Fifth Circuit values estate tax claim on date of death.

• Author: Barton, Peter C.

In Estate of Smith, 198 F3d 515 (1999), the Fifth Circuit ruled that claims against an estate must be valued on the date of the decedent's death; post-death events are irrelevant. Also, the Fifth Circuit held that this ruling applies even if a claim is disputed or contingent, with its enforceability uncertain, on the date of death. Estate of Smith will frequently result in increased estate tax deductions for these claims, because subsequent events often result in payments smaller than prior estimates.

Sec. 2053(a)(3) allows a deduction from a gross estate for claims against it that are allowable under state law, but does not specify the valuation date to be used. Regs. Sec. 20.2053-4 supports valuing claims on the date of death. Regs. Sec. 20.2053-1(b)(3) supports waiting until claims are "ascertainable with reasonable certainty" to value them. Also, cases have differed on when claims should be valued. The Ninth Circuit has ruled that claims legally enforceable on the date of death are valued on that date, even if the amount must be estimated. For claims not legally enforceable on the date of death, post-death events are relevant, and the deduction is the amount ultimately paid (Propstra, 680 F2d 1248 (1982)). On the other hand, the Eighth Circuit has ruled that post-death events should always be considered (Estate of Sachs, 856 F2d 1158 (1988)).

In Estate of Smith, Algerine Smith had leased land to Exxon while retaining a royalty interest in oil and gas production. In 1978, the U.S. Department of Energy (DOE) sued Exxon for mis-classifying certain crude oil, resulting in overcharges. In 1983, a court ruled that Exxon owed the DOE $895 million (plus interest), which Exxon paid in 1986. In 1988, Exxon sued Smith and the other royalty owners to recoup part of this judgment.

In 1989, a district court ruled that Exxon had a cause of action against the royalty owners. In November 1990, Smith died. In February 1991, the court ruled that the royalty owners were liable to Exxon. In April 1991, Exxon claimed Smith's estate owed it $2,482,719. In July 1991, the executor deducted that amount on the estate tax return as a claim against the estate. In February 1992, the parties settled for $681,840.

The IRS claimed that only $681,840 was deductible as a claim against the estate, arguing that the claim was disputed on the date of Smith's death. The estate argued that $2,482,719 was deductible, because Exxon's claim was certain and enforceable when Smith...