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. Durney, and
Michael L. Paup, Acting Assistant Attorney General, were on brief
for appellee.
February 23, 1994
COFFIN, Senior Circuit Judge. Charles and Myles Huntington
claim that their stepmother, the decedent, promised as part of a
reciprocal will agreement with their father that she would devise
her estate in equal shares to them and their stepsister.
Decedent died intestate, leaving the sons without an inheritance.
Their claim against her estate ultimately led to a $425,000
settlement. The question posed by this appeal is whether the
estate may deduct the settlement amount for purposes of the
federal estate tax. The answer depends upon whether the mutual
will agreement was "contracted bona fide and for an adequate and
full consideration in money or money's worth," as required by 26
U.S.C. 2053(c)(1)(A).1 After careful review of the facts and
precedent, we affirm the Tax Court's determination that the claim
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 . . . .
-2-
-3-
I. Factual Background
The decedent, Elizabeth Huntington, married Dana Huntington
on October 15, 1955. At that time, Dana's two sons from his
previous marriage, Charles and Myles, were, respectively, 30 and
28 years old. Elizabeth and Dana had one daughter, Nancy.
On January 3, 1978, Dana executed a will in which he devised
to Nancy, Charles and Myles $25,000 each. The remainder of his
estate would be held in trust for the benefit of Elizabeth, and,
upon her death, the trust would terminate and the corpus would be
distributed in equal shares to the three children. This will was
revoked by Dana on May 8, 1979, when, during the illness that led
to his death, he executed a new will. The later will stated that
Dana intentionally was making no provision for Charles, Myles and
Nancy. Instead, Dana devised his entire estate to Elizabeth.
Dana died on April 6, 1980, and his May 8, 1979, will was
admitted to probate.
Charles and Myles maintain that their father changed his
will in 1979 to give everything to Elizabeth only because she
agreed to execute a will devising her estate in three equal
shares to Nancy, Charles and Myles. They point to Dana's
previous will to demonstrate his intent to make direct bequests
to his sons, and they refer to conversations through the years in
which Dana acknowledged a moral obligation to leave part of his
estate to his sons in order to compensate for the inadequate
divorce settlement their mother received.
-4-
They also offer direct evidence of an agreement between the
couple. Dana's attorney, William Beckett, testified in his
deposition that, shortly before execution of the 1979 will, Dana
and Elizabeth discussed the arrangement in which Dana would leave
everything to her and she shortly would draft a will that would
include Charles and Myles. Also in a deposition, Myles's wife
testified that at the family luncheon immediately following
Dana's funeral, Elizabeth told her that "`Dana left everything to
me,' meaning herself, with the understanding that upon her death,
everything would be divided equally between the boys . . . and
Nancy . . . ." See App. at 133.
Charles and Myles initially attempted to challenge the May
8, 1979 will based on their father's alleged mental incompetence.
They dropped that lawsuit,2 and on September 10, 1981, filed a
petition in Rockingham County (N.H.) Superior Court seeking to
impose a constructive trust on all of the property received by
Elizabeth from Dana's estate and on all of the property owned by
the decedent on and after May 8, 1979, the date of Dana's final
will. They alleged that Dana and decedent had made a binding
oral agreement to execute reciprocal wills, and that Elizabeth
had not yet executed a will in compliance with the agreement.
On November 12, 1981, the superior court issued a temporary
restraining order barring Elizabeth from taking any actions to
encumber or transfer the property. Five years later, on December
2 They abandoned this effort because of the difficulty of proving that the will was the product of undue influence, see
Deposition of Myles Huntington, May 16, 1986, at 27.
-5-
10, 1986, Elizabeth, Charles and Myles settled the constructive
trust lawsuit. The settlement provided that Elizabeth would
execute a will in which she would devise 20 percent of her estate
to each of Dana's sons. Two weeks later, however, on December
24, 1986, Elizabeth died intestate. Charles and Myles filed a
notice of claim against her estate and, subsequently, they filed
a lawsuit to enforce the settlement terms.
