Court Opinion

ID: 19330
Source: CourtListenerOpinion
Date Created: 2010-04-25 07:23:32+00
Date Added: 2024-06-11T11:08:50.902235
License: Public Domain

IN THE UNITED STATES COURT OF APPEALS
                      FOR THE FIFTH CIRCUIT

             _______________________________________

                           No. 98-60241
             _______________________________________

ALGERINE ALLEN SMITH, Estate of
Deceased; JAMES ALLEN SMITH, EXECUTOR,

                                              Petitioner-Appellant,

versus

COMMISSIONER OF INTERNAL REVENUE,

                                              Respondent-Appellee.

             _______________________________________

                           No. 98-60313
             _______________________________________

COMMISSIONER OF INTERNAL REVENUE,

                                              Petitioner-Appellant,

versus

ALGERINE ALLEN SMITH, Estate of
Deceased; JAMES ALLEN SMITH, EXECUTOR,

                                              Respondent-Appellee.

_________________________________________________________________

             Appeals from the United States Tax Court
_________________________________________________________________
                         December 15, 1999

Before WIENER, DeMOSS and PARKER, Circuit Judges.

WIENER, Circuit Judge:

     In this complex federal tax case, involving both estate and

income tax issues, Petitioner-Appellant Estate of Algerine Allen

Smith (the “Estate”) appeals an adverse decision of the Tax Court.

At the time of her death, Algerine Allen Smith (the “Decedent”) was
one of many defendants in a lawsuit brought by Exxon Corporation

that arose out of royalty provisions in numerous oil and gas

leases. Exxon had overpaid royalty owners, including the Decedent,

and was suing to recoup the overpayments.

      Four questions are presented in this appeal: (1) As of what

date is a claim against the Decedent that is deductible from gross

estate under § 2053(a)(3)1 to be valued?              (2) How and to what

extent, if any, does an estate’s inchoate right to an income tax

deduction (or refund) under § 1341(a) —— a right that ripens only

when and if an estate makes a payment on a claim deducted under §

2053(a)(3) —— affect the § 2053(a)(3) estate tax deduction allowed

to the estate for such claim?        (3) Assuming that, in computing its

estate taxes, an estate is entitled to and does take a deduction

for a claim in an amount that ultimately proves to be greater than

the   sum   it   eventually   pays   to    the   claimant    whose    claim   has

generated    the   §   2053(a)(3)    deduction,    will     the   estate   incur

discharge-of-indebtedness income under § 61(a)(12)?                  And, (4) In

this case, did the Tax Court abuse its discretion when it denied

the Estate’s motion to amend its petition after the case had

already been submitted for decision on stipulated facts?

      In answer to the first two questions, we hold that the claim

generating the estate tax deduction under § 2053(a)(3) —— as well

as the § 1341(a) income tax relief that will necessarily attend any

payment by an estate on that claim —— must be valued as of the date

      1
     All statutory references are to the Internal Revenue Code of
1986 as amended, Title 26 of the United States Code.

                                       2
of the death of the decedent and thus must appraised on information

known or available up to (but not after) that date.         We therefore

vacate and remand with instructions to the Tax Court that it admit

and consider evidence of pre-death facts and occurrences that are

relevant to the date-of-death value of Exxon’s claim, without

admitting or considering post-death facts and occurrences such as

the Estate’s settlement with Exxon, which occurred some fifteen

months after Decedent’s death.          As for the third question, we

reject the assertion of Respondent-Appellee the Commissioner of

Internal Revenue (the “Commissioner”) that if the amount the Estate

is allowed to deduct under § 2053(a)(3) exceeds the amount it

ultimately pays to Exxon, the difference will constitute discharge-

of-indebtedness income to the Estate in the year of the payment.

Finally, we hold that the Tax Court did not abuse its discretion

when it refused to consider the Estate’s late-filed motion to amend

its petition.

