921 / How are notes, mortgages, and mortgage participation certificates valued for federal transfer tax purposes?

The fair market value of notes, secured or unsecured, is presumed to be the amount of unpaid principal, plus interest accrued to the date of death or gift, unless the executor or the donor establishes that the value is lower or that the notes are worthless. If not returned at face value, plus accrued interest, satisfactory evidence must be submitted that the note is worth less than the unpaid amount (because of the interest rate, date of maturity, or other cause), or that the note is uncollectible, either in whole or in part (by reason of the insolvency of the party or parties liable, or for other cause), and that any property pledged or mortgaged as security is insufficient to satisfy the obligation.¹

Mortgages and mortgage participation certificates are treated similarly. The presumption that their face value is their true value governs unless the representative of the estate submits convincing evidence to the contrary.

If it is contended that the actual value of mortgages or mortgage participation certificates is less than their face value, pertinent factors to be taken into consideration in fixing the correct value include the valuation of real estate and any collateral covered by the mortgages, arrears in taxes and interest, gross and net rentals, foreclosure proceedings, assignment of rents, prior liens or encumbrances, present interest yield, over-the-counter sales, bid and asked quotations, etc. The existence of an over-the-counter market for such securities and the quotations and opinions of value furnished by brokers and real estate appraisers cannot be accepted as conclusive evidence of the value of such securities. Such sales and bid and asked quotations are merely items to be considered with other evidence in fixing values.

In valuing unit mortgages, consideration will be given first to the value of the property securing the mortgages, applying the same factors as are used in fixing the valuation of real estate owned in fee. Where the mortgage is amply secured, the value will be determined to be its face value plus accrued interest to the date of death. Where the security is insufficient, the mortgage will be valued upon the basis of the fair market value of the property less back taxes, estimated foreclosure expenses, and, where justified, the expense of rehabilitation. If the mortgage is not affected by moratorium laws, the mortgagee’s recourse against the mortgagor personally will be taken into consideration.

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Planning Point: The valuation of such assets is a question of fact and the IRS contends that the burden of proof is upon the estate to overcome the presumption that the face value is the true value where a lower value is sought to be established.²