Opinion ID: 157391
Heading Depth: 3
Heading Rank: 1

Heading: Deduction for Claims Against the Estate

Text: 17 The Estate argues that payments to settle these tort claims are deductible under I.R.C. § 2053(a)(3), which permits a deduction from the value of the gross estate for claims against the estate. 2 The United States responds that the settlement payment is not deductible because it is a distribution of a portion of the estate, not the payment of a claim against the estate. Cf. First Nat'l Bank of Amarillo v. United States, 422 F.2d 1385, 1386 (10th Cir.1970) (interpreting § 2053 and making the same distinction); Estate of Huntington v. Commissioner, 16 F.3d 462, 467-68 (1st Cir.1994) (same). Both parties cite Treas. Reg. § 20.2053-4, which provides in relevant part: 18 The amounts that may be deducted as claims against a decedent's estate are such only as represent personal obligations of the decedent existing at the time of his death, whether or not then matured.... Only claims enforceable against the decedent's estate may be deducted. 19 The regulation goes on to specify the deductibility of various kinds of personal obligations: 20 [With certain exceptions,] section 2053(c)(1)(A) provides that the allowance of a deduction for a claim founded upon a promise or agreement is limited to the extent that the liability was contracted bona fide and for an adequate and full consideration in money or money's worth.... Liabilities imposed by law or arising out of torts are deductible. 21 Id. 22 The Estate would have us read from this regulation a blanket rule that all tort claims paid by an estate are deductible. The regulation's language does not bear such a construction. The general rule that [l]iabilities ... arising out of torts are deductible is still subject to the regulation's initial restriction: [t]he amounts that may be deducted as claims against a decedent's estate are such only as represent personal obligations of the decedent existing at the time of his death.... As indicated above, the claims here were tort claims against Williamson, not liabilities incurred by Buell before his death. 23 To overcome this obstacle, the Estate argues alternatively that Williamson's obligation was in substance Buell's obligation, because Williamson was essentially acting under Buell's authority. Williamson, at the direction of Buell through his repeatedly expressed desire to exclude his descendants, influenced Buell not to succumb to a change of heart. Appellant's Br. at 23. It reasons further that Williamson would have been sued as a trustee of the Buell Trust, and that the Trust would have had to indemnify him. This right of indemnification from a revocable trust, it argues, made Williamson's tort liability a personal obligation[ ] of the decedent existing at the time of his death. 24 This is an unusual argument for an unusual situation. Typically an intentional interference with inheritance claim is paid by the tortfeasor, not by an estate or trust. To justify an estate tax deduction, the Estate must characterize the alleged tort as Buell's, who (through his trustee Williamson) tortiously influenced himself before his death. 25 This circuitous reasoning failed to convince the district court. It noted that [t]he Descendants' allegation of tortious interference with inheritance was not against Buell, nor could it have been. 927 F.Supp. at 1405. For the following reasons, we agree that this was not Buell's personal obligation. 26
27 The substance of the matter is that the claims at issue here (the Buell descendants' tort claims for interference with inheritance) 3 sought inheritances that the Buell descendants had been denied, not any amounts that Buell personally owed them before his death. For tax purposes, we characterize their claims as claims to inheritances for two reasons: (1) they were brought by the Buell descendants in their capacity as Buell's heirs at law; (2) compensatory damages for these claims would have been measured by the size of the inheritances with which Williamson allegedly interfered. 28 I.R.C. § 2053 and Treas. Reg. § 20.2053-4 permit deduction for claims based on personal obligations of the decedent, not for payment to an heir claiming as such. The status of the claimant is the determinative factor.... Pennsylvania Bank & Trust Co. v. United States, 597 F.2d 382, 384 (3d Cir.1979) (citations omitted) (emphasis added). Who pays the claim, and in what capacity, is not determinative. Neither is the form of the action. 29 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. 30 Bank of New York v. United States, 526 F.2d 1012, 1017 (3d Cir.1975) (footnote omitted); accord Huntington, 16 F.3d at 468. 31 Here, the Buell descendants' tort claims were based on their status as potential heirs. Although Colorado state courts have not recognized the common law tort of intentional interference with inheritance, we assume for purposes of decision that they would, 4 and treat the settlement agreement as a bona fide compromise of colorable claims. The elements of the tort are quite uniform across jurisdictions that have recognized it. Recovery in a suit for interference with inheritance requires proof of (1) a valid expectancy; (2) intentional interference with that expectancy; (3) independently tortious conduct (such as undue influence, fraud, or duress); (4) reasonable certainty that absent the tortious interference the plaintiff would have received the expectancy; and (5) damages. 