                                    I

                        FACTS AND PROCEEDINGS

      In 1970, Decedent and two aunts leased tracts of land located

in   Wood County,   Texas,   to   Exxon’s   predecessor,   Humble   Oil &

Refining Company (“Humble Oil”).          The lessors were to receive

royalty payments calculated as a fraction of the price received by

the lessee for any oil and gas produced from the leased tracts.

The lease agreements provided that if the price of the minerals

produced under the lease were ever regulated by the government,

royalties would be adjusted accordingly.         When Decedent’s aunts

                                    3
died, she succeeded to their interests.

      The tracts that Decedent and her aunts leased to Humble Oil,

together with a number of other tracts in Wood County, were

collectively designated as the Hawkins Field Unit (“HFU”).              After

Decedent and her aunts had entered into the lease agreements, Exxon

acquired Humble Oil.          In 1975, approximately 2,200 HFU royalty

owners and 300 working interest owners entered into a unitization

agreement with Exxon.         Under this agreement, all HFU tracts were

aggregated into a functional whole and Exxon was designated as the

sole operator of the unit.2          In addition to being unit operator,

Exxon was the largest single royalty owner in the HFU.

      During the early years of the HFU’s operation, the federal

government regulated the price of domestic crude oil. In 1978, the

Department of Energy (“DOE”) filed suit against Exxon (the “DOE

Litigation”) in the United States District Court for the District

of Columbia (the “D.C.D.C.”), claiming that Exxon had misclassified

the   oil   produced   from    the   HFU   and   thus   had   overcharged   its

customers, in contravention of the federal price regulations.

Exxon continued to pay the HFU interest owners royalties based on

the price that the DOE had challenged as excessive, but in 1980

Exxon began withholding a portion of royalties to offset its

potential future liability from the DOE Litigation.

      That same year, a group of the royalty owners sued Exxon (the

“Jarvis Christian Litigation”) in federal district court in Texas,

      2
     For a detailed account of the history of the HFU and federal
regulation of oil prices during this period, see United States v.
Exxon Corp., 773 F.2d 1240, 1250-53 (Temp. Emer. Ct. App. 1985).

                                       4
asserting that Exxon was required to pay them the full amount of

their royalties. Early in 1981, Decedent intervened as a plaintiff

in the Jarvis Christian Litigation.

     Three years later, in the DOE Litigation, the D.C.D.C. held

that Exxon had violated the federal price-control regulations.3

The court determined that Exxon was liable, in restitution, for

over $895 million.4   In February of 1986 —— following affirmance of

the D.C.D.C.’s judgment and shortly after the Supreme Court denied

certiorari —— Exxon paid the judgment, which, including both pre-

and post-judgment interest, totaled approximately $2.1 billion.

     In 1988, Exxon sued the HFU royalty owners, seeking to recoup

a portion of the $2.1 billion judgment.        In its complaint, Exxon

alleged that it was entitled to contribution from the royalty

owners under alternative legal theories, including federal common

law, federal statutory law,5 and several state common law causes of

action.      In that suit, which was consolidated with the Jarvis

Christian    Litigation,   the   royalty   owners   vigorously   defended

against Exxon’s claim.     They argued that Exxon’s complaint failed

to state a cause of action under either federal common law or

     3
      See United States v. Exxon Corp., 561 F. Supp. 816 (D.D.C.
1983).
     4
     The judgment was in favor of the United States Treasury. The
Treasury, under guidelines established by Congress, ultimately
distributed the judgment to several States and Territories. See
United States v. Exxon Corp., 773 F.2d 1240, 1246 (Temp. Emer. Ct.
App. 1985).
         5
       Exxon alleged that it had a cause of action under both 12
U.S.C. §1904 (The Economic Stabilization Act of 1970) and 15 U.S.C.
§754(a)(1) (The Emergency Petroleum Allocation Act of 1973).

