T.C. Memo. 1998-309
UNITED STATES TAX COURT
ESTATE OF ETHEL M. CUMBER WILSON, DECEASED, ETHEL C. KELLY AND
DENNIS I. BELCHER, CO-EXECUTORS, Petitioner v. COMMISSIONER OF
INTERNAL REVENUE, Respondent
Docket No. 15559-96. Filed August 24, 1998.
Dennis I. Belcher, Michele A.W. McKinnon, and John F.
Kelly, for petitioner.
William Henck, for respondent.
MEMORANDUM OPINION
RUWE, Judge: Respondent determined a deficiency of
$1,225,296 in petitioner's Federal estate tax plus an accuracy-
related penalty under section 66621 in the amount of $202,811.
1
Unless otherwise indicated, all section references are to
the Internal Revenue Code in effect as of the date of decedent's
(continued...)
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The parties have by way of settlement or concession disposed of
all but one of the issues raised in the notice of deficiency.
The issue remaining for decision is whether petitioner is
entitled to deduct claims against decedent's estate made by David
and Daniel Griffith in the amounts that were ultimately paid to
the claimants. This case was submitted fully stipulated.
Background
Ethel M. Cumber Wilson (decedent) died a resident of
Richmond, Virginia, on October 3, 1992. Decedent was a widow and
was survived by her only child, Ethel C. Kelly (Mrs. Kelly).
Decedent's will dated July 20, 1989, was probated in the Circuit
Court of the City of Richmond. Under her will, decedent made
specific cash bequests to certain individuals totaling $240,000,
including a cash bequest of $100,000 to Daniel Griffith. She
gave the balance of her estate to Mrs. Kelly. Decedent's will
named Mrs. Kelly as executor and granted Mrs. Kelly the power to
designate a coexecutor. Dennis I. Belcher of Richmond, Virginia,
was named to serve as coexecutor.
During decedent's lifetime, David Griffith and Daniel
Griffith assisted her in various personal and financial matters.
David and Daniel were brothers. David assisted decedent from
1
(...continued)
death, and all Rule references are to the Tax Court Rules of
Practice and Procedure.
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1976 to 1984, and Daniel assisted decedent from 1984 until her
death in 1992. The Griffiths were not related by blood to
decedent but were distant cousins of decedent's deceased husband.
Decedent's husband died on June 22, 1943.
The services performed by the Griffiths included
companionship, secretarial work, chauffeuring, reading to her,
reviewing and paying bills, and taking her to medical and dental
appointments. The Griffiths were on call at all times to meet
decedent's demands, which were substantial because she was of
advanced age, in very poor health (she was blind and severe
diabetes required amputation of her leg in 1989), and unable to
take care of any of her affairs. Both David and Daniel were
employed full time elsewhere during the periods they assisted
decedent. David was employed by C&P Telephone Co. and worked a
significant amount of overtime. Daniel worked for Phillip
Morris, but worked the 3 p.m. to 11 p.m. shift and worked for
decedent in the mornings before going to work.
Decedent never had an investment adviser but had a stock
broker who handled trades for her. Decedent also informally
sought the advice of her son-in-law, two stock brokers, and a
trust officer. Decedent kept her stock certificates in her own
name and did not use a brokerage firm to hold her stock
certificates. Decedent employed other persons in her personal
residence.
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On December 30, 1993, David filed a lawsuit against
decedent's estate claiming that in the fall of 1976 he and
decedent had entered into a binding oral contract under which
decedent agreed to provide in her will that David receive one-
third of her estate in return for his agreement to provide
personal and financial services to decedent until her death.
David provided such personal and financial services to decedent
from 1976 until 1984. In 1980, decedent executed a will in which
decedent gave one-third of her estate to David. However, because
of a dispute with David, decedent executed a new will in 1984
that eliminated David as a beneficiary.
Decedent's executors disputed the validity of David's claim
and litigated the matter on behalf of decedent's estate. The
litigation included extensive discovery and contested pretrial
matters. Following 2 years of discovery and pretrial motions, a
2-day jury trial was held in the Circuit Court of the City of
Richmond on January 11 and 12, 1995. The principal issues were
the validity and amount of David's claim. Before submitting the
matter to the jury, the court granted the executors' statute of
frauds motion with respect to decedent's real property but not
with respect to her personal property. Consequently, if the jury
believed that David and decedent had an oral agreement, David
would receive: (a) One-third of decedent's personal property (or
one-third of approximately $4.5 million), and (b) an award based
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on quantum meruit for the portion of his claim relating to
decedent's real estate.
