DocketNumber： No. 2173-00
Citation Numbers： 117 T.C. 247, 82 T.C.M. 4244, 2001 U.S. Tax Ct. LEXIS 52, 117 T.C. No. 21
Judges： Nlms
Filed Date： 12/10/2001
Status： Precedential
Modified Date： 1/13/2023
D, a nonresident alien for U.S. tax purposes, possessed at the time of his death interests in certain properties located in the State of California. D's interests in two of these parcels, one of which was subject to a promissory note secured by a deed of trust, were contained in his residuary estate. D's will provided for his surviving spouse to receive a three-eighths fractional interest in his residuary estate, with the remaining five-eighths going to his sons. In accordance with an agreement executed by the residuary beneficiaries, the two California properties were distributed to D's surviving spouse while the foreign residuary assets were distributed to D's sons.
Held: The full value of D's interest in the encumbered residuary property, rather than the net equity value thereof, must be included in his gross estate.
Held, further, the estate has failed to establish its entitlement to a marital deduction in excess of that allowed by respondent.
*248 OPINION
NIMS, Judge: Respondent determined *53 a Federal estate tax deficiency in the amount of $ 144,980 with respect to the estate of Hon Hing Fung (the estate). The issues for decision are:
(1) Whether a one-half interest owned by Hon Hing Fung (decedent) in certain real property must be included in his gross estate at its full value of $ 442,500, or whether the property may be included at its net equity value after reduction for an encumbrance in the amount of $ 324,974; and
(2) whether the estate is entitled to a marital deduction in excess of that allowed by respondent.
Unless otherwise indicated, all section references are to sections of the Internal Revenue Code in effect as of the date of decedent's death, and all Rule references are to the Tax Court Rules of Practice and Procedure.
This case was submitted fully stipulated pursuant to Rule 122, and the facts are so found. The stipulations of the parties, with accompanying exhibits, are incorporated herein by this reference. Decedent was a citizen of Hong Kong, legally resident in Kowloon, Hong Kong, when he died testate in the Commonwealth of Massachusetts on September 5, 1995. At all relevant times, decedent was a nonresident alien for U.S. tax purposes. Decedent *54 was survived by his wife, Fung Wong Tuen Wang (also known as Norah Fung), likewise a nonresident alien for U.S. tax purposes, and by his five sons. The executor of decedent's estate, Bernard Fung, maintained his principal residence in the State of California at the time the petition in this case was filed.
At decedent's date of death, he possessed ownership interests in three parcels of real property located in the United States. Pursuant to community property principles, decedent and his wife each owned a one-half interest in: (1) 287 Monte Vista Avenue in Oakland, California, consisting of real property improved with a 3-story, 20-unit residential building; and (2) 16597 Calle Victoria in Pacific Palisades, California, consisting of unimproved land. A third parcel, located at 68 Vernon Street in Oakland, California, and consisting of real property improved with a 3-story, 10-unit *249 residential building, was held by decedent and his wife as joint tenants.
In connection with the Monte Vista property, a promissory note dated October 24, 1988, was executed by decedent and his wife as borrowers and by World Savings and Loan Association as lender. The note was in the amount of $ 700,000 and *55 was secured by a deed of trust on the Monte Vista property. The note specified that "Borrower, and each of them, and Borrower's successors, transferees and assigns shall be jointly and severally, directly and primarily, liable for the amount of all sums owing and to be owed hereon". The note further provided the following with regard to remedies upon default: Upon the occurrence of any event of default under this Note: (1) the entire unpaid principal balance, any unpaid interest, and any other amounts owing under this Note shall, at the option of the holder of this Note and without notice or demand of any kind to Borrower or any other person, immediately become due and payable; and (2) the holder of this Note shall have and may exercise any and all rights and remedies available at law or in equity and also any and all rights and remedies provided in the Deed of Trust. The remedies of the holder of this Note, as provided in this Note and in the Deed of Trust or any other instrument securing this Note, shall be cumulative and concurrent, and may be pursued singularly, successively or together, at the sole discretion of the holder of this Note, and may be *56 exercised as often as occasion therefor shall arise. No act of omission or commission of the holder, including specifically any failure to exercise any right, remedy or recourse, shall be deemed to be a waiver or release of any right, remedy or recourse, such waiver or release to be effected only through a written document executed by the holder. * * *
As of decedent's date of death, the value of the Monte Vista property was $ 885,000, and the unpaid balance on the note was $ 649,948. 1*57 Thus, in accordance with community property principles, decedent's interest in the property had a value of $ 442,500 and was encumbered to the extent of $ 324,974.