                                    5
federal statutory law; and, alternatively, that if Exxon had stated

a claim, the royalty owners were not liable to Exxon because (1)

Exxon was equitably estopped —— by the wrongful nature of its own

conduct —— from recovering in restitution, and (2) Exxon had not

actually suffered a loss despite having paid the judgment.

     In August 1989, fifteen months before Decedent’s death, the

district     court    that     was   adjudicating    the     Jarvis   Christian

Litigation    ruled    that    Exxon   had   “an   implied   cause    of   action

[against the HFU royalty owners, including the Decedent] under

federal common law for reimbursement.”6

     In January 1990, the royalty owners, including Decedent, moved

for summary judgment.         The main thrust of the motion was that Exxon

had reaped profits far exceeding the judgment that it had paid in

the DOE litigation, both as the largest royalty owner in the HFU

and as unit operator. According to the royalty owners’ motion, the

established tenets of the law of restitution prevent Exxon from

recouping a sum exceeding the losses that it had suffered; and,

contended the royalty owners, as Exxon had suffered no losses, its

potential recovery was nil.

     Decedent died on November 16, 1990.            At the time of her death,

the royalty owners’ Motion for Summary Judgment was still pending.

Exxon subsequently filed its own motion for summary judgment, and

in February 1991 —— after Decedent’s death but before the filing of

her estate tax return (Form 706) —— the district court granted

     6
      Exxon Corp. v. Jarvis Christian College, 746 F. Supp. 652,
655 (E.D. Tex. 1989).

                                        6
summary judgment in favor of Exxon.             The court held that (1) the

royalty owners were liable to Exxon; (2) Exxon’s damages would

equal the difference between the regulated price of oil and the

higher price Exxon had charged its customers; and (3) Exxon could

recover interest on its damages for the period beginning on the

date that Exxon had paid the judgment in the DOE litigation

(February 27, 1986) and ending on the date that the interest owners

paid Exxon.   The court expressly did not allow Exxon to collect

interest   accruing   before     it    paid     the    judgment    in    the    DOE

litigation,   reasoning   that      to     do   so    would   be   “unjust      and

inequitable” because Exxon could have avoided this portion of the

judgment by paying the DOE earlier.             The court then referred the

calculation of damages to a special master.             Exxon claimed that it

was owed a total of $2.48 million by the Estate.7

     Decedent’s Form 706 was filed in July, 1991, approximately

eight months after her death and five months after the summary

judgment favorable to Exxon but while the Special Master was

calculating   the   quantum    of     Exxon’s    claims.       Pursuant        to   §

2053(a)(3), Decedent’s Form 706 included a $2.48 million deduction

for Exxon’s claim against the Estate.                 In March 1992, fifteen

months after Decedent’s death and nine months after the filing of

her Form 706, the Estate paid Exxon $681,840 to settle the case, a

sum equal to 27.5 percent of the § 2053(a)(3) deduction claimed by

the Estate.

     The   Commissioner   determined        that,     as   Exxon’s      claim   was

     7
      The exact figure is $2,482,719.

                                       7
disputed on the date of Decedent’s death, the Estate was entitled

to deduct only the amount paid in settlement ($681,840), even

though that was not done until fifteen months after Decedent’s

death. Accordingly, the Commissioner issued a notice of deficiency

for   $663,785   in   estate   taxes,       based   in   part   on    the   reduced

deduction.

      Subsequently, the Commissioner issued a second notice of

deficiency, asserting in the alternative an income tax deficiency

for 1992, the year of the settlement payment.                   The Commissioner

reasoned that if the Estate were allowed an estate tax deduction

for the full $2.48 million, despite paying only $681,840 to Exxon,

it would have realized income from the discharge of indebtedness.

The   discharge-of-indebtedness         income       was    calculated      to    be

$1,800,879, the difference between the claimed estate tax deduction

(approximately    $2.48   million)          and   the    post-death    settlement

($681,840).

      The Estate filed two petitions for redetermination in the Tax

Court, contesting the Commissioner’s notices of deficiencies.                    The

Tax Court consolidated the two petitions, and the parties submitted

the case on stipulated facts.