5 Especially relevant here is the fact that the prima facie tort requires proof of more than a mere expectancy; plaintiffs must show a tangible basis to assert a prospective inheritance, such as being an heir at law of the decedent or having been named in a prior will or testamentary instrument. 6 Beren v. Ropfogel, 24 F.3d 1226, 1230 (10th Cir.1994) (emphasis added); cf. Lyeth v. Hoey, 305 U.S. 188, 196, 59 S.Ct. 155, 83 L.Ed. 119 (1938) (holding (in income tax context) that for purposes of deductibility, a will contest settlement is an inheritance because of the heirship which underlay the compromise, the status which commanded that agreement and was recognized by it). 7 32 Reinforcing this conclusion is the fact that compensatory damages for an interference claim are based on the amount the claimant would have received absent the interference. Assuming the validity of their tort claims, the Buell descendants would have received substantial inheritances (not deductible to the Estate) if not for the tortious conduct of Williamson and others. It makes no difference for estate tax purposes that instead these amounts were distributed only after threatened tort litigation for interference with inheritance. 33 The fact that the tort claims at issue here did not challenge the validity of Buell's testamentary instruments is irrelevant for tax purposes. The form of the claim, a tort action instead of a will contest, is not determinative; both require that plaintiffs prove some status-based expectation of inheritance, and both provide a recovery commensurate with that expectation. 34 The possibility that Buell intended a different disposition of his Estate does not alter our analysis. For at least 18 years prior to his death, Buell expressly excluded his children from the terms of his trusts and from his will (although the Family Trust did include terms favorable to his grandchildren). Buell may truly have wanted the $2.27 million to stay in the Buell Trust and then to pass to the Foundation as a deductible charitable contribution; or perhaps (if not for the alleged tort) he would have changed his mind and given his descendants nondeductible inheritances. Rather than proceed to litigation on this issue, authorized representatives of the Buell Trust, the Foundation, and the Estate determined that, despite the express disclaimer in the will, Buell's true intentions were at least unclear enough to warrant giving his descendants $2.27 million. Whether or not the settlement accorded with Buell's intentions, his representatives made a choice from which flowed tax consequences. [W]hile a taxpayer is free to organize his affairs as he chooses, nevertheless, once having done so, he must accept the tax consequences of his choice, whether contemplated or not.... Commissioner v. National Alfalfa Dehydrating & Milling Co., 417 U.S. 134, 149, 94 S.Ct. 2129, 40 L.Ed.2d 717 (1974). The Estate cannot now invoke Buell's supposed intentions as a shield against those consequences. A will contest settlement would not be deductible merely by virtue of a possible conflict with the testator's intent; neither is the settlement of a tortious interference claim. 35
36 An additional reason exists for upholding the district court's decision. Any tort liability here would have been Williamson's, not the Estate's. Even assuming that a right of indemnification from the Buell Trust would somehow have made Williamson's tort liability a personal obligation of the decedent, nevertheless Williamson was not entitled to such indemnification. 37 If, as the district court found, Williamson was threatened with suit only in his capacity as trustee of the Foundation, certainly he was not entitled to indemnification from the Buell Trust. Even if, as the Estate argues, Williamson would have been sued as trustee of the Buell Trust, the traditional rule is that an estate cannot be held liable for a tort committed by an executor or trustee. See, e.g., Herbert B. Chermside, Jr., Annotation, Liability of Estate for Tort of Executor, Administrator, or Trustee, 82 A.L.R.3d 892 §§ 2[a], 3 (1978 & Supp.1998). 38 The Estate cites two exceptions to this rule, but neither applies here. First, Colorado law provides that [c]laims based on ... torts committed in the course of trust administration[ ] may be asserted against the trust estate by proceeding against the trustee in his fiduciary capacity, whether or not the trustee is personally liable therefor. Colo.Rev.Stat. § 15-16-306(3) (1998); see also IIIA Scott on Trusts § 268 (4th ed.). Williamson's allegedly tortious acts were not committed in the course of the administration of the Buell Trust. The Buell descendants claimed that Williamson tortiously influenced Buell to leave all the Trust's assets to the Foundation when Buell otherwise would have changed the terms of the Trust to leave at least a portion to his family. Williamson had no business as trustee preventing Buell from modifying the terms of the Trust, advancing the interests of a current beneficiary at the expense of other potential beneficiaries. 39 Second, some courts have held that where a trustee's personal tort confers a benefit on the trust, tort victims have an equitable right to reach the trust estate to the extent of the benefit, when necessary to ensure compensation and to prevent unjust enrichment of the trust. See Chermside, supra, at § 4; IIIA Scott on Trusts § 269 (4th ed.). Influencing Buell to leave Trust assets to the Foundation instead of to the descendants did not confer any benefit on the Trust. Either way the Trust would have maintained its assets until Buell's death, at which time it would have passed all its assets to beneficiaries.