The Calle Victoria property was unencumbered at the time of decedent's death. The value of decedent's interest therein, *250 again pursuant to community property principles, was $ 435,000. The Vernon property had a value of $ 475,000 and was encumbered to the extent of $ 277,257.
Decedent provided for the disposition of his property at death by means of a will executed on September 27, 1988. The will first appointed three of decedent's sons as executors and trustees of his will and directed that "this will shall be construed according to the Laws of Hong Kong." Then, after making a series of specific bequests, the document dealt with decedent's residuary estate in the manner set forth below: 7. I give the residual and remainder of my estate property and effects of whatsoever nature or kind and wheresoever situate (including any property over which I may have a general power of appointment or disposition by will) to my trustees upon trust to sell call in and convert the same into money with power to postpone such sale calling in and *58 conversion for so long as they shall in their absolute discretion think fit without being liable for loss. 8. My trustees shall out of the monies to arise from the sale calling in and conversion of or forming part of my estate pay all my just debts funeral and testamentary expenses and legacies and all estate duty payable in respect of my estate * * * 9. Subject to the payment of all my just debts, funeral and testamentary expenses, my trustees shall hold my residuary estate property and effects of whatsoever nature or kind and wheresoever situate upon trust for the following beneficiaries who shall survive me for a period of 30 days in manner hereinafter following: -- (a) As to THREE (3) equal shares or parts thereof to my wife the said FUNG WONG TUEN WAN * * * for her own use and benefit absolutely. (b) As to ONE (1) equal share or part thereof to my son MICHAEL K. L. FUNG * * * for his own use and benefit absolutely. (c) As to ONE (1) equal share or part thereof to my son the said ANTHONY K. T. FUNG * * * for his own use and benefit absolutely. (d) As to ONE (1) equal share or part thereof to my son the said *59 BERNARD K. K. FUNG * * * for his own use and benefit absolutely. (e) As to ONE (1) equal share or part thereof to my son the said JOHN K. K. FUNG * * * for his own use and benefit absolutely. (f) As to ONE (1) equal share or part thereof to my son the said EDMOND K. H. FUNG * * * for his own use and benefit absolutely.
Decedent's residuary estate included certain property located in Hong Kong as well as the aforementioned Monte Vista and Calle Victoria parcels in California.
In the fall of 1996, documents were filed with the Superior Court of the State of California, County of Los Angeles, regarding the disposition of decedent's property located in *251 that State. Decedent's wife filed a SPOUSAL PROPERTY PETITION, and later a SUPPLEMENT to such petition, requesting a "determination of property passing to the surviving spouse without administration" and a "confirmation of property belonging to the surviving spouse". *60 In connection with this action, an AGREEMENT ABOUT DISTRIBUTION OF DECEDENT'S ESTATE was filed with the Superior Court. The agreement was executed by each of decedent's five sons in August of 1996 and recited that the residuary beneficiaries agree to allocate to Decedent's spouse, FUNG WONG TUEN WAN, also known as NORAH FUNG, as her 3/8ths share of the Residue, all of Decedent's right, title and interest in the Real Property [defined as the Monte Vista and Calle Victoria properties], and to allocate to each of Decedent's children as his 1/8th of the Residue, 1/5th of that portion of the Residue located in Hong Kong.
After an uncontested hearing, the Superior Court on December 3, 1996, issued an ORDER APPROVING SPOUSAL PROPERTY PETITION. The order confirmed the passing of the Monte Vista and Calle Victoria parcels to decedent's surviving spouse and her ownership thereof. On the following day, December 4, 1996, decedent's wife transferred the interest formerly owned by decedent that she received in these properties, as well as the Vernon parcel, to the Norah Fung Qualified Domestic Trust. The parties have stipulated that the trust was, at the time of its establishment on December 4, 1996, a "qualified domestic trust" under the applicable provisions of
In addition, the parties have further stipulated that as of October 22, 1996, all estate duty payable to the Hong Kong Government, if any, and all debts, liabilities, funeral expenses, and testamentary *61 expenses with respect to decedent's estate in Hong Kong had been provided for or paid. Accordingly, as of October 22, 1996, the residual beneficiaries were entitled under Hong Kong law to their respective shares in the residuary estate absolutely and could demand distribution thereof.
A Form 706-NA, United States Estate (and Generation- Skipping Transfer) Tax Return, Estate of nonresident not a citizen of the United States, was timely filed with respect to *252 decedent's estate on December 5, 1996. 2 The notice of deficiency on which this litigation is based was subsequently issued on November 30, 1999. 3 Therein, respondent determined that the estate was not entitled to report decedent's interest in the Monte Vista real property at its net equity value for gross estate purposes and that the marital deduction claimed by the estate should be reduced.