During jury deliberations, David and the executors reached
an agreement, called a structured settlement, the terms of which
depended in part on the jury verdict.
The jury determined that David and decedent had entered into
a binding contract under which decedent agreed to give David one-
third of her estate and in return David agreed to provide
personal and financial services to decedent. The jury also
determined the value of David's services performed under the
contract to be worth $75,000 (without interest).
The jury found sufficient consideration to support the oral
contract at the time of the alleged oral agreement. The jury's
finding that the value of David's services was $75,000 did not
limit David's recovery with respect to decedent's personal
property, but would have been used as a basis to determine
David's ultimate recovery with respect to the real estate. As a
result of the jury's verdict in favor of David, he would have,
but for the settlement agreement, received approximately $1.5
million plus $3,750 (the quantum meruit portion relating to
decedent's real estate). Because the jury returned a verdict in
favor of David, the structured settlement provided that David was
entitled to receive $400,000 in full satisfaction of his claim
against decedent's estate for services provided to decedent
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during her life. Pursuant to the settlement agreement, David
recognized that the settlement payment he received was for
services rendered and agreed to treat the settlement payment
received as compensation. As required by law for a payor of
miscellaneous income, the executors furnished a Form 1099 to
David.
On July 22, 1993, Daniel filed a lawsuit against decedent's
estate claiming that in 1984 he and decedent had entered into a
binding oral contract under which decedent agreed to provide by
her will that Daniel receive one-third of her estate and that in
return Daniel agreed to provide personal and financial services
to decedent until her death. Daniel provided such personal and
financial services to decedent from 1984 until decedent's death
in 1992.
The executors disputed the validity of Daniel's claim and
litigated the matter on behalf of decedent's estate. The
litigation continued for more than 2 years and included extensive
discovery and contested pretrial matters. After 2 years of
discovery and other litigation matters, the executors and Daniel
agreed to submit Daniel's claim to mediation. Retired Chief
Judge Robert R. Harris, Sr., of the Circuit Court of the City of
Richmond, acted as mediator between the parties. As a result of
the mediation, the executors agreed to pay Daniel $550,000 (in
addition to the $100,000 specific bequest provided to Daniel in
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decedent's will) in full satisfaction of his claim against
decedent's estate. Pursuant to the settlement agreement, Daniel
recognized that the settlement payment he received was for
services rendered and agreed to treat the settlement payment
received as compensation. As required by law for a payor of
miscellaneous income, the executors furnished a Form 1099 to
Daniel.
The estate's respective payments of $400,000 to David and
$550,000 to Daniel were triggered solely by the results of the
judicial and mediation proceedings described above and for no
other reason.
Discussion
The issue for decision is whether decedent's estate may
deduct the claims of David and Daniel Griffith in the amounts
paid to them pursuant to the settlement of their claims.2
Section 2053 allows an estate tax deduction for claims
against the estate that are allowable by the laws of the
jurisdiction in which the estate is being administered. Section
2053 seeks to distinguish between claims based upon obligations
2
Respondent does not appear to be contesting the
deductibility of $75,000 of each of the payments that was made to
David and Daniel. Respondent argues that the deductions are
limited to $75,000 of each payment, because that was the value
that the jury placed on the services that were actually rendered
by David. Respondent argues that Daniel's services should be
given a similar value.
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of the decedent or of the estate, as compared to bequests and
legacies. First Natl. Bank of Amarillo v. United States, 422
F.2d 1385, 1386 (10th Cir. 1970). To be deductible, the claim
must represent a personal obligation of the decedent at the time
of death. Section 2053(c)(1)(A) places a limitation on the type
of claims at issue in this case by providing:
(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; * * *
Section 2053(c)(1)(A) is mirrored by the provisions of section
20.2053-4, Estate Tax Regs.
The purpose of the "adequate and full consideration"
requirement is to prevent the depletion of the estate by the use
of agreements which would ultimately serve to avoid the estate
tax. Bank of New York v. United States, 526 F.2d 1012, 1016 (3d
Cir. 1975); see Estate of Hartshorne v. Commissioner, 402 F.2d
592, 594 n.2 (2d Cir. 1968); Latty v. Commissioner, 62 F.2d 952,
953-954 (6th Cir. 1933). Thus, claims based upon promises or
agreements must be "contracted for a consideration which at the
time either augmented the estate of the decedent, granted to him
some right or privilege he did not possess before, or operated to
discharge a then existing claim". Latty v. Commissioner, supra
at 954. Furthermore, under the statute, some consideration is not
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enough; it must be "adequate and full". Sec. 2053(c)(1)(A). Our
task is to determine whether the underlying claims that resulted
in the settlement payments were based on bona fide agreements
between decedent and David and Daniel Griffith for adequate and
full consideration in money's worth.