      After the parties had supplemented their stipulation of facts

and submitted the case to the Tax Court for decision, the Estate

filed a motion seeking leave to amend one of its petitions.                      The

Commissioner contested the Estate’s late-filed motion to amend.

Siding with the Commissioner, the Tax Court denied the Estate’s

motion.

                                        8
     On the merits, the Tax Court ultimately held that because (1)

Exxon’s claim      was    neither    certain    nor   enforceable    as     of   the

decedent’s death, the estate was entitled to deduct only the post-

death settlement payment of $681,840; and (2) the income tax

benefit the      estate    derived    under    §   1341(a)   for   paying    Exxon

$681,840 in settlement constituted property of the Estate, as of

Decedent’s death.        As the court ruled that the Estate’s deduction

was limited to the value of the settlement, i.e., $681,840, rather

than $2.48 million, the Commissioner’s protective assessment of

discharge-of-indebtedness income was moot, so the Tax Court did not

address that issue.        The estate timely filed this appeal.

                                        II

                                     ANALYSIS

A.   Jurisdiction & Standard of Review

     We have jurisdiction pursuant to 26 U.S.C. § 7482 to hear

appeals from the Tax Court.          We review the Tax Court’s findings of

fact for clear error; questions of law are reviewed de novo.8

Construction of the Internal Revenue Code is a question of law.9

B.   Deduction for Claims Against the Estate

     A tax is imposed on the transfer of the “taxable estate” of

every decedent who is a citizen or resident of the United States.10

      8
      See § 7482(a) (courts of appeals review Tax Court decisions
“in the same manner and to the same extent as decisions of the
district courts . . . .”); Street v. Commissioner, 152 F.3d 482,
484 (5th Cir 1998).
     9
      See Grigg v. Commissioner, 979 F.2d 383, 384 (5th Cir. 1992).
     10
          See § 2001(a).

                                        9
The “taxable estate” is the “gross estate”11 less those deductions

allowable under §§ 2051 through 2056.12       The first issue in this

case is whether post-death facts and occurrences can be considered

in valuing the deduction authorized by § 2053(a)(3) for “claims

against the estate . . . as are allowable by the laws of the

jurisdiction . . . under which the estate is being administered.”

     The Tax Court held, and the Commissioner urges on appeal, that

the Estate’s deduction is limited to the $681,840 that the Estate

ultimately paid, fifteen months after death, to settle Exxon’s

claim. This conclusion is grounded on the facts that liability and

quantum of the claim were still being litigated at Decedent’s

death, and the compromise which determined liability and quantum

had not yet been achieved.       The Estate counters that post-death

events are irrelevant, contending that, because Exxon’s claims

constituted     “enforceable   contractual   rights”   existing   as   of

Decedent’s death, the full $2.48 million of Exxon’s claim is

deductible.     The Tax Court did not hold, and the Commissioner has

never argued, that the Estate is not entitled to any deduction at

all; only that the amount is not that being asserted by Exxon at

Decedent’s death but rather the amount paid in settlement fifteen

months later.       Thus the question presented is not whether a

deduction is available, but rather what is the correct amount of

    11
     The gross estate consists of “all property, real or personal,
tangible or intangible, wherever situated,” and the Code explicitly
directs that the gross estate is to be “value[d] at the time of
[the taxpayer’s] death.” Id. § 2031.
     12
          See § 2051.

                                   10
the deduction.

     Although     we    are    persuaded       that,   on   these       facts,   the

Commissioner     is    not   permitted    to    consider    ——   much    less    rely

exclusively on —— the amount of the post-death settlement of the

Exxon claim when valuing Decedent’s allowable estate tax deduction,

we are also persuaded that the estate is not entitled to deduct the

full amount that was being claimed by Exxon at Decedent’s death.

Rather, for the reasons that follow, we conclude that the correct

analysis requires appraising the value of Exxon’s claim based on

the facts as they existed as of death.

