## Facts

- Hon Hing Fung died testate in Massachusetts in 1995; he was a Hong Kong citizen and a nonresident alien for U.S. estate tax purposes.
- At death, he held interests in three U.S. real properties: (1) 287 Monte Vista Avenue, Oakland, California; (2) 16597 Calle Victoria, Pacific Palisades, California; and (3) 68 Vernon Street, Oakland, California.
- Under California property rules, the decedent and his wife each owned a one-half interest in the Monte Vista and Calle Victoria properties; the Vernon Street property was held in joint tenancy.
- In 1988, the decedent and his wife executed a $700,000 promissory note secured by a deed of trust on the Monte Vista property.
- The loan documents permitted the lender, upon default, to pursue “any and all remedies available in law or in equity.”
- At death, the Monte Vista property was valued at $885,000, and the loan had a substantial unpaid balance; the parties framed the valuation dispute using the fair market value of the decedent’s one-half interest ($442,500) and an encumbrance amount attributable to that interest ($324,974).
- The estate reported the decedent’s Monte Vista interest at net equity (fair market value reduced by the mortgage balance), treating the debt as effectively property-limited.
- The IRS determined that the mortgage was recourse; therefore, the decedent’s Monte Vista interest had to be included in the gross estate at full fair market value, with any mortgage relief addressed as a deduction under I.R.C. § 2053.
- The IRS also reduced the claimed marital deduction, resulting in an estate tax deficiency; the case was submitted on stipulated facts under Tax Court Rule 122.

## Issues

1. Whether the decedent’s one-half interest in the Monte Vista property must be included in the gross estate at full fair market value, or instead at net equity after reduction for the encumbrance.
2. Whether the estate was entitled to a marital deduction greater than the amount allowed by the Commissioner.

## Decision

- The court held that the decedent’s one-half interest in the Monte Vista property was includible in the gross estate at its full fair market value under I.R.C. § 2031.
- The court treated the mortgage as a recourse “claim against the estate” potentially deductible under I.R.C. § 2053, not as a valuation reduction to the property’s § 2031 value.
- The court rejected the estate’s argument that local foreclosure practice effectively made the mortgage nonrecourse.
- The court held the estate failed to establish entitlement to a marital deduction in excess of that allowed by the Commissioner.
- The deficiency determination was sustained in substance.

## Legal Principles

- For estate tax valuation under I.R.C. § 2031, a decedent’s interest in property is included at fair market value; recourse indebtedness secured by the property is generally not netted against that value.
- A recourse mortgage is treated as a claim against the estate addressed through deductions under I.R.C. § 2053, subject to applicable requirements and limitations.
- Whether debt is recourse or nonrecourse depends on the creditor’s legal rights under the governing instruments; typical foreclosure practices do not change contractual remedies.
- The taxpayer bears the burden to substantiate entitlement to deductions, including any claimed marital deduction beyond what the Commissioner allows.

## Conclusion

The Tax Court required full fair market value inclusion of the decedent’s one-half interest in mortgaged U.S. real property because the mortgage was recourse and therefore deductible, if at all, under § 2053 rather than reflected as a net-equity valuation under § 2031; the estate also did not prove a larger marital deduction.


Estate of Fung v. Commissioner, 117 T.C. 247 (2001)