Charles, Myles, and their stepsister, Nancy -- as
administratrix of her mother's estate -- eventually settled the
lawsuit brought to enforce the terms of the earlier constructive
trust settlement. Under the second settlement, Nancy agreed to
pay to Charles and Myles a total of $425,000, an amount
representing 40 percent of Elizabeth's estate. Nancy made that
payment on April 14, 1989.
On the federal tax return for Elizabeth's estate, a
deduction was taken for the settlement payment based on section
2053(a)(3) of the Internal Revenue Code, which allows deductions
for "claims against the estate."3 The Commissioner disallowed
the deduction, and calculated a deficiency of $117,067 in the
estate tax.4
3 The estate return was filed before the settlement reached among Charles, Myles and Nancy and the amount originally deducted was $350,000. The estate later claimed a deduction for the full amount of the $425,000 payment.
4 Both the Tax Court opinion and the Commissioner's brief on appeal state that the Commissioner rejected the deduction on the ground that the payment was a testamentary disposition rather than a claim against the estate within the meaning of section 2053(a). The Commissioner's Notice of Deficiency did not specify the basis of the rejection. See App. at 73.
-6-
The Tax Court affirmed. It found that the asserted
reciprocal will agreement between Dana and Elizabeth lacked
adequate consideration to support a "claim[] against the estate"
within the meaning of section 2053. The court concluded that the
only consideration underlying the agreement was the couple's
"donative intent," making the agreement a testamentary
arrangement rather than an arms-length deal providing the basis
for a deduction. The court further held that the lawsuit filed
by Charles and Myles to enforce the alleged reciprocal will
agreement did not change the essence of the sons' claim so as to
render their claim deductible.
On appeal, the estate argues that Elizabeth received
substantial consideration in exchange for her promise to provide
for Charles and Myles in her will -- the excess amount over what
she would have received under Dana's revoked 1978 will -- and
that this consideration made the sons' claim fully enforceable
and deductible. In addition, the estate contends that Elizabeth
also received valuable consideration when she agreed in December
1986 to settle the constructive trust lawsuit. In exchange for
her promise to execute a will in which she would devise 40
percent of her estate to Charles and Myles, her stepsons released
their claim to two-thirds of her estate. The estate contends
that either or both of these considerations is sufficient to
support its claim to a deduction under section 2053.
As there is no material dispute concerning the underlying
facts, our task is to determine solely whether the Tax Court
-7-
properly applied the statute in these circumstances. Our review
therefore is de novo. See LeBlanc v. B.G.T. Corp., 992 F.2d 394,
396 (1st Cir. 1993).
II.
At the risk of stating the obvious, we think it worth noting
at the outset that any analysis of estate tax issues must be
sensitive to "the general polic[y] of taxing the transmission of
wealth at death," United States v. Stapf, 375 U.S. 118, 134
(1963). Section 2053 of the Internal Revenue Code, which allows
deductions from a decedent's gross estate for certain claims, has
been carefully crafted to promote that policy. In a series of
revisions to the statutory language early in the century,
increasingly formal requirements were imposed on claims based on
promises or agreements, see Taft v. Commissioner, 304 U.S. 351,
355-56 (1938);5 Estate of Pollard, 52 T.C. 741, 744 (1969), "to
5 The history of section 2053 was detailed in Taft as
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).
-8-
prevent deductions, under the guise of claims, of what were in
reality gifts or testamentary dispositions," Carney v. Benz, 90
F.2d 747, 749 (1st Cir. 1937).
In other words, Congress wanted to be sure that bequests to
family members and other natural objects of the decedent's bounty
were not transformed into deductible claims through collaboration
and creative contracting. See Bank of New York v. United States,
526 F.2d 1012, 1016-17 (3d Cir. 1975); Carney, 90 F.2d at 749;
Estate of Satz v. Commissioner, 78 T.C. 1172, 1178 (1982);
Pollard, 52 T.C. at 744. Thus, a "claim against the estate" is
deductible only if the agreement giving rise to the claim was
"contracted bona fide and for an adequate and full consideration
in money or money's worth," 26 U.S.C. 2053(c)(1)(A).
