Estate of Fung v. Commissioner

Hon Hing Fung and his wife were Hong Kong citizens who each owned a one-half interest in properties situated in California. These included a residential building located in Oakland that was subject to a $700,000 promissory note secured by a deed of trust on the property. The note gave the lender, World Savings and Loan Association, the right to pursue any and all remedies available in law or in equity if Fung and his wife defaulted. Fung died, at which time the property was valued at $885,000, with a $649,948 unpaid balance on the note. Fung’s estate (plaintiff) filed a US estate-tax return in which the property was valued according to net equity—that is, the total value minus the unpaid balance. The commissioner of the Internal Revenue Service (IRS) (defendant) assessed a deficiency, asserting that the value of the Oakland property should be its fair market value (which would result in a higher taxable estate). The IRS relied on Internal Revenue Code (IRC) § 2053 and surrounding regulations and caselaw to argue that fair market value was the appropriate form of valuation if personal liability for the underlying debt could be asserted against the property owner or the property owner’s estate. The estate challenged this determination in the United States Tax Court, arguing that, as a practical matter, California foreclosed on deeds of trust through nonjudicial proceedings.