Opinion ID: 509535
Heading Depth: 3
Heading Rank: 2

Heading: Treasury Regulation Sec. 20.2053-1(b)(2)

Text: 31 Treasury Regulation Sec. 20.2053-1(b)(2), which is entitled Effect of Court Decree, provides in relevant part: 32 The decision of a local court as to the amount and allowability under local law of a claim or administration expense will ordinarily be accepted if the court passes upon the facts upon which deductibility depends. If the court does not pass upon those facts, its decree will, of course, not be followed.... If the decree was rendered by consent, it will be accepted, provided the consent was a bona fide recognition of the validity of the claim (and not a mere cloak for a gift) and was accepted by the court as satisfactory evidence upon the merits.... The decree will not be accepted if it is at variance with the law of the State ... (emphasis added). 33 The district court concluded in light of this regulation that (1) the Surrogate having passed upon the facts upon which deductibility depends, and (2) in the absence of a prima facie showing by the IRS that the Surrogate's decision was motivated by factors other than those upon which deductibility depends, such as fraud, overreaching, or excessiveness by the attorney or the Surrogate, the IRS was bound by the Surrogate's decision. 650 F.Supp. at 909. The district court therefore accepted White's claim that an IRS investigation of the deductibility of his fees would be pointless and hence it found that the IRS summonses were not issued for a legitimate purpose. 34 We believe that the district court erred in concluding that this regulation precludes the IRS from investigating the deductibility of White's fees under state law. The regulation merely parallels and elaborates on its related statute, I.R.C. Sec. 2053(a), and therefore, the principles discussed in Bosch are as applicable in the context of the regulation as they are in the statutory context. In stating that a local court decree will not be accepted if it is at variance with the law of the State, the regulation, like the statute, when read in conjunction with Bosch, makes it clear that the IRS is entitled to make an independent assessment of applicable state law as interpreted by the state's highest court. Contrary to the district court's conclusion, and by analogy to Bosch, the regulation does not preclude the IRS from independently assessing the deductibility of White's fees under state law. 35 Moreover, the regulation authorizes the IRS to determine, prior to acceptance of a local court decree, whether or not that decree is at variance with state law. For instance, a local court decree may be at variance with state law if, in the district court's words, the Surrogate's decision was motivated by factors other than those upon which deductibility depends, such as fraud, overreaching, or excessiveness by the attorney or the Surrogate. The decree may also be at variance with state law if the local court did not pass on the facts upon which deductibility depends, or if the consent given was not a bona fide recognition of the validity of the claim--these are questions regarding the proper application of state law that the regulation itself sets forth as standards to determine when the IRS should accept a local court decree. Also, these standards are consistent with our prior statement that a state court decree would only be as valid as its evidentiary base and may be disregarded where [it is determined that] a lower state court made an erroneous application of state law. Bosurgi, 530 F.2d at 1112. 36 From the language of the regulation, it is clear that, while the IRS may ordinarily accept a local court decree, it is not required to do so if the decree did not properly apply state law. Rather, the regulation permits the IRS to make an independent assessment of the deductibility of White's fees under state law and to assess the acceptability of the Surrogate's decree for federal tax purposes. Since neither I.R.C. Sec. 2053 nor Treas.Reg. Sec. 20.2053-1(b)(2) precludes the IRS from investigating the deductibility of White's fees under state law, we conclude that White has failed to meet his burden of disproving the existence of a legitimate tax determination purpose. 37 The district court erred in requiring, as a prerequisite for summons enforcement, that the IRS make a prima facie showing that the Surrogate's decision was motivated by impermissible factors such as fraud, overreaching, or excessiveness by the attorney or the Surrogate. This requirement is virtually the same as that advanced by the taxpayer in Powell, namely, that the IRS must make an advance showing of probable cause to suspect fraud. In Powell, the Supreme Court rejected such a standard because it might seriously hamper the Commissioner in carrying out investigations he thinks warranted, forcing him to litigate and prosecute appeals on the very subject which he desires to investigate. 379 U.S. at 54, 85 S.Ct. at 253. Since we believe that the district court's requirement would be equally likely to hamper the IRS in carrying out investigations it thinks are warranted, and has already forced the IRS to litigate and prosecute an appeal on the very subject it desires to investigate, we reject the district court's new standard for enforcement of summonses as an invalid restraint on the summons power of the IRS. 38 Finally, the district court prematurely considered and decided the issue of whether the Surrogate passed on the facts upon which deductibility depends. As previously stated, at this summons enforcement stage, the validity of the Surrogate's decree is not at issue. Rather, the IRS seeks to inquire into the factors that bear on the deductibility of White's fees, and not to accuse the Surrogate of error. See Bisceglia, 420 U.S. at 146, 95 S.Ct. at 918-19. Indeed, as far as we know, no record evidence, as such, had been presented to the district court that would have enabled it to decide whether the Surrogate passed on the facts upon which deductibility depends. The post hoc letter from the Surrogate justifying its decision is not sufficient to eliminate inquiry into whether the Surrogate actually considered the appropriate facts. 39 The function of the district court and of this Court in an enforcement proceeding is not to test the final merits of the claimed tax deduction, but to assess within the limits of Powell whether the IRS issued its summons for a legitimate tax determination purpose. We conclude from our review of I.R.C. Sec. 2053 and its associated regulation that, contrary to White's claim, the IRS has a legitimate purpose in investigating the deductibility of his fees. We further conclude that White has failed to meet his heavy burden of disproving the existence of a legitimate tax determination purpose for the IRS investigation.