USCA1 Opinion UNITED STATES COURT OF APPEALS FOR THE FIRST CIRCUIT ____________________ No. 93-1602 ESTATE OF ELIZABETH G. HUNTINGTON, DECEASED, NANCY H. BRUNSON, ADMINISTRATRIX, Petitioner, Appellant, v. COMMISSIONER OF INTERNAL REVENUE, Respondent, Appellee. ____________________ APPEAL FROM THE UNITED STATES TAX COURT [Hon. Stephen J. Swift, U.S. Tax Judge] ______________ ____________________ Before Selya, Circuit Judge, _____________ Coffin, Senior Circuit Judge, ____________________ and Cyr, Circuit Judge. _____________ ____________________ Michael E. Chubrich for appellant. ___________________ Annette M. Wietecha, with whom Gary R. Allen, Ann B. Durn
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U.S.C. 2053(c)(1)(A).1 After careful review of the facts
precedent, we affirm the Tax Court's determination that the c
is not deductible.
____________________
1 Section 2053 provides in relevant part:
(a) General rule.--For purposes of the tax imposed ____________ by section 2001, the value of the taxable estate shall be determined by deducting from the value of the gross
estate such amounts-- * * * (3) for claims against the estate, . . . as are allowable by the laws of the jurisdiction . . . under which the estate is being administered. * * * (c) Limitations.-- ___________ (1) Limitations applicable to subsections (a) _________________________________________ and (b).-- _______ (A) Consideration for claims.--The deduction ___________________________ allowed by this section in the case of claims against the estate . . . shall, when founded on a promise or agreement, be limited to the extent that they were contracted bona fide and for an adequate and full consideration in money or money's worth . . . .
notice of claim against her estate and, subsequently, they f
a lawsuit to enforce the settlement terms.
Charles, Myles, and their stepsister, Nancy --
administratrix of her mother's estate -- eventually settle
lawsuit brought to enforce the terms of the earlier construc
trust settlement. Under the second settlement, Nancy agree
pay to Charles and Myles a total of $425,000, an a
representing 40 percent of Elizabeth's estate. Nancy made
payment on April 14, 1989.
On the federal tax return for Elizabeth's estate
deduction was taken for the settlement payment based on sec
2053(a)(3) of the Internal Revenue Code, which allows deduct
for "claims against the estate."3 The Commissioner disall
the deduction, and calculated a deficiency of $117,067 in
estate tax.4
____________________
3 The estate return was filed before the settlement rea among Charles, Myles and Nancy and the amount originally dedu was $350,000. The estate later claimed a deduction for the
amount of the $425,000 payment.
4 Both the Tax Court opinion and the Commissioner's brie
appeal state that the Commissioner rejected the deduction onground that the payment was a testamentary disposition ra
than a claim against the estate within the meaning of sec 2053(a). The Commissioner's Notice of Deficiency did not spe the basis of the rejection. See App. at 73. ___
5 The history of section 2053 was detailed in Taft___
follows:
The Revenue Act of 1916 permitted the deduction of the amount of claims against the estate "allowed by the laws of the jurisdiction . . . under which the estate is being administered." . . . The Act of 1924 altered existing law and authorized the deduction of claims against an estate only to the extent that they were "incurred or contracted bona fide and for a fair consideration in money or money's worth." Congress had reason to think that the phrase "fair consideration" would be held to comprehend an instance of a promise
which was honest, reasonable, and free from suspicion whether or not the consideration for it was, strictly speaking, adequate. The words "adequate and full consideration" were substituted by 303(a)(1) of the Act of 1926.
304 U.S. at 356 (footnotes omitted).
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prevent deductions, under the guise of claims, of what wer
reality gifts or testamentary dispositions," Carney v. Benz______ ___
F.2d 747, 749 (1st Cir. 1937).
In other words, Congress wanted to be sure that bequest
family members and other natural objects of the decedent's bo
were not transformed into deductible claims through collabora
shortly thereafter. Such a purely voluntary, testamen
arrangement is not the product of a bona fide contract,
consequently does not provide a basis for a deduction u
section 2053.
The estate suggests that, because Dana had a
commitment, evidenced by his prior wills,7 to make di
bequests to his sons, the change in his last will must have
the product of bona fide bargaining between the couple. Nei
the fact that Elizabeth received an immediate advantage, rela
to the earlier wills, nor Dana's longstanding intention to
____________________
7 The will in effect before 1978, which had been execute1971, provided for a bequest of one-half of his adjustedestate to Elizabeth, and for the rest to pass to MylesCharles.
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his sons beneficiaries of his estate is enough, however,
transform an apparently cooperative agreement into a bona
contract. See Estate of Morse, 69 T.C. at 418.
___ _______________
Dana simply may have changed his mind about the best wa
provide for his family, either before or after discussion
This is not to say that "hard bargaining as would o
between hostile parties is [] an absolute prerequisite t
deduction under section 2053," Estate of Morse, 69 T.C. at 4_______________
But when family members adopt a course of action whose objec
to pass on their collective wealth, a deduction for the a
ultimately transferred is not permitted under section 2053 un
there is some showing of a bargained-for exchange. Any o
conclusion would seriously undermine the policy of taxing
transfer of wealth at death. Where, as here, there is
evidence of any type of negotiations, the claim to deductibi
unquestionably fails for lack of proof.
The language of the Third Circuit in Bank of New Yor_______________
United States, 526 F.2d at 1017, is equally applicable here: _____________
When the interests of family members are not divergent but coincide so that the elements of a transaction advance the separate concerns of each, we are unable to find the arm's length bargain mandated by
the Code. This Court has adhered to the distinction between family arrangements bargained for at arm's length and family arrangements that reflect a community of interests. Tax advantages are not permitted when an agreement between members of a family could be regarded as a cooperative attempt to make a testamentary disposition rather than as an arm's length bargain.
Indeed, on the issue of arm's-length bargaining, the
before us is indistinguishable from Bank of New York, in whi_________________
husband and wife executed reciprocal wills leaving their est
distinguished cases involving family arrangements in
deductions were upheld, noting that they involved "the sor
agreements that arise between parties separated by diver
interests," id. at 1016-17. The clearest cases are those ari
___
in the divorce setting, where it is likely that the estra
spouses obtain advantages only by trading them for concession
other issues. See, e.g., Leopold v. United States, 510 F.2d___ ____ _______ _____________
624 (9th Cir. 1975); Estate of Scholl v. Commissioner, 88
_________________ ____________
1265, 1276 (1987).9
____________________
9 Even in the divorce context, however, a claim willalways be fully deductible. See In re Estate of Hartshorne,
___ ___________________________ F.2d 592, 596 (2d Cir. 1968) (deduction allowed for ex-wi life interest in property but denied for children's remai interest).
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In other instances, courts have upheld deductions when
underlying transactions demonstrated that the claim at issue
based on a "purely commercial undertaking," Carney, 90 F.2______
749, or was "[i]n no sense . . . a device for makin
Sess. 238 (1942) (reprinted in 1942-2 Cum. Bull. 504, 679)).
Nor does the subsequent court-approved settlement
Elizabeth's estate transform the claim into an arm's-le
transaction within the meaning of section 2053. The Bank of_______
York case again is directly on point: ____
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To effectuate the policy underlying the federal estate tax requires that courts look beneath the surface of transactions to discover the essential character of each transfer. Even where a claim is ultimately satisfied by the operation of law, the
courts will determine the nature of the claim for federal tax purposes by examining the particular status of the claimant that enabled him to impose his claim on the estate.
526 F.2d at 1017. See also Luce, 444 F. Supp. at 354;___ ____ ____
with the Huntington sons' claim therefore may be character
alternatively as a failure of proof of "full and ade
consideration."
We need not decide today whether there may be some fac
circumstances in which a claim that began with a w
discretionary desire to make a bequest can fulfill
requirements of section 2053 for a "bona fide" contract suppo
by "an adequate and full consideration in money or mon
worth." It suffices to say that, in this case, the requi
attributes of a deductible claim were not shown.
The decision of the Tax Court is affirmed. _________________________________________
____________________
10 In Estate of Morse, decedent and his wife negotiat_______________
detailed antenuptial agreement to take care of various finan concerns, including the wife's loss of income, upon
remarriage, from a trust established by her former husb Decedent agreed that, after his death, his wife would rec $12,000 per year during her life from his estate (the same a as provided by the forfeited trust). The Tax Court held that the commuted value of the wi right to receive the $12,000 was not deductible for estate
purposes as a claim against her husband's estate under sec 2053. The court rejected the contention that the decede
right to live in his wife's house rent-free during his life,he had survived her, was consideration for his agreementprovide her with the $12,000 income. 69 T.C. at 418 ("
examination of the facts and circumstances of this case re an absence of bargaining . . . .").