     Section 2053(a)(3) is silent regarding the “as of” date for

valuing claims against an estate.             The Commissioner cites Treasury

Regulation (“Reg.”) § 20.2053-1(b)(3), which allows a deduction for

a claim “though its exact amount is not then known, provided it is

ascertainable with reasonable certainty, and will be paid.”                      The

Commissioner urges that because the “reasonable certainty” and

“will be paid” requirements were not met as of the date of death,

post-death events can and should be considered in establishing the

value of the claim.      The Estate, on the other hand, emphasizes that

Reg. § 20.2053-4 allows a deduction for those “personal obligations

of the decedent existing at the time of his death.”13               According to

the Estate, this temporal reference establishes the precise date as

of which claims are to be valued.                 Thus, insists the Estate,

because the district court had held that Exxon had a cause of

action, and because Exxon was asserting a debt of $2.48 million as

     13
          Id. § 20.2053-4 (emphasis added).

                                         11
of Decedent’s death, this is the proper amount of the deduction.

     The most that can be discerned from these Regulations is that

the situation we now face is not expressly contemplated, and that

there is, arguably, language that supports the opposite contentions

of the     parties.   Finding no definitive answer in the statute or

regulations, we turn to the case law.

     Ithaca Trust Co. v. United States is the Supreme Court’s

clearest statement of the general rule that “[t]he estate so far as

may be is settled as of the date of the testator’s death.”14   Ithaca

Trust involved the value of a charitable remainder subject to a

life estate.       The question before the Court was whether the

charitable remainder became more valuable (as a deduction from the

gross estate) because the life tenant, who survived the testator,

died before reaching her actuarial life expectancy. The Court, per

Justice Holmes, held that the estate tax is a levy on the transfer

of property, a discrete act, and that

     the value of the thing to be taxed must be estimated as
     of the time when the act is done.       But the value of
     property at a given time depends upon the relative
     intensity of the social desire for it at that time,
     expressed in the money that it would bring in the market.
     Like all values, as the word is used by the law, it
     depends largely on more or less certain prophecies of the
     future; and the value is no less real at that time if
     later the prophecy turns out false than when it comes out
     true.     Tempting as it is to correct uncertain
     probabilities by the now certain fact, we are of opinion
     that it cannot be done, but that the value of the wife's
     life interest must be estimated by the mortality tables.
     Our opinion is not changed by the necessary exceptions to

     14
          279 U.S. 151, 155 (1929).