Thus far, this case has focused primarily on whether
Elizabeth Huntington received sufficient consideration, within
the meaning of section 2053, for her promise to include Charles
and Myles in her will. The Tax Court concluded that the
Huntingtons' reciprocal will agreement was supported only by
donative intent, and that this was not enough to establish a
deductible claim. In its notice of appeal and in its brief, the
estate specifically challenges the Tax Court's failure to credit
as consideration Elizabeth's enhanced inheritance -- the
immediate $75,000 representing the bequests previously earmarked
for Charles, Myles and Nancy, plus absolute rights in the balance
of Dana's estate (in contrast to simply a life estate).
Alternatively, it offers as "adequate and full" consideration the
-9-
financial benefit conferred on Elizabeth when Charles and Myles
dropped the constructive trust lawsuit in exchange for her second
promise to include them in her will.
Our view of the caselaw, reflected against the backdrop of
section 2053(c)(1)(A)'s limiting purpose, persuades us that the
real issue here is not whether Elizabeth received a financial
benefit from the reciprocal will agreement -- clearly, she did --
but whether the mutual promises made by Dana and Elizabeth
created the sort of "bona fide" contractual obligation for which
section 2053 allows a deduction. We have little difficulty in
concluding that they did not.
Two threshold propositions inform our inquiry. First,
transactions among family members are subject to particular
scrutiny, even when they apparently are supported by monetary
consideration, because that is the context in which a testator is
most likely to be making a bequest rather than repaying a real
contractual obligation. See Bank of New York, 526 F.2d at 1016;
Estate of Morse v. Commissioner, 69 T.C. 408, 418 (1977), aff'd
per curiam, 625 F.2d 133 (1980); Estate of Woody, 36 T.C. 900,
903 (1961).6 Second, we need not be concerned with whether a tax
avoidance motive was present here, "because it is the substance
of the arrangement as a potential device for defeating the estate
tax that is of controlling significance," Estate of Pollard, 52
6 We note, however, that a close relationship does not necessarily preclude a deduction under section 2053. See infra
at 13-14. It simply requires close judicial review. Estate of
Morse, 69 T.C. at 418.
-10-
T.C. at 745. See also Young v. United States, 559 F.2d 695, 703
(D.C. Cir. 1977).
Thus, while the record in this case provides no evidence
that the Huntingtons sought to defeat estate taxes through their
reciprocal will agreement, this fact does not assist the estate's
effort to overturn the deficiency judgment. The record is
equally barren of evidence indicating that the agreement was
other than a collaborative effort to pass on the family's assets.
From all that appears in the record, it is most plausible that
Dana and Elizabeth discussed their respective desires for
disposing of their property, and concluded that everyone's needs
would be met by the simple will ultimately executed by Dana on
May 8, 1979, and the will Elizabeth was expected to complete
shortly thereafter. Such a purely voluntary, testamentary
arrangement is not the product of a bona fide contract, and
consequently does not provide a basis for a deduction under
section 2053.
The estate suggests that, because Dana had a firm
commitment, evidenced by his prior wills,7 to make direct
bequests to his sons, the change in his last will must have been
the product of bona fide bargaining between the couple. Neither
the fact that Elizabeth received an immediate advantage, relative
to the earlier wills, nor Dana's longstanding intention to make
7 The will in effect before 1978, which had been executed in 1971, provided for a bequest of one-half of his adjusted gross estate to Elizabeth, and for the rest to pass to Myles and Charles.
-11-
his sons beneficiaries of his estate is enough, however, to
transform an apparently cooperative agreement into a bona fide
contract. See Estate of Morse, 69 T.C. at 418.
Dana simply may have changed his mind about the best way to
provide for his family, either before or after discussion with
Elizabeth. By passing on his entire estate to his wife, who was
substantially younger than himself, he could ensure that she
would be fully provided for as long as she lived. He may have
felt that Charles and Myles, both well into adulthood, had no
immediate need for the money. By securing his wife's agreement
that the balance of both of their estates would be divided
equally among the couple's three children, he still could fulfill
his moral obligation to Charles and Myles.
