Paul L. Caron
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Wednesday, February 23, 2011

9th Circuit Reverses Denial of Estate's § 2053 Deduction for Palimony Claim

The Ninth Circuit yesterday, in a 2-1 decision, held that the district court wrongly concluded that an estate could not deduct the amount paid in settlement of a palimony claim under § 2053. Estate of Shapiro v. Commissioner, No. 08-17491 (9th Cir. Feb. 22, 2011). From the majority opinion:

Bernard Shapiro and Cora Jane Chenchark lived together for twenty-two years, but they never married. Over those twenty-two years, Chenchark cooked, cleaned, and managed their household. When they broke up, she filed a palimony suit against him in state court. While the suit was pending, he died. In the context of this tax refund lawsuit filed by Shapiro’s estate, the district court held that Chenchark’s homemaking services did not, as a matter of law, provide sufficient consideration to support a cohabitation contract between Shapiro and Chenchark, and that therefore, an estate tax deduction for the value of Chenchark’s claim was properly disallowed. Because the district court’s holding was premised upon a misconstruction of Nevada law regarding contracts between cohabitating individuals, we reverse. ...

The United States argues that Chenchark’s claim is not deductible because it is not supported by “adequate and full consideration in money or money’s worth.” We do not disagree with the government’s point that, under § 2053(c)(1)(A), a claim founded on a promise or agreement, like Chenchark’s claim, is only deductible “to the extent [it was] contracted bona fide and for adequate and full consideration in money or money’s worth” —but the district court never reached this specific issue. Homemaking services such as those provided by Chenchark can be quantified and have a value attached to them. Our point is simply that these services are not of zero value as a matter of law, as the district court apparently believed.

This is not to say that, even if a factfinder determines that Chenchark’s claim was supported by “adequate and full consideration,” the Estate is necessarily entitled to the full deduction it seeks. Rather, the value of Chenchark’s claim is a factual issue that precludes summary judgment. The value of the claim (and the corresponding allowable estate tax deduction) remains for the district court to determine on remand. Whether her claim was worth $1 million (as it was eventually settled for) or some other amount is for the district court to decide.

Judge Tashima filed a vigorous dissent on this point:

Although the majority is correct that § 2053(a) “allows a deduction for ‘claims against the estate . . . as are allowable by the laws of the jurisdiction . . . under which the estate is being administered,’" a valid state law claim is a necessary condition for the deduction, but not necessarily a sufficient one. Section 2053 also requires that, to be deductible, claims “founded on a promise or agreement[ ] be limited to the extent that they were contracted . . . for an adequate and full consideration in money or money’s worth[.]" § 2053(c)(1)(A). This requirement is not satisfied merely because a claim is “legally binding and enforceable against [an] estate” under state law. ...

The statute’s requirement that deductions based on promises or agreements be supported by full consideration in money’s worth is based on a need to protect the estate tax. Without this limitation, there would be nothing to “prevent testators from depleting their estates by transforming bequests to the natural objects of their bounty into deductible claims.” ... Accordingly, any contract between a decedent and someone who would be a natural object of his or her bounty is viewed with suspicion, requiring exceptional circumstances to be treated as something other than “simply an agreement to make a testamentary disposition to persons who are the natural objects of one’s bounty.” ... 

Accordingly, any love and affection provided to Shapiro by Chenchark must not, and cannot, be treated as consideration for purposes of § 2053, even if it would support a contract under state law. “Nevada law regarding contracts between cohabiting individuals” ... is simply irrelevant to determining the adequacy of consideration under § 2053. ... Even assuming that anything Chenchark provided to Shapiro out of love and affection would support a deduction of its full dollar value, the Estate has presented no evidence here that would create a genuine issue of material fact that Chenchark enhanced the value of the Estate in money’s worth. Although there is evidence that Chenchark supervised Shapiro’s household staff, including a maid, gardener, and a pool man, and that she cooked, cleaned, and provided emotional support to Shapiro, the Estate presented no evidence that these services have a cash value or what that cash value would be. ... Thus, the Estate has not raised a genuine issue of material fact to support its contention that Chenchark’s claim against the Estate, assuming arguendo that it was contracted bona fide, was supported by full consideration in money’s worth for the purpose of federal tax law. Accordingly, I would affirm the district court on this issue.

(Hat Tip: Bob Kamman.)

Update: Joe Kristan notes that "[t]his his could open the door for a do-it-yourself marital deduction for unmarried couples."

https://taxprof.typepad.com/taxprof_blog/2011/02/9th-circuit.html

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