                                      12
     the general rule specifically made by the Act.15

As many courts have noted, decisions following Ithaca Trust Co. are

irreconcilable.16 In the context of the §2053(a)(3) “claims against

the estate” deduction, some courts have strictly adhered to the

Supreme Court’s directive to value deductions based on the “more or

less certain prophecies of the future”17 existing on the date of

death;18 others have not.19

     Propstra v. United States from the Ninth Circuit is a leading

case that strictly applies the date-of-death valuation principle to

a claim against the estate.20      As of his death, the decedent in

               15
            Ithaca Trust       Co., 279 U.S.   at   155   (citations
omitted)(emphasis added).
     16
      See, e.g., Estate of Kyle v. Commissioner, 94 T.C. 829, 849
(1990) (“all of the cases in this field dealing with post-death
evidence are not easily reconciled with one another, and at times
it is like picking one’s way through a minefield in seeking to find
a completely consistent course of decision.” (quoting Estate of Van
Horne v. Commissioner, 78 T.C. 736-37 (1982), aff’d 720 F.2d 1114
(9th Cir. 1983)).
     17
          Ithaca Trust Co., 279 U.S. at 155.
          18
        In the following cases interpreting § 2053(a)(3) or its
predecessors, the courts refused to consider post-death events:
Estate of Van Horne, 720 F.2d 1114 (9th Cir. 1983); Propstra v.
United States, 680 F.2d 1248 (9th Cir. 1982); Green v. United
States, 447 F. Supp. 885 (N.D. Ill. 1978); Estate of Lester v.
Commissioner, 57 T.C. 503 (1972); Russell v. United States, 260 F.
Supp. 493 (1966); Winer v. United States, 153 F. Supp. 941 (1957).
      19
       In the following cases the courts did consider post-death
events: Estate of Sachs v. Commissioner, 856 F.2d 1158 (1988);
Jacobs v. Commissioner, 34 F.2d 233 (1929); Estate of Kyle v.
Commissioner, 94 T.C. 829 (1990); Estate of Hagmann v.
Commissioner, 60 T.C. 465 (1973), aff’d per curium, 492 F.2d 796
(5th Cir. 1974); Estate of Cafro v. Commissioner, T.C. Memo. 1989-
348, 1989 WL 79310; Estate of Quintard v. Commissioner, 62 T.C. 317
(1974).
     20
          680 F.2d 1248 (9th Cir. 1982).

                                   13
Propstra owned property encumbered with liens exceeding $400,000.

More        than   two    years    later,    his    estate    paid    the    lien    holder

approximately $135,000 in full satisfaction of its claims.                               The

Commissioner argued, as he does here, that the estate was permitted

to deduct only the amount actually paid.                     The court disagreed: “We

rule that, as a matter of law, when claims are for sums certain and

are legally enforceable as of the date of death, post-death events

are not relevant in computing the permissible deduction.”21

        The Propstra court cited three reasons for its conclusion.

First, it found significant a change in the wording of the relevant

Code section when Congress enacted the Internal Revenue Code of

1954.        Prior to 1954, the predecessor to § 2053(a) had authorized

deduction          for    claims    “as     are    allowed    by     the    laws    of   the

jurisdiction . . . under which the estate is being administered.”22

Courts were divided regarding whether the use of “allowed” meant

that the estate actually had to pay the claim for it to be

deductible.23            In the 1954 re-enactment of the Code, “allowed” was

replaced with “allowable.”                The Propstra court found this change

indicative of Congress’s preference for the line of cases that

measured a claim’s viability and value as of the date of death

       21
      Propstra, 680 F.2d at 1254. We acknowledge that the Propstra
court drew a distinction between “disputed or contingent” claims on
one hand, and “certain and enforceable” claims on the other. Id.
at 1253. It stated, in dicta, that post-death events are relevant
in computing the allowable deduction in the case of “disputed or
contingent” claims, but the court gave no indication of the meaning
that it assigned to these imprecise terms.
        22
             Id. (emphasis in original; citing § 812(b)(3) (1939)).
        23
             Id. at 1254-55.

                                              14
without imposing the additional element of actual post-mortem

payment by the estate.24

        Second, the Propstra court reasoned that its holding was

supported by Treasury Regulation § 20.2053-4, which allows an

estate to deduct “personal obligations of the decedent existing at

the time of [the decedent’s] death.”25         Finally, the court reasoned

that its holding comported with the teaching of Ithaca Trust.

        The Ninth Circuit again applied the date-of-death valuation

principal to a claim against an estate in Estate of Van Horne v.

Commissioner.26        The decedent in Van Horne was obligated, pursuant

to a valid judgment, to make support payments to her ex-husband for

the duration of his life, notwithstanding either his remarriage or

her death.        The judgment provided that if the decedent predeceased

her ex-husband, the support obligation would be payable by her

estate.        She predeceased him, and shortly after her death —— but

far short of his actuarial life expectancy —— her ex-husband died.

Consequently, the estate’s ultimate liability on the claim was only

a small fraction of the actuarial prediction as of her death.

Consistent with Ithaca Trust and Propstra, the Van Horne court held

that        “legally   enforceable   claims   valued   by   reference   to   an

actuarial table meet the test of certainty for estate tax purposes.