There is no evidence that Dana and Elizabeth reached
agreement on the asserted reciprocal wills only after a period of
give-and-take bargaining. Indeed, Dana's sister testified that
her brother's lawyer suggested that "he not discuss every last
detail of his estate plan [with Elizabeth] because . . . she
would probably want to argue over every point." Elizabeth's
wishes may have played a substantial role in Dana's decision to
change his will -- she was, after all, his wife -- but the record
is silent as to any form of negotiations.8
8 In its brief, the estate points to comments allegedly made by Elizabeth and by Dana's sister, Marjorie, suggesting that Dana became increasingly vulnerable to Elizabeth's "verbal onslaughts" during his illness and that Elizabeth was aggressive on money issues after Dana's death. This evidence does not, however, reveal why and how Dana and Elizabeth decided to execute reciprocal wills.
-12-
This is not to say that "hard bargaining as would occur
between hostile parties is [] an absolute prerequisite to a
deduction under section 2053," Estate of Morse, 69 T.C. at 419.
But when family members adopt a course of action whose object is
to pass on their collective wealth, a deduction for the amount
ultimately transferred is not permitted under section 2053 unless
there is some showing of a bargained-for exchange. Any other
conclusion would seriously undermine the policy of taxing the
transfer of wealth at death. Where, as here, there is no
evidence of any type of negotiations, the claim to deductibility
unquestionably fails for lack of proof.
The language of the Third Circuit in Bank of New York v.
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 case
before us is indistinguishable from Bank of New York, in which a
husband and wife executed reciprocal wills leaving their estates
first to each other and then to specifically identified friends
and relatives. The wife later made several changes in her will,
eliminating one of the husband's chosen beneficiaries and
limiting the bequest to the other. The wife's estate eventually
-13-
settled with the two disadvantaged beneficiaries, and then sought
to deduct the settlement payment for estate tax purposes.
The Third Circuit upheld the Commissioner's rejection of the
deduction, concluding that "the value of the claim settled by the
estate may not be deducted if the agreement on which the claim
was based was not bargained at arm's length." 526 F.2d at 1016.
The court found that no such bargaining took place there because
the parties were "of one mind" when they executed the mutual
wills for the purpose of fixing the ultimate disposition of their
property. Id. at 1017. "There is nothing in the record," the
court observed, "to support a finding that the mutual wills here
were executed as the result of an arm's length bargain of any
sort." Id.
The court in Bank of New York carefully and appropriately
distinguished cases involving family arrangements in which
deductions were upheld, noting that they involved "the sort of
agreements that arise between parties separated by divergent
interests," id. at 1016-17. The clearest cases are those arising
in the divorce setting, where it is likely that the estranged
spouses obtain advantages only by trading them for concessions on
other issues. See, e.g., Leopold v. United States, 510 F.2d 617,
624 (9th Cir. 1975); Estate of Scholl v. Commissioner, 88 T.C.
1265, 1276 (1987).9
9 Even in the divorce context, however, a claim will not always be fully deductible. See In re Estate of Hartshorne, 402
F.2d 592, 596 (2d Cir. 1968) (deduction allowed for ex-wife's life interest in property but denied for children's remainder interest).
-14-
In other instances, courts have upheld deductions when the
underlying transactions demonstrated that the claim at issue was
based on a "purely commercial undertaking," Carney, 90 F.2d at
749, or was "[i]n no sense . . . a device for making a
testamentary gift," Estate of Woody, 36 T.C. at 904. In Woody, a
deduction was allowed for a father's $14,000 bequest to his
daughter that was intended as reimbursement for the daughter's
earlier release of her brother -- at her father's request -- from
an indebtedness in that specific amount. In Carney, the claim
against the decedent's estate was based on a guaranty given by
the decedent on behalf of his wife and daughter in a regular
business context.
Some courts have suggested that a bona fide, deductible
claim can be differentiated from one that fails to meet the
requirements for deductibility by examining whether the claim is
against the estate or to a portion of the estate. See, e.g.,
Latty v. Commissioner, 62 F.2d 952, 953 (6th Cir. 1933); Estate
of Lazar v. Commissioner, 58 T.C. 543, 552 (1972). In other
words, if the debt underlying the claim has its origin in a
discretionary desire to pass on wealth to specific individuals --
giving those individuals a claim "to" a portion of the estate --
it is unlikely to be the sort of bona fide, arm's-length
obligation that is deductible under the statute. Deductible
claims will have arisen from transactions that created true debts
"against" the estate.
