Estate of Johnstone v. Comm'r of Internal Revenue

• Decision Date: 20 October 1952
• Docket Number: Docket No. 26760.
• Citation: 19 T.C. 44
• Parties: ESTATE OF HARCOURT JOHNSTONE, CHARLES EDWARD MURRAY ELLIOTT, EXECUTOR, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
• Court: U.S. Tax Court

19 T.C. 44

ESTATE OF HARCOURT JOHNSTONE, CHARLES EDWARD MURRAY ELLIOTT, EXECUTOR, PETITIONER,

v.COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Docket No. 26760.

Tax Court of the United States.

Promulgated October 20, 1952.

Thomas P. Glassmoyer, Esq., for the petitioner.

John J. Madden, Esq., for the respondent.

ESTATE TAX— NONRESIDENT ALIEN— GROSS ESTATE— PROPERTY SUBJECT TO MORTGAGE—FULL VALUE OR ONLY EQUITY OF REDEMPTION— SECTIONS 861(a)(1), 812(b)(4)—REGULATIONS 105, SECTION 81.38.— Only the equity of redemption in United States real property need be included in the gross estate of a nonresident alien under Regulations 105, section 81.38 which is in accordance with Congressional intention as indicated by section 812(b)(4) of the Internal Revenue Code.

OPINION.

MURDOCK, Judge:

The Commissioner determined a deficiency in estate tax in the amount of $20,735.87. The only issue presented for decision is whether the interest of a nonresident alien decedent in real property situated in the United States is includible in his gross estate at its full value or at what value less the amount of mortgages to which it was subject. The facts have been stipulated.

The estate tax return was filed with the collector of internal revenue for the second district of New York.

The decedent was a subject and resident of Great Britain. He died in London, England, on March 1, 1945. The decedent, as tenant in common, at the time of his death held an undivided 32.0936 per cent interest in four parcels of real estate situated in New York City. He acquired his only interest in those properties by devise from his mother, Antoinette Eno Johnstone, a British subject who died on July 1, 1934. All of the four properties were then subject to outstanding mortgages.

The stipulation shows, as to each property, its value at the time the mother died, the smaller amount of the mortgage at that time, the fair market value at the time the decedent died, and the reduced amount of the mortgage at that time. The mortgage on the first two properties were extended by agreements, to which the decedent was a party, which specifically provided that he assumed no personal liability beyond that which already existed. Similar statements were contained in letters relating to temporary arrangements for payments affecting the loan on the third property. The mortgage on the fourth property was extended after the decedent's death and the agreement provided that the mortgagee would look only to the mortgaged premises and to the assets of estates other than that of the decedent for repayment of the loan.

The last will and testament of the decedent's mother contained no directions with respect to the payment of the debts secured by the mortgages on the four parcels of land. The will provided for small bequests and left the remainder of her property to the decedent.

The only issue for decision is whether the value of the gross estate should include the value of real property less the amount of the mortgages, or should include the full value of real property undiminished by the amount of the mortgages but with a portion of the amount of the mortgages allowed as a deduction. Section 861(a)(1) of the Internal Revenue Code allows the estate of a nonresident alien to deduct only that portion of the unpaid mortgages to be deducted under section 812(b)(4) which the value of the gross estate situated in the United States bears to the value of the entire estate wherever situated. Section 812(b)(4) recognizes that there are cases in which the full value of a decedent's interest in property undiminished by mortgages may not be included in the gross estate. It provides that there may be deducted from the value of the gross estate as indebtedness amounts ‘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.‘ Regulations 105, section 81.38 is in part as follows:

UNPAID MORTGAGES.— Deduction is allowed of the full unpaid amount of a mortgage upon, or of an indebtedness in respect of, any property of the gross estate, including interest which had accrued thereon at the time of death, provided the value of the property, undiminished by the amount of the mortgage or indebtedness, is returned as part of the value of the gross estate. If 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 decedent's estate is not so liable, only the value of the equity of redemption (or value or the property, less the indebtedness) need be returned as part of the value of the gross estate.

That regulation obviously applies to the estate of a nonresident alien. It it not clear that it has any other application.

The first argument of the Commissioner is that the decedent's estate, at the time of his death, was liable generally for the amount of the mortgage debts under the laws of New York although the Commissioner concedes that the decedent never became personally liable for any of those debts. Neither the laws of New York nor the decisions cited support that contention. The respondent does not claim and the record does not indicate that there were any properties, other than the four properties in question, owned by the decedent and situate in the United States at the time of his death which he had received from his mother's estate. He had held the four properties for many years following the death of his mother in 1934. The laws of New York did not impose a liability for any of the mortgage debts, under circumstances similar to those here present, upon any property of the decedent at the time of his death in or out of the United States except that held subject to the mortgages.

The respondent next seems to argue that his regulation is void. He says to allow the petitioner's contention would be contrary to the City Bank Farmers' Trust Co. v. Bowers, 68 F.2d 909, certiorari denied 292 U.S. 644, and Rodiek v. Helvering, 87 F.2d 328, affirming 33 B.T.A. 1020. He fails to point out where his regulation would have any effect if it does not apply here. His regulation is fair, reasonable, and just in...