David filed a lawsuit against the estate claiming that in
1976 he and decedent had entered into an oral contract, whereby
decedent agreed to give him one-third of her estate in return for
his promise to provide personal and financial services to
decedent for her lifetime. David provided such services from
1976 to 1984. In 1980, decedent executed a will in which she
gave one-third of her estate to David. Decedent subsequently had
a dispute with David, and in 1984 she executed a new will that
eliminated David as a beneficiary.
David's claim that decedent had breached her contract was
litigated, and a jury returned a verdict that would have awarded
him more than $1.5 million. However, during jury deliberations
David and the executors of decedent's estate entered into a
structured settlement agreement, the terms of which were, in
part, dependent on the jury's verdict. Pursuant to the verdict
and the terms of the settlement agreement, the estate paid David
$400,000 in full satisfaction of his claim.
Respondent would have us limit the deduction for David's
claim to $75,000 because that was the jury's determination of the
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value of the services that David actually performed for decedent
from 1976 to 1984. The problem with respondent's position is
that the consideration that David provided in return for
decedent's promise was not the years of services that he actually
provided; rather, it was his 1976 promise obligating him to
provide services to decedent for her lifetime. The date on which
the contract (agreement) was made is the proper date on which to
value the consideration. Estate of Fenton v. Commissioner, 70
T.C. 263, 275-276 (1978). Thus, the value of the consideration
provided by David must be judged as of the time the contract was
made. Likewise, the value of the consideration that decedent
provided (a promise to give one-third of her estate) must be
measured at the time the contract was entered into.
There is no direct evidence of the 1976 value of David's
promise to provide lifetime services or of the 1976 value of
decedent's promise to give David one-third of her estate. We
must therefore look to other factors to determine whether the
mutual promises of decedent and David constitute adequate and
full consideration in money's worth. Generally, the best
indication of value is that which unrelated parties, dealing at
arm's length, agree to. See Bank of New York v. United States,
supra at 1016-1017.
David was not related to decedent. He was not the natural
object of her bounty or affection. At the time of the agreement,
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neither party could have known the ultimate results that their
respective promises would produce, since both promises depended
upon unknown future events and conditions. The nature and the
duration of the services that David was obligated to perform were
dependent upon decedent's condition and longevity. The value of
one-third of decedent's estate was dependent upon whatever
expenditures were made to meet her needs and desires during her
life and fluctuations in the value of her assets. See Estate of
Hartshorne v. Commissioner, supra at 596; Estate of Fenton v.
Commissioner, supra at 276-277. Nevertheless, decedent and David
struck their bargain. Based upon the facts presented, we find
that their mutual promises were based on adequate and full
consideration in money's worth and not intended as a substitute
for a testamentary disposition. Our conclusion is supported by
the results of the adversarial litigation between David and the
estate and their arm's-length structured settlement. See First
Natl. Bank of Amarillo v. United States, 422 F.2d at 1388.3
3
In Estate of Boyce v. Commissioner, T.C. Memo. 1972-204,
affd. in part, revd. in part and remanded sub nom. Wilder v.
Commissioner, 493 F.2d 608 (2d Cir. 1974), respondent disallowed
deductions for amounts paid to decedent's attorney for legal
services rendered during decedent's life. Respondent conceded
that the deduction claimed by decedent's estate was allowable
pursuant to sec. 2053, in the event we decided in a companion
case that the decedent's attorney was required to include the
distribution from decedent's estate in gross income. In the
companion case, we found such amounts to be includable in the
income of decedent's attorney and, therefore, held that
decedent's estate was entitled to a deduction in the same amount.
(continued...)
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Daniel's claim against the estate is for all practical
purposes the same as David's, and we believe that the same
considerations warrant our holding that the mutual, arm's-length
promises of decedent and Daniel constituted adequate and full
consideration in money's worth. The fact that the amount of the
settlement disposing of Daniel's claim was somewhat greater than
David's settlement has no bearing on our finding. Settlement
figures are generally arrived at after considering the
uncertainties of litigation. However, our focus in analyzing the
adequate and full consideration issue falls on the point at which
decedent and Daniel decided to make their bargain.
Decision will be entered
under Rule 155.
3
(...continued)
Estate of Boyce v. Commissioner, supra. In the instant case,
both David and Daniel agreed to treat the settlement payments as
compensation received.