117 T.C. 247 (T.C. 2001), 2173-00, Estate of Hon Hing Fung v. Commissioner of Internal Revenue
|Citation:||117 T.C. 247, 117 T.C. No. 21|
|Opinion Judge:||NIMS, Judge:|
|Party Name:||ESTATE OF HON HING FUNG, DECEASED, BERNARD FUNG, EXECUTOR, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent|
|Attorney:||Robert B. Martin, Jr., for petitioner. Ric D. Hulshoff, for respondent.|
|Judge Panel:||Nims, Authur L., III|
|Case Date:||December 10, 2001|
|Court:||United States Tax Court|
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.
Respondent determined 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 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
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 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 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.  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,
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 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 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
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" . 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...
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