-15-
The estate, of course, insists that there was a debt here
once Elizabeth made her promise and received a financial benefit,
but then reneged on the deal. It may be that, under state law,
the reciprocal will agreement was an enforceable contract that,
when violated, created a debt in favor of Charles and Myles
against the estate. A valid contract is not necessarily enough,
however, to establish a deductible claim for purposes of section
2053. Bank of New York, 526 F.2d at 1015; see also Stapf, 375
U.S. at 131; Luce v. United States, 444 F. Supp. 347, 350 (W.D.
Mo., S.D. 1977); Carli v. Commissioner, 84 T.C. 649, 658 (1985);
Pollard, 52 T.C. at 744 ("To be sure, the mutual promises
undoubtedly constitute consideration under the law of contracts.
But the statute requires more."). A claim derived solely from
Dana Huntington's desire to share some portion of his estate with
his sons, carried out through cooperative estate planning, is
precisely the sort of "debt" section 2053(c)(1)(A) was designed
to exclude. See Bank of New York, 526 F.2d at 1018 ("The policy
of section 2053 is to deny a deduction where the underlying
transaction was `essentially donative in character.'") (citing H.
Rep. No. 2333, 77th Cong., 2d Sess. 169 (1942) (reprinted in
1942-2 Cum. Bull. 372, 493); S. Rep. No. 1631, 77th Cong., 2d
Sess. 238 (1942) (reprinted in 1942-2 Cum. Bull. 504, 679)).
Nor does the subsequent court-approved settlement with
Elizabeth's estate transform the claim into an arm's-length
transaction within the meaning of section 2053. The Bank of New
York case again is directly on point:
-16-
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; cf.
Phillips v. Gnichtel, 27 F.2d 662, 663-64 (3d Cir. 1928)
(involving transfers made "in contemplation of death," which are
included in gross estate except in case of "a bona fide sale for
a fair consideration in money or money's worth") ("[W]e [are]
inclined to go to the heart of the transaction and find, if we
can, just what the parties intended, just what they did and what
was the precise result.").
Our examination of the issue of arm's-length bargaining
helps bring into focus the parties' dispute over consideration.
If the reciprocal will agreement did represent collaborative
estate planning by the Huntingtons, the fact that Elizabeth
received a larger direct bequest than she would have received
under Dana's prior will is of no consequence. In such
circumstances, the increase would reflect changed priorities
rather than a bargained- for "consideration." Cf. Estate of
Morse, 69 T.C. at 418 ("[A] consideration hypothetically full and
adequate within the statutory meaning has no relevance if the
asserted consideration was not part of the bargain between the
parties."); Estate of Morse, 625 F.2d at 135 ("[T]he Tax Court
was correct in ruling that it was necessary to show that such
-17-
consideration was so bargained for . . . .").10 The problem
with the Huntington sons' claim therefore may be characterized
alternatively as a failure of proof of "full and adequate
consideration."
We need not decide today whether there may be some factual
circumstances in which a claim that began with a wholly
discretionary desire to make a bequest can fulfill the
requirements of section 2053 for a "bona fide" contract supported
by "an adequate and full consideration in money or money's
worth." It suffices to say that, in this case, the requisite
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 negotiated a
detailed antenuptial agreement to take care of various financial concerns, including the wife's loss of income, upon her remarriage, from a trust established by her former husband. Decedent agreed that, after his death, his wife would receive $12,000 per year during her life from his estate (the same amount as provided by the forfeited trust). The Tax Court held that the commuted value of the wife's right to receive the $12,000 was not deductible for estate tax purposes as a claim against her husband's estate under section 2053. The court rejected the contention that the decedent's right to live in his wife's house rent-free during his life, if he had survived her, was consideration for his agreement to provide her with the $12,000 income. 69 T.C. at 418 ("[A]n examination of the facts and circumstances of this case reveals an absence of bargaining . . . .").
-18-