Because decedent’s spousal support obligation meets that test, it

       24
      Id. at 1254-55. See also Winer v. United States, 153 F. Supp.
941, 943 (S.D.N.Y. 1957).
        25
             Emphasis added.
        26
             720 F.2d 1114, 1117 (9th Cir. 1983).

                                       15
is subject to the Propstra rule.”27

     In sharp contrast to the holdings of the Ninth Circuit in both

Propstra and Van Horne, the Eighth Circuit squarely held in Estate

of Sachs v. Commissioner that “[i]n this Circuit . . . the date-of-

death principle of valuation does not apply to claims against the

estate deducted under §2053(a)(3).”28            Because of events that

occurred before Sachs’s death, his estate owed federal income tax.

The estate paid the income tax, and deducted the amount paid as a

claim against the estate under § 2053(a)(3). Congress subsequently

amended      the   Internal   Revenue    Code;   the   amendment    applied

retroactively, resulting in forgiveness of the income tax liability

that the estate had paid; and the estate received a full refund.

The Commissioner argued that the § 2053(a)(3) estate tax deduction

should be disallowed, but the Tax Court disagreed.                 It   held

instead that the estate was permitted to deduct the subsequently-

refunded tax liability because it existed at the decedent’s death,

and the post-death statutory amendment effecting a retroactive

repeal could not be considered.29

     The Eighth Circuit reversed, holding that “an estate loses its

     27
          720 F.2d 1114, 1117 (9th Cir. 1983).
    28
      856 F.2d 1158, 1160 (8th Cir. 1988). Accord Commissioner v.
Shively, 276 F.2d 372 (2d Cir. 1959) (“We hold that where, prior to
the date on which the estate tax return is filed, the total amount
of a claim against the estate is clearly established under state
law, the estate may obtain under Section 812(b)(3) [predecessor to
§ 2053(a)(3)] no greater deduction than the established sum,
irrespective of whether this amount is established through events
occurring before or after the decedent’s death.”)(emphasis added).
      29
       See 88 T.C. 769, 779-783 (1987), rev’d 856 F.2d 1158 (8th
Cir. 1988).

                                    16
§ 2053(a)(3) deduction for any claim against the estate which

ceases to exist legally.”30 The court acknowledged that its holding

was inconsistent with Propstra and Van Horne, but held that it was

bound by its prior holding in Jacobs v. Commissioner31 —— a case

decided a mere five months after Ithaca Trust.

     The       Sachs   court   first   distinguished   the   valuation   of   a

charitable bequest —— the deduction at issue in Ithaca Trust ——

from the valuation of claims against the estate deductible under §

2053(a)(3).      The Sachs court reasoned that the value of charitable

bequests, unlike claims against the estate, “must be determined as

of the date of [death] because any other method would permit

estates a one-sided advantage.”32 It then found that Ithaca Trust’s

reliance on       YMCA v. Davis,33 another case involving a charitable

bequest, indicated that the holding in Ithaca Trust was supported

by concerns specific to that context, concerns not implicated by

the § 2053(a)(3) deduction for claims against the estate.34               The

     30
          856 F.2d 1158, 1161.
     31
          34 F.2d 233 (8th Cir.), cert. denied, 280 U.S. 603 (1929).
    32
      Id. at 1161. The court was correct on this point because if
date-of-death valuation were not the rule for charitable bequests,
exceptions to the use of the actuarial tables would always benefit
the taxpayer: Only when the life tenant dies prior to filing the
estate tax return (and thus before the life tenant’s actuarial life
expectancy) would an exception be made. Such exceptions, if they
were permitted, would always result in a greater value being
assigned to the charitable remainder and, correspondingly, a
greater estate tax deduction.
     33
          264 U.S. 47 (1924).
          34
856 F.2d at 1161-62.    We note that, in support of the
proposition that “[t]he tax is on the act of the testator not the
receipt of property by the legatees,” Ithaca Trust, 279 U.S. at