As a general rule, the Internal Revenue Code imposes a Federal tax "on the transfer of the taxable estate (determined as provided *62 in
As regards the deductions permitted to nonresident aliens,
In general, the Commissioner's determinations are presumed correct, and the taxpayer bears the burden of proving otherwise.
The parties in this case differ as to the treatment for gross estate purposes of decedent's interest in the Monte Vista property. The estate contends that the parcel should be included in the gross estate at its net equity value, after offsetting the portion of the indebtedness considered to burden decedent's one-half interest in the property. Respondent, in contrast, takes the position that decedent's interest in the parcel must be included in the gross estate at its full fair market value, with the associated indebtedness being allowed as a deduction only to the extent provided in
A deduction is allowed from a decedent's gross estate of the full unpaid amount of a mortgage upon, or of any other indebtedness in respect of, any property of the gross estate, including interest which had accrued thereon to the date of death, provided the value of the property, undiminished by the amount of the mortgage or indebtedness, is included in the value of the gross estate. If the decedent's estate is liable for the amount of the mortgage or indebtedness, the full value of the property subject to the mortgage or indebtedness must be included as part of the value of the gross estate; the amount of the mortgage or indebtedness being in such case allowed as a deduction. But if the decedent's estate is not so liable, only the value of the equity of redemption (or the value of the property, less the mortgage or indebtedness) need be returned as part of the value of the gross estate. * * * [
The validity of this regulation, and its applicability to the estate of a nonresident alien, has long been established. In the words *66 of this Court in If a particular debt can be collected only from property mortgaged to secure the debt and not from the estate generally, the full amount of the debt should be excluded even in the case of a nonresident alien, but if it can be collected from the estate generally, and a part of that estate is not being taxed in the United States, then it is appropriate to allow only a proportionate part of the debt to be deducted. * * *
Both parties appeal to the above-quoted regulation in support of their respective positions. Respondent maintains that because decedent was personally liable for the indebtedness at issue by the terms of the promissory note, the full value of his interest in the Monte Vista property must be returned as part of the gross estate. The estate, on the other hand, does not specifically deny that decedent was legally liable for the debt evidenced by the promissory note. Rather, the estate argues that "the Petitioner had no realistic personal liability for the debt on the Monte Vista Property" and that "The mere possibility that a lender might have made a claim against the estate on the *67 Monte Vista note is insufficient to conclude that the estate was personally liable for the obligation."
*255 The estate's argument rests on the provisions governing deeds of trust under California law, specifically that contained in No judgment shall be rendered for any deficiency upon a note secured by a deed of trust or mortgage upon real property or an estate for years therein hereafter executed in any case in which the real property or estate for years therein has been sold by the mortgagee or trustee under power of sale contained in the mortgage or deed of trust. [Id.]
The effect of such section is to prevent a lender who chooses to foreclose on a deed of trust by means of a nonjudicial sale, under the power of sale contained in the trust instrument, from thereafter seeking a deficiency judgment against the debtor. 'It seems clear that
Nonetheless, the estate avers that "It is the near universal practice in California to foreclose on a deed of trust through a nonjudicial foreclosure under the power of sale" and that such *69 would be particularly appropriate in the case of property held by the estate of a nonresident alien. From this proposition, the estate concludes that "this entirely theoretical liability" does not render the estate personally liable within the meaning of
We disagree with the estate's contention that "a practical approach is mandated" in resolving the question at issue. As a threshold matter, we note that the standard applied under
Furthermore, this Court has previously embraced the notion that potential liability can be sufficient for purposes of
*257 Given the foregoing, we are unable to agree with the estate that decedent's express legal liability on his own interest in the disputed property may be disregarded in applying
Following execution of a distribution agreement by decedent's residuary beneficiaries and in accordance with an order by the California Superior Court, decedent's wife received decedent's one-half interest in both the Monte Vista property and the Calle Victoria property. Regulations promulgated under If as a result of the controversy involving the decedent's will, or involving any bequest or devise thereunder, a property interest is assigned or surrendered to the surviving spouse, the interest so acquired will be regarded as having "passed from *73 the decedent to his surviving spouse" only if the assignment or surrender was a bona fide recognition of enforceable rights of the surviving spouse in the decedent's estate. Such a bona fide recognition will be presumed where the assignment or surrender was pursuant to a decision of a local court upon the merits in an adversary proceeding following a genuine and active contest. However, such a decree will be accepted only to the extent that the court passed upon the facts *258 upon which deductibility of the property interests depends. If the assignment or surrender was pursuant to a decree rendered by consent, or pursuant to an agreement not to contest the will or not to probate the will, it will not necessarily be accepted as a bona fide evaluation of the rights of the spouse. [
In construing this regulation, courts have explained that "the 'test' of whether assets pass from the decedent for estate tax purposes is 'whether the interest reaches the spouse pursuant to state law, correctly interpreted--not whether it reached the spouse as a result of good faith, adversary confrontation. '"
In light of the foregoing, the estate contends a marital deduction is allowable for the full value of decedent's interest in the California property received by the surviving *75 spouse, while respondent maintains that only three-eighths of the value of decedent's interest in the Monte Vista and Calle Victoria parcels may be considered in computing the deduction.
