dissenting: I respectfully dissent. The estate tax returns of the two decedents presented two issues, whether the value of certain lots must be included in the gross estate pursuant to section 2036 and, if so, whether the outstanding mortgage debt on each lot should be taken into account under section 2053(a)(3) or (4). The parties stipulated, as they must, that section 2036 requires lots 7 and 8 to be included in the taxable estate. Thus, the issue before us is simply whether the lots should be valued on a gross or net basis. By reason of what I consider to be a materially erroneous stipulation as to value which the majority chooses to accept, I would, on this record, reach the same result as the majority as to lot 8, but via a different route. There can be no disagreement as to lot 7 insofar as it affects decedent-wife. Thus, my dissent is primarily directed to the result which the Court reaches as to lot 7 in decedent-husband’s estate. Nevertheless, it is desirable to discuss lot 8 first since it more pointedly illustrates the majority’s erroneous reasoning.
Lot 8
Lot 8, prior to the mortgage, had a one-story structure on it. The mortgage loan proceeds of approximately $31,000 were used by the remainderman, decedent’s daughter, to construct an addition to that building for her use.1 Section 2036 does not exclude the value of improvements, whether constructed by the life tenant or the remainderman.2 Thus, the gross estate of each decedent should have been increased by the value of lot 8 as improved.3 However, the gross estate should be increased only by the net value of lot 8 as improved.
The majority recognizes that section 20.2053-7, Estate Tax Regs.,4 literally requires that the outstanding balances of the mortgages as of the respective dates of death of the decedents should be taken into account and only the net value included in the estate. To the extent here pertinent, that regulation provides:
But if the decedent’s estate is not so liable [for the amount of the mortgage indebtedness], 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. * * * [Sec. 20.2053-7, Estate Tax Regs.]
With respect to lot 8, this result clearly produces the only correct economic result. The mortgage proceeds, being used to construct a second story addition, benefited the life tenants. We are entitled to assume that the value of lot 8 was substantially increased by the expenditure. It would be unconscionable to include the enhanced value in the gross estates of each decedent without taking into account the outstanding balance of the mortgage indebtedness on lot 8, irrespective of the lack of personal liability on the part of either decedent.5 The property was worth no more than its net value.
Since the parties neglected to stipulate as to the value of lot 8 as improved, I would assume that the enhanced value of the structure is exactly equivalent to the outstanding balance of the mortgage. The value of the "equity of redemption” that is to be included in the gross estate under the regulations would thus equal the stipulated value. For this reason, I would reach the same result as the majority as to lot 8.6
Lot 7
Lot 7, insofar as it affects decedent-husband, presents a different factual situation.7 In this instance the majority has, in my judgment, reached an erroneous result, apparently motivated by what the majority sees as an abuse.
The majority correctly concludes that the balances due on the mortgages do not qualify as claims against the estate under section 2053(a)(3). Neither decedent had any personal liability for the mortgage indebtedness against lot 8, and Mrs. Theis had no personal liability for the mortgage indebtedness on lot 7. However, Mr. Theis signed the mortgage note and thereby incurred personal liability, even though he was only an accommodation party.8 If the mortgage had become delinquent during Mr. Theis’ lifetime, the unpaid balance could have been collected from him. At the date of death, this liability was, as the majority points out, an unmatured and potential claim only, since the note was not in default. At most, only a contingent claim could have been filed by the mortgagee against the estate. But if the mortgage had been in default, and provided a proper claim had been filed against the estate,9 the mortgagee could have recovered the balance due from its assets. According to the stipulation, no claim was filed against the estate of Mr. Theis by the lot 7 mortgagee. Hence, upon the expiration of the limitation period, the unmatured, potential claim became unenforceable against the estate. This extinguished the direct or personal liability of the decedent-husband’s estate. The amount of the mortgage note could not qualify as a claim under section 2053(a)(3); See sec. 20.2053-4, Estate Tax Regs.
Section 2053(a)(4) is a different issue. This section authorizes a deduction for "unpaid mortgages on” property, the value of which is included in the gross estate. The Florida nonclaim statute excludes from its application any lien on the property of the decedent.10 If this mortgage had become delinquent during the lifetime of Mr. Theis, there would have been nothing, based upon the stipulated facts, that would have inhibited the mortgagee from proceeding to foreclose on the entire fee interest in the property, thereby cutting off Mr. Theis’ life estate. Upon his death, the mortgage remained as a valid lien upon the fee interest, but the fee interest was no longer divided into a life estate and a remainder. The two merged upon Mr. Theis’ death and the remainderman, the son, at that moment in time acquired a full, fee simple interest, subject to the outstanding mortgage.11
Congress directed in section 2036 that the gross estate include the value of property (the value of the fee simple interest) when a decedent holds a life estate. But how can that value be in excess of the net fair market value? Respondent’s regulations (sec. 20.2053-7, Estate Tax Regs.) literally apply to this case and would limit the amount to be included in the decedents’ estates to the net value of the property, the value less the outstanding mortgage indebtedness. The case of Estate of Johnstone v. Commissioner, 19 T.C. 44 (1952), is cited apparently as support for the majority’s position, but an examination of that case reveals that the majority is in fact following the position of the dissent in Johnstone. Without citation of authority, the majority chooses to narrow the plain meaning of respondent’s regulations, constructing a totally unrealistic hypothetical as justification.