                                        17
court in Estate of Sachs concluded that “none of the considerations

which     dictate       date-of-death     valuation        of   charitable    bequests

applies to claims against the estate.”35

     We        are   persuaded    that    the     Ninth    Circuit’s      decisions   in

Propstra and Estate of Van Horne correctly apply the Ithaca Trust

date-of-death valuation principle to enforceable claims against the

estate.         As we interpret Ithaca Trust, when the Supreme Court

announced the date-of-death valuation principle, it was making a

judgment        about    the     nature      of   the     federal   estate     tax    ——

specifically, that it is a tax imposed on the act of transferring

property by will or intestacy and, because the act on which the tax

is levied occurs at a discrete time, i.e., the instant of death,

the net value of the property transferred should be ascertained, as

nearly as possible, as of that time.                This analysis supports broad

application of the date-of-death valuation rule. We think that the

Eighth Circuit’s narrow reading of Ithaca Trust, a reading that

limits its application to charitable bequests, is unwarranted.

     That        there    are,    as   the    Ithaca      Trust   Court    recognized,

statutory exceptions to this rule36 does not command or even permit

further judge-made exceptions.                To the contrary, it suggests that

when Congress wants to derogate from the date-of-death valuation

155, the Court cited three cases in addition to YMCA v. Davis, 264
U.S. 47 (1924), none of which involved charitable bequests.
     35
856 F.2d at 1162.
          36
       Current exceptions to date-of-death valuation include §§
2053(a)(1) (funeral expenses), 2053(a)(2) (estate administration
expenses), and 2054 (casualty losses).

                                             18
principle it knows how to do so.                We note in passing that since

Ithaca Trust, Congress has thrice reenacted the entire Internal

Revenue Code and has made countless other modifications to the

statute,    but   has     never     seen    fit    to   overrule    Ithaca    Trust

legislatively.37         We    decline   the    Commissioner’s      invitation   to

rewrite the law ourselves.38

     Other courts (including the Tax Court in this case) that have

delved     into   this        confused     jurisprudence     have    perceived    a

distinction between (1) cases concerning the valuation of claims

that are certain and enforceable as of death, and (2) cases

concerning disputed or contingent claims, the enforceability of

which is unknown as of death.39                 Claims falling into the first

category are —— according to the courts that have accepted this

distinction —— deductible at their date-of-death value.                      Claims

falling into the second category, by contrast, are deductible in

the amount of their ultimate resolution.                In the instant case, the

Tax Court classified Exxon’s claim as one of uncertain validity and

enforceability on the date of death and, accordingly, relied on

post-death facts, specifically, the settlement.

     Although      this        dichotomy,       which    distinguishes       between

    37
      See, e.g., Orr v. United States, 343 F.2d 553, 557 (5th Cir.
1965) (“In 1954 Congress reenacted the [Internal Revenue Code]
using the same language. The prior construction is of some value
in determining the meaning of the new statute.”).
     38
         See Leggett v. United States, 120 F.3d 592, 598 (5th Cir.
1997).
     39
       See Estate of Smith v. Commissioner, 108 T.C. 412, 419-20
(1997); Estate of Kyle v. Commissioner, 94 T.C. 829, 849 (1990).

                                           19
enforceability on the one hand and valuation on the other, has

superficial appeal, closer examination reveals that it is not a

sound basis for distinguishing claims in this context.                 There is

only a semantic difference between a claim that may prove to be

invalid and a valid claim that may prove to have a value of zero.

For example, if given the choice between being the obligor of (1)

a claim known to be worth $1 million with a 50 percent chance of

being        adjudged    unenforceable,    or   (2)   a    claim   known   to   be

enforceable with a value equally likely to be $1 million or zero,

a rational person would discern no difference in choosing between

the     claims,     as     both   have    an    expected     value   $500,000.40

Nevertheless, it could be argued that in some cases, the date-of-

death claim against the estate is so specious that its value should

be ignored because for practical purposes it is worthless. This is

not such a case.

      Here, the district court adjudicating the Jarvis Christian

litigation had held, prior