More specifically, the estate's position is that "The U.S. property received by the surviving spouse was in bona fide recognition of her rights to 3/8ths of the entire residue of decedent's estate and therefore passed from the decedent." Respondent, in contrast, interprets the language of the will as granting to the surviving spouse only an undivided three-eighths interest in each residuary asset. Thus, as framed by *259 the parties, the dispute turns on what rights in the residuary pool were afforded to decedent's wife by the terms of his will and Hong Kong law.
However, we need not address this challenging question of will construction. Even if we were to assume for the sake of argument that the fractional share legacy set forth in decedent's will could be construed as a right to three-eighths of the residue as a whole, 4 the estate has failed to prove the amount of the allowable deduction. See Rule 122(b). The estate at no time offered evidence to establish the value of the foreign residuary assets. The sole allegation regarding a specific dollar figure for the foreign residue appears to be a statement in the uncontested distribution agreement filed by decedent's beneficiaries in connection with the California spousal property petition, wherein it is recited that "The residue consists of certain property located in Hong Kong having an estimated value of U.S. $ 600,000." Such statement is by its very terms an estimate *76 or approximation and falls short of constituting reliable proof. In addition, although both parties seem to have accepted $ 729,339 as the value of the foreign gross estate, they have not identified the portion of that amount which was administered under the residuary clause of decedent's will. A similar shortcoming adheres with respect to the assets lists accompanying the Hong Kong CERTIFICATE OF EXEMPTION FROM ESTATE DUTY, which, while included as part of the record, have been offered without further explanation of the relationship, if any, of the enumerated items to the provisions of decedent's will. Accordingly, we have no means by which to ascertain that the deduction claimed for the parcels received by the spouse under the distribution agreement did not exceed three-eighths of the total value of the residue.
Thus, because the estate has failed *77 to carry its burden of proof with regard to the facts necessary to sustain its own substantive legal argument, we need not decide whether such approach is sustainable under the law. We simply hold that *260 the estate has failed to prove that it is entitled to a marital deduction greater than that allowed by respondent.
To reflect the foregoing,
Decision will be entered for respondent.
Gross Estate
Monte Vista:*261
| Appraised value | $ 885,000 | |
| Less: Encumbrances | (649,947) | |
| Net equity value | 1*78 237,053 | |
| Less: One-half interest | (118,527) | |
| Gross estate value | $ 118,526 | |
| Calle Victoria: | ||
| Appraised value | 870,000 | |
| Less: One-half interest | (435,000) | |
| Gross estate value | 435,000 | |
| Vernon: | ||
| Appraised value | 475,000 | |
| Less: Encumbrances | (277,257) | |
| Gross estate value | 197,743 | |
| GROSS ESTATE IN UNITED STATES | 751,269 | |
| GROSS ESTATE OUTSIDE UNITED STATES | 729,339 | |
| TOTAL GROSS ESTATE | 1,480,608 | |
| Deductions | ||
| Expenses, claims, etc. | ||
| amount claimed | 2 $ 50,081 | |
| Marital deduction | ||
| Value of property to surviving | ||
| spouse | ||
| Monte Vista | $ 118,526 | |
| Calle Victoria | 435,000 | |
| Vernon | 197,743 | |
| Available amount | $ 751,269 | |
| Less: Deduction claimed for | ||
| expenses/claims | (50,081) | |
| Claimed marital deduction | 701,188 | |
| TOTAL DEDUCTIONS CLAIMED | 751,269 | |
| Taxable Estate | ||
| Gross estate in United States | 751,269 | |
| Less: Deductions | (751,269) | |
| TAXABLE ESTATE | -0- | |
Gross Estate
Monte Vista:*262
| Appraised value | $ 885,000 | |
| Less: One-half interest | (442,500) | |
| Gross estate value | $ 442,500 | |
| Calle Victoria: | ||