The majority hypothesizes a situation in which the owner of a remainder interest obtains a loan on the security of the remainder interest alone. It is inconceivable that a commercial lender such as a bank or savings and loan association (the lenders here) would make a loan on the security of a remainder interest in real property during the lifetime of the life tenant. Such an interest is illiquid and, in normal circumstances, unsalable. This fact undoubtedly causes the two lenders in this case to require the holders of the life estates to join in the mortgages so that the entire fee in each lot could be subjected to the liens as security for repayment of the debts. The majority’s hypothetical example could not come to pass except in some intrafamily, non-arm’s-length transaction.
In note 13 of the majority opinion, it is suggested that Estate of Scofield v. Commissioner, T.C. Memo. 1980-470, is also supportive of the majority’s conclusions. In note 14, the majority argues that each of the decedents had a right of contribution against their children which apparently would be an asset of their estates and would dollar for dollar offset the mortgage lien even if section 20.2053-7, Estate Tax Regs., were applicable. It may well be true that if the mortgages had been foreclosed during the lifetimes of the decedents, the decedents would have had under Florida law a right of contribution from the parties primarily liable for the repayment of the mortgage indebtedness, i.e., their children. However, a right of contribution such as this arises only at that point in time when the accommodation party has suffered a loss. Until there is a loss, i.e., a payment to the mortgage lender or a loss of the life estate through foreclosure, there is no basis for a contribution. Any right of contribution prior to that time would at most be inchoate. However, neither estate could have suffered any loss under these facts. Upon the death of each decedent, the life estate terminated. Hence, foreclosure of the mortgage lien would not deprive either estate of any value. Upon the running of the nonclaim statutory period against the one estate and from the date of death of the other decedent, there was no possible loss due to personal liability of the estate. Hence, no possibility of a right of contribution could have arisen in this case. The Florida cases cited by the, majority simply are inapplicable under the facts before us. In addition, as to lot 8, it is not clear that the decedents were accommodation parties only.
Apparently, the majority considers lot 7 to be an abuse situation since the mortgage proceeds did not directly or indirectly increase the decedent-husband’s gross estate. Under my analysis of lot 8, this perceived abuse would not be present. But I find no justification in either the Code or the regulations for a differing analysis, dependent upon whether the mortgage proceeds are used for the benefit of the mortgaged property. In any event, whether or not there is some possibility of abuse is not the issue before this Court. If there is an abuse, Congress has not seen fit to correct it and it is not up to this Court to attempt to do so.
For the reasons indicated, only the net value of each lot as of the date of death of each decedent should be included in the gross estate of each decedent. The majority’s treatment of lot 7 with respect to the estate of Mr. Theis is in error.
Nims and Cohen, JJ., agree with this dissent.The fact that the life tenants allowed the daughter to occupy the structure is irrelevant. The improvements enhanced the potential income value of the property to the holders of the life estates.
See and compare sec. 2035 and sec. 20.2035 — 1(e), Estate Tax Regs.
The stipulated value erroneously excludes the value of the improvements. See note 4 of the majority opinion.
Since neither decedent incurred any personal liability, sec. 2053(a)(3) can have no application. Sec. 2053(a)(4) by contrast includes "unpaid mortgages on” property of a decedent.
The record does not indicate whether the daughter paid rent to her parents. Since it is indicated that she and her husband made the mortgage payments, not the decedents, I infer that no rent was paid. On this assumption, the value of the life tenancies was increased without any out-of-pocket cost to the life tenants. Questions as to a right of contribution are fully treated infra.
Alternatively, the record could be reopened for receipt of evidence as to the value of the lot as improved.
Since the mortgage was not placed on lot 7 until after the death of Mary L. Theis, her estate should clearly be increased by one-half of the value of lot 7, without reference to the post-death mortgage, which is the result reached by the majority.
While clearly Mr. Theis was an accommodation party with respect to the debt on lot 7, that may not have been true as to either decedent with respect to lot 8, since the loan added value to the life estates. I do not believe that this question has any relevancy, however.
Florida has enacted a typical nonclaim statute, largely patterned on the uniform act, which provides that no claim against a decedent shall be binding on the estate unless filed within 3 months after the first publication of the notice of administration. Compare sec. 3-804 of the Unif. Probate Code, 8 U.L.A.
Fla. Stat. Ann. sec. 733.702(3) (West 1976), provides in part:
(3) Nothing in this section affects or prevents:
(a) A proceeding to enforce any mortgage, security interest, or other lien on property of the decedent.
Of course, foreclosure after the death of either life tenant would not affect any asset of the probate estate of that life tenant since the estate had no further interest of any kind in lots 7 and 8.