Ashforth v. COMMISSIONER OF INTERNAL REVENUE
| Citation | 30 BTA 1306 |
| Decision Date | 27 July 1934 |
| Docket Number | Docket No. 67654. |
| Parties | HENRY ADAMS ASHFORTH, FREDERICK H. ECKER AND HENRY L. SERVOSS, EXECUTORS OF THE ESTATE OF ELIZABETH MILBANK ASHFORTH, PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. |
| Court | U.S. Board of Tax Appeals |
Clarence Castimore, Esq., and Thomas B. Gilchrist, Esq., for the petitioners.
Frank T. Horner, Esq., for the respondent.
This is a proceeding for the redetermination of a deficiency in estate tax in the amount of $113,201.18. Seven assignments of error were set forth in the petition and amendments thereto, upon which issue was joined, but all of these issues have been settled by the parties, except one. The issues so settled will be given effect in the redetermination of the deficiency under Rule 50, in accordance with the agreement of the parties filed at the hearing.
The parties also stipulated certain facts, in addition to which petitioners offered the testimony of two witnesses and certain documentary evidence. The stipulation in full is here adopted as a part of our findings of fact, and so much thereof as is deemed pertinent, as well as other facts established by proof, will be set forth in connection with our discussion of the issue.
The sole issue submitted for decision is whether or not respondent erred in including in the gross estate of the decedent, at a valuation of $766,000, certain real estate situated in the town of Greenwich, Connecticut, known as "Milbank."
The decedent, Elizabeth Milbank Ashforth, died testate on March 8, 1930, and the petitioners herein are the duly appointed and qualified executors and ancillary executors of the last will and testament of the decedent.
At the time of her death the decedent was about 25 years of age, and had been in excellent health prior to her last illness, which was of only three or four weeks duration. She was married in 1925 at the age of 20, and had two children. Thereafter, in 1928, she consulted her lawyer in reference to making a gift to her husband. She had considerable income from certain trust funds, while her husband's income was small. This situation required her to pay most of the bills, which was humiliating for her husband, and she wanted him to have an independent income. She had no income-producing property in her own right except about $100,000 in stocks and bonds. She did not desire to give these securities to her husband, because they were the only assets she had upon which she could readily realize cash if occasion arose. In view of these facts, she was advised by her lawyer that the only thing she could give her husband that would create an independent income for him was a mortgage on the real estate in Greenwich, and she expressed her willingness to do this.
The effect of the proposed transaction was fully explained to the decedent by her attorney, who told her that she was making a gift of property of the value of $700,000, which she could not recover without paying the full sum of $700,000 for it, and that she was committing herself to the payment of interest in the annual sum of $42,000. Decedent stated that she understood all this, and that it was satisfactory to her.
Decedent then signed a demand note for $700,000, bearing interest at 6 percent per annum and executed a mortgage deed in the same amount on the real estate, and delivered these instruments to her husband at his office in the presence of her attorney on April 28, 1928. A few days later the attorney sent the mortgage to Greenwich, Connecticut, to be recorded, but the instrument was thereafter returned to him and not recorded at that time for the reason that the amount of the mortgage was in excess of the assessed value of the property and recording would have had the immediate result of raising the assessment. The mortgage was recorded on April 8, 1931, after decedent's death.
Decedent's husband was also informed of the effect of the transaction, and he accepted the note and mortgage and placed them in a safe-deposit box to which his wife had no access during her lifetime. Decedent regularly paid to her husband the interest specified in the note and mortgage, from the date of delivery thereof to the date of her death.
In the preparation of her will decedent took into consideration the fact that she had already given her husband the mortgage for $700,000, and she made him the residuary legatee in her will, conditioned upon his release of the mortgage and note. She stated definitely to her lawyer, who prepared the will, that she did not want her husband to have both the mortgage and the residuary estate. After the death of decedent her husband elected to take the residuary estate under the will, and he thereupon canceled the note and executed and delivered to the trustee under the will a quitclaim deed to the property. There was no agreement or understanding between decedent and her husband that the mortgage would be canceled at any time at her request, nor was there any understanding that the husband would cancel it after her death.
The fair market value of the "Milbank" property was $766,000 on March 8, 1930.
No monetary consideration for the note and mortgage deed passed from decedent's husband to the decedent during her lifetime.
The executors of the decedent's estate, in the estate tax return filed, listed as an asset the "Milbank" property at a value of $766,000, and claimed a deduction for the unpaid note and mortgage in the amount of $707,933.33. Presumably $7,933.33 of this amount represented accrued interest. The respondent disallowed the entire amount of the deduction so claimed.
The provisions of the Revenue Act of 1926, pertinent here, are as follows:
SEC. 302. The value of the gross estate of the decedent shall be determined by including the value at the time of his death of all property, real or personal, tangible or intangible, wherever situated—
(a) To the extent of the interest therein of the decedent at the time of his death;
* * * * * * *
SEC. 303. For the purpose of the tax the value of the net estate shall be determined—
(a) In the case of a resident, by deducting from the value of the gross estate—
(1) Such amounts for funeral expenses, administration expenses, claims against the estate, unpaid mortgages upon, or any indebtedness in respect to property, * * * to the extent that such claims, mortgages, or indebtedness were incurred or contracted bona fide and for an adequate and full consideration in money or money's worth, * * *
Petitioners do not now claim to be entitled to deduct from the gross estate the face amount of the mortgage under section 303 (a) (1). They claim that under section 302 (a) the extent of the interest of the decedent in the "Milbank" property was not more than the value of her equity of redemption, $66,000, and no more than that sum should be included in the gross estate.
It is contended by petitioners that the legal effect of a mortgage in Connecticut is to vest legal title to the land in the mortgagee, and to leave the mortgagor with no legal title therein until performance of the condition of the mortgage. There are cases containing language which supports that view, one of which, McKelvey v. Creevey, 72 Conn. 464; 45 Atl. 4, cited by petitioners, reads in part:
The mortgagee is the owner of the land, while the mortgagor has no legal estate therein until he performs the condition. If he fails to do so, all his right to the land is gone.
But the same opinion continues as follows:
In substance and in fact, however, and except for a very limited purpose, a mortgage is regarded as mere security for the performance of the duty described in the mortgage deed; and the mortgagor is for most purposes regarded as the sole owner of the land, "as well after forfeiture as before execution of the deed, and the mortgagee has rather a power than an interest, the use of which is strictly limited to the collection of the debt or enforcement of the duty which the mortgage was intended to secure." * * * In this view of the matter, the "equity of redemption" is regarded as the land, and its owner as the owner of the land, for most purposes; while the "estate in fee" of the mortgagee is, except for a limited purpose, regarded as personal estate and mere security. Citing authorities. In accordance with this view it has been held, in the following cases, that the estate of the mortgagor is subject to dower; descends to heirs; may be attached and set off on execution; may, as real estate, confer rights of settlement; is devisable and taxable as real estate; and is based upon a title sufficient to maintain ejectment,—while to the estate of the mortgagee none of these incidents attach, save the right to maintain ejectment. Citing authorities. As between mortgagor and mortgagee, however, it is the law of this state that the latter is regarded as having the legal title to the land * * * but he is so regarded, as appears from the cases cited, only to a limited extent and for a limited purpose. He is regarded as having the legal title, and therefore is legal owner, mainly for the purpose of obtaining, by ejectment or otherwise, the possession of the land, and holding it, in order to make his security available in payment of his debt. * * * He has title and ownership enough to make his security available, but for substantially all other purposes he is not regarded as owner; but the mortgagor is so regarded,—always subject, of course, to the mortgage. * * * The real interest of the mortgagee in the land is measured by the amount of his debt, and not by his deed.
See also Downing v. Sullivan, 64 Conn. 1; 29 Atl. 130; Ensign v. Batterson, 68 Conn. 298; 36 Atl. 51; Cion v. Schupack, 102 Conn. 644; 129 Atl. 854.
Under the above quoted decision we must deny the contention of the petitioners that the value of the land in question should be excluded from the gross estate up to the amount of the mortgage on the theory that the only interest...
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