| Appraised value | 870,000 | |
| Less: One-half interest | (435,000) | |
| Gross estate value | 435,000 | |
| Vernon: | ||
| Appraised value | 475,000 | |
| Less: Encumbrance | (277,257) | |
| Gross estate value | 197,743 | |
| GROSS ESTATE IN UNITED STATES | 1,075,243 | |
| GROSS ESTATE OUTSIDE UNITED STATES | 729,339 | |
| TOTAL GROSS ESTATE | 1,804,582 | |
| Deductions | ||
| Expenses, claims, etc. | ||
| amount allowed | 1*79 $ 258,944 | |
| Marital deduction | ||
| Available amount attributable to | ||
| each item of U.S. property | ||
| passing to surviving spouse | ||
| Monte Vista | 2 $ 166,313 | |
| Calle Victoria | 3 163,125 | |
| Vernon | 4 197,743 | |
| Total | $ 527,181 | |
| Less: Three-eights share of | ||
| taxes, debts, and expenses | ||
| payable out of the residue | (217,293) | |
| Allowed marital deduction | 309,888 | |
| TOTAL DEDUCTIONS ALLOWED | 568,832 | |
| Gross estate in United States | 1,075,243 | |
| Less: Deductions | (568,832) | |
| TAXABLE ESTATE | 5 506,412 |
1. The parties stipulated that the total unpaid balance was $ 649,958 and that the corresponding balance with respect to decedent's one-half interest was $ 324,974. Since one-half of $ 649,958 equals $ 324,979, we conclude that an error was made in the stipulation. The estate tax return shows the total encumbrance as $ 649,946.67, one-half of which is $ 324,973.34, and respondent used the amounts $ 324,973 and $ 324,974 in making calculations which involved one-half of the note's balance. We therefore accept the stipulated value of $ 324,974 as representing one-half of the encumbrance and assume that the parties intended $ 649,948 when referring to the full amount of the debt.
2. App. A sets forth the calculations shown on the estate tax return.↩
3. App. B describes respondent's computations, to the extent ascertainable from the notice of deficiency.↩
4. It is by no means certain that this argument would prevail. See discussions by the following well-known commentators: 4 Casner, Estate Planning, sec. 13.5.2, at 87 (5th ed. 1988); Manning et al., Manning on Estate Planning, sec. 2.7, at 2-31 (5th ed. 2001); Covey, The Marital Deduction and the Use of Formula Provisions, 95 (2d ed. 1978).↩
1. $ 885,000 minus $ 649,947 equals $ 235,053, one-half of shown to be $ 97,404 on the return. which would be $ 117,527 (rounded), but it appears a mathematical error was made on the return.
2. This amount should equal the percentage of total expenses/claims which corresponds to the ratio of value of the gross estate in the United States to total gross estate value. Again, however, there appears to be a mathematical discrepancy as the total expenses/claims are shown to be $ 97,404 on the return. ↩
1. This amount takes into account one-half of the unpaid balance on the Monte Vista mortgage, or $ 324,973, reduced in accordance with the ratio of U.S. to total gross estate value.
2. It appears that this amount was likely intended to equal three-eights of the value of decedent's one-half interest in the parcel ($ 442,500 x .375 = $ 165,938 (rounded)). The mathematical discrepancy is not explained.↩
3. This amount equals three-eights of the value of decedent's one-half interest in the parcel ($ 435,000 x .375 = $ 163,125). ↩
4. This amount equals the full gross estate value of decedent's interest in the parcel. It would appear that no five- eights reduction was applied because the property passed to the surviving spouse pursuant to the joint tenancy form of ownership, as opposed to under the residuary clause of decedent's will.↩
5. The $ 1 discrepancy ($ 1,075,243 - $ 568,832 = $ 506,411) is not explained and presumably results from rounding. ↩
estate-of-charles-fred-theis-deceased-laura-watson-and-guy-w-theis , 770 F.2d 981 ( 1985 )
Estate of Hubert v. Comr. of IRS , 63 F.3d 1083 ( 1995 )
Cornelison v. Kornbluth , 15 Cal. 3d 590 ( 1975 )
Roseleaf Corp. v. Chierighino , 59 Cal. 2d 35 ( 1963 )
Estate of Stanley M. Carpenter, Deceased William R. Thomas, ... , 52 F.3d 1266 ( 1995 )