens County, New York, on July 18, 1941.

On July 8, 1941, the decedent assigned to his daughter, Blanche M. Hessner, the executrix of his estate and the petitioner herein, the seven first mortgages covering the seven parcels of realty. These assignments to Blanche were not recorded in the office of the Register of Queens County, New York, until November 27, 1944.

On March 7, 1942, the decedent filed a Federal gift tax return listing the seven first mortgages so assigned to his daughter, Blanche M. Hessner, and showed thereon a net gift subject to tax. A gift tax of $ 3,069 was duly paid.

The decedent died on August 28, 1943, possessed of the seven parcels of realty. In the estate tax return filed, the seven first mortgages were included in the deductions from the gross estate. The respondent has disallowed the deduction of the mortgages from the gross estate under the provisions of section 812 (b) of the Internal Revenue Code. It was stipulated that, should the petitioner be entitled to deductions on account of any of the seven first mortgages, the amounts of said deductions would be as follows:

Parcel 1, 3045 33d St	$ 15,000
2, 3049 33d St	15,000
3, 3054 33d St	12,375
4, 3058 33d St	12,375
5, 3060 33d St	14,625
6, 3061 33d St	12,000
7, 3064 33d St	14,625

It was further stipulated that additional deductions to which petitioner may be entitled on account of administration expenses and credit for state estate and inheritance taxes which may be allowable shall be determined under the provisions of Rule 50.

OPINION.

The primary issue is whether or not the amounts of certain first mortgages on realty owned by decedent at his death are deductible in computing the decedent's net estate under section 812 (b) of the Internal Revenue Code. ¹

The decedent acquired title to seven parcels of real estate, each subject to a first mortgage issued for monetary consideration. Subsequently, the decedent paid the outstanding balance due on the seven mortgages and caused six of them to be assigned to his wife and one to his daughter Lillian. The wife and the daughter Lillian assigned the mortgages to the decedent, who then assigned all of the mortgages to his daughter Blanche. The decedent filed a Federal gift tax return reporting the seven mortgages as a gift to his daughter for the consideration of "love and affection" and paid a gift tax of $ 3,069 thereon.

Blanche M. Hessner, the decedent's daughter, executrix of his estate and petitioner herein, alleges error in the respondent's determination that the mortgages were not deductible from the decedent's gross estate, which included the full value of the seven parcels of real estate.

The petitioner contends that, having been originally issued for monetary consideration by decedent's predecessor in title, the mortgages retained that status after payment by decedent, assigned to him, and, in turn, assignment to his daughter. In other words, the petitioner's argument is that the original consideration of money paid survived and serves to bring the assignments within the statute. The petitioner states in her brief that the requirement of consideration in money or money's worth "has no application to a mortgage on property included in his estate where the promise to pay was made by one other than decedent before the decedent acquired the property."

The petitioner would distinguish on the above stated ground the case of Henry Adams Ashforth, Executor, 30 B. T. A. 1306. In that case we held that, where decedent had issued a mortgage on property owned by her and gave the mortgage to her husband, the mortgage could not decrease the value of the gross estate, not having been contracted for adequate and full consideration in money or money's worth. We see no basic difference in that situation and the one before us. The whole meaning of the pertinent section of the code would be lost if the words "contracted bona fide" were considered to apply only to the original parties to the mortgage and to touch not at all its later assignee. There is no implication in section 812 (b) that permits such an obvious circumvention of the intent of the whole paragraph. The intent of Congress in enacting the subject section of the code was to refuse to allow the estate a deduction based on a mortgage given without monetary consideration to a natural object of the decedent's bounty. If effect is to be given to the intent of section 812 (b), the requirement of monetary consideration can not be limited so as to apply to only the first holder of the mortgage. The record does not clearly reveal the purpose hidden behind the multiplex assignments of the mortgages. It is clear, however, that, whatever the purpose, the assignments were without consideration in money or money's worth.

The lack of realism in petitioner's approach and argument are at once apparent. The simple fact is that the mortgages had been paid and, notwithstanding the fact they had not been released of record, having been paid, they were not "unpaid mortgages." The same mortgage debt can not at one time be characterized both as "paid" and "unpaid." It seems to us that this simple fact is a complete answer to petitioner.

We hold that the mortgages assigned to the decedent's daughter are not deductible in computing the decedent's net estate. There is no need, therefore, to discuss the question of the merger of the realty and the mortgages, inasmuch as we disallow the deduction for the mortgages in any event.

A subordinate issue is whether or not the gift tax of $ 3,069 paid by the decedent on the gift of mortgages to his daughter should be allowed as a credit against the estate tax. The pertinent part of the Internal Revenue Code is section 813 (a) (2) (A), which, eliminating the impertinent parts, provides as follows for a credit against the basic estate tax:

SEC. 813. CREDITS AGAINST TAX.

(a) Gift Tax. --

* * * *

(2) Revenue act of 1932 or chapter 4. --

(A) If a tax has been paid * * * on a gift, and thereafter upon the death of the donor any amount in respect of such gift is required to be included in the value of the gross estate * * * there shall be credited against the tax imposed * * * the amount of the tax paid * * *.

A similar provision is found in section 936 (b) (1), relating to a credit against the additional estate tax.

The respondent, in arguing that no credit should be allowed against the estate tax on account of the payment by decedent of the gift tax, points out that "first mortgages were claimed as deductions from the * * * gross estate" and that the "gift tax payment * * * is not allowable as a credit against the estate tax for the reason that the value of * * * [the] first mortgages was not included in the decedent's gross estate * * *."

The burden was on petitioner to demonstrate that the payment of gift tax made by decedent fits into the scheme and purpose of the controlling act. This she has failed to do. We see no way, under the present facts, by which she can be allowed the credit claimed. Whether she can recover the payment in another forum is beyond our province to decide.

Decision will be entered under Rule 50.

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Footnotes

• 1. SEC. 812. NET ESTATE.

  For the purpose of the tax the value of the net estate shall be determined, in the case of a citizen or resident of the United States by deducting from the value of the gross estate --

  * * * *

  (b) Expenses, Losses, Indebtedness, and Taxes. -- Such amounts --

  * * * *

  (4) for unpaid mortgages upon, or any indebtedness in respect to, property where the value of decedent's interest therein undiminished by such mortgage or indebtedness, is included in the value of the gross estate, * * *↩

  * * * The deduction herein allowed in the case of claims against the estate, unpaid mortgages, or any indebtedness shall, when founded upon a promise or agreement, be limited to the extent that they were contracted bona fide and for an adequate and full consideration in money or money's worth; * * *