A Claim Is a Claim Is a Claim: Post-death Events and Section 2053 Deductions

• Publication year: 2007
• Author: By Michael C. Gerson, Esq.

A CLAIM IS A CLAIM IS A CLAIM: POST-DEATH EVENTS AND SECTION 2053 DEDUCTIONS

By Michael C. Gerson, Esq.

I. INTRODUCTION

There are two certainties in life: death and taxes.¹ The interplay of these two has confused the courts, reflecting the old adage that "[1]ogic and taxation are not always the best of friends."² The Ninth Circuit has proven this adage true in its approach to the estate tax deduction claims that constitute a liability and are against the decedent, that is, "for claims against the estate."³

A decedent's claims can be either an asset (such as a pending lawsuit against a third party) or a liability (such as a pending lawsuit against the decedent). The Ninth Circuit's consistent position has been that claims, contingent or otherwise, that constitute an asset are included in a decedent's gross estate based on their date of death value.⁴ However, the Ninth Circuit's position on claims that constitute a liability, that is, "claims against the estate," has been inconsistent.⁵ First, the Ninth Circuit held that post-death events are relevant in valuing the deduction for a claim against the estate.⁶ Then the Ninth Circuit concluded that post-death events are irrelevant in valuing the deduction for a claim against the estate, but in dicta opined that uncertain claims are valued at the date of payment.⁷ Subsequently, the Ninth Circuit has confirmed that post-death events are irrelevant in valuing the deduction for a claim against the estate.⁸ Thus, the author respectfully disagrees with the contrary conclusion reached in Loeb, Crossed Circuits on Estate Tax Deductibility of Contingent or Disputed Claims,⁹ that in the Ninth Circuit, contingent claims are valued based on post-death events.

II. BRIEF OVERVIEW: STATUTE AND REGULATIONS

Before analyzing the Ninth Circuit decisions on this issue, it is important to review general estate tax principles.

The estate tax is levied not on the property transferred but on the transfer itself. The tax is on the act of the testator not on the receipt of the property by the legatees. Consequently we look at the value of the property in the decedent's hands at the time of its transfer by death, 26 U.S.C. §2033, or at the alternate valuation date provided by statute, 26 U.S.C. §2032(a). That the tax falls as an excise on the exercise of transfer underlies the point that the value of the transfer is established at that moment; it is not the potential of the property to be realized at a later date.¹⁰

In other words, "the property to be valued for estate tax purposes is that which the decedent actually transfers at his death rather than the interest held by the decedent before death or that held by the legatee after death."¹¹ Because the estate tax is an excise tax, a tax on the act of transfer, and not a direct tax, it is constitutional.¹²

To determine the estate tax due, "the taxpayer first determines the value ofthe gross estate. [IRC] § 2031(a). From the gross estate, the taxpayer subtracts allowable deductions."¹³ The estate tax return must be filed no later than nine (or with an extension, no later than 15) months after the decedent's death.¹⁴ Meanwhile, regardless of the extension, the estate tax is due and owing nine months after date of death.¹⁵ Within three years of the filing of the return or the due date, whichever is later, the IRS must assess the estate tax liability.¹⁶

This article focuses on the Ninth Circuit's analysis and rulings on the estate tax deduction "for claims against the estate . . . as are allowable by the laws of the jurisdiction."¹⁷ "[T]he contents of section 2053 do not give rise to any inference regarding whether post-death events should be considered when valuing claims against an estate."¹⁸ Moreover, nothing in the statute or the legislative history clarifies what "claims" means or distinguishes between types of claims. Adding to the confusion, prior to 1954, the Internal Revenue Code provided a deduction for claims against the estate as are "allowed" by local law, but the new Code introduced "allowable" claims, without defining what they are.

The Internal Revenue Code and Congressional history offer no clear guidance and, unfortunately, the Treasury Regulations also are unclear and susceptible to different interpretations.¹⁹ The Regulations could be read to support a conclusion that post-death events should be considered because any estimate of a claim must be "ascertainable with reasonable certainty" and "will be paid."²⁰ But, at the same time, the Regulations arguably support a conclusion that post-death events cannot be considered because valuation is made "at the time of death."²¹ Nothing in the Regulations definitely answers when claims are valued (date of death, date of filing the estate tax return, date the statute of limitations runs, date of payment, or some other date). Given the lack of clear guidance from the Internal Revenue Code and the Treasury Regulations, the Ninth Circuit has struggled mightily with this issue.

III. BRIEF SUMMARY OF U.S. SUPREME COURT DECISIONS

As this article focuses on the Ninth Circuit's position on the deductions "for claims against the estate," the key decisions are those of the United States Supreme Court and decisions of the Ninth Circuit itself. The United States Supreme Court has not specifically addressed what constitutes a "claim" against a decedent and when to calculate that claim under Internal Revenue Code section 2053(a)(3). There are, though, two relevant Supreme Court decisions dealing with valuing a deduction in the estate tax context: Ithaca Trust Co. v. United States²² and Estate of Hubert.²³

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In Ithaca Trust, the Supreme Court addressed "whether the charitable remainder became more valuable (as a deduction from the gross estate) because the life tenant, who survived the trustor, died before reaching her actuarial life expectancy."²⁴ In concluding that the post-death event (the premature death) did not affect the value of the charitable remainder, the United States Supreme Court stated:

The first impression is that it is absurd to resort to statistical probabilities when you know the fact. But that is due to inaccurate thinking. The estate so far as may be is settled as of the date of the testator's death. . . . [T]he value of the thing to be taxed must be estimated as of the time when the act is done . . . and the value is no less real at that time if later the prophecy turns out false than when it comes out true. Tempting as it is to correct uncertain probabilities by the now certain fact, we are of the opinion that it cannot be done. . . . ²⁵

In 1996, in Estate of Hubert, the United States Supreme Court addressed the impact on the estate tax marital deduction of the use of post-mortem income to pay administration expenses.²⁶ In concluding that the post-death event, the use of post-mortem income to pay administration expenses, was not relevant to valuing the marital deduction, the lead plurality opinion held that date of death principles apply and "valuation for marital deduction purposes occurs on the date of death."²⁷ The dissent, in contrast, believed that the post-death event, that is, the use of the post-mortem income, impacted the amount of the marital deduction.²⁸

Thus, the United States Supreme Court's position in Ithaca Trust and Estate of Hubert is that the marital and charitable deductions are valued as of date of death.

IV. NINTH CIRCUIT DECISIONS

Unlike the United States Supreme Court, the Ninth Circuit Court of Appeals has addressed the issue of deductions for claims against an estate. However, its jurisprudence has evolved and changed. The Ninth Circuit Court of Appeals has successively taken the positions that the deduction for a claim against the estate is: (1) valued at the time of payment,²⁹ (2) valued at date of death, but in dicta opining that uncertain claims are valued at the date of payment,³⁰ and (3) valued at date of death.³¹

A. Pre-1954 Cases and Deductions for Claims Allowed

In its earliest reported decision on this issue, Buck v. Helvering, the Ninth Circuit stated that the deduction for a potential claim against the estate is valued based on the actual payment, if any, and is not valued at date of death.³² In this decision, the decedent, a shareholder in a California corporation, was personally and primarily liable for a proportionate share of a corporation's validly incurred debt.³³ The estate sought to deduct that debt both against the corporate assets, thereby reducing the value of the corporate stock, and against the other assets of the decedent-shareholder.

The Ninth Circuit ruled that such double-dipping was not allowed, and that either: (1) the debt was a liability of the estate and not the corporation, and thus the stock was worth more than the estate reported, or (2) the debt was a liability of the corporation and not the estate.³⁴ In reaching this conclusion, the court stated that Congress did not intend for an estate to deduct "potential" claims and that only "actual claims, not theoretical ones," are deductible.³⁵ The Ninth Circuit did not explain what is a "potential," "actual," or "theoretical" claim.

The Ninth Circuit next addressed "claims against the estate" in Estate of DuVal v. Commissioner.³⁶ In Estate of DuVal, the estate sought a deduction for all amounts potentially due under a guarantee for which the decedent and others were co-guarantors, but at the same time the estate allocated no value to the decedent's right of reimbursement from the primary obligor.³⁷ The Ninth Circuit concluded that the right of reimbursement was an asset, valued at date of death, but the liability was not deductible. The opinion did not explain why the liability was not deductible. Instead the court simply opined that if the estate were correct and a co-guarantor could deduct the full extent of a guarantee, each guarantor's estate would be able to deduct the full amount of the liability.³⁸ The court also did not analyze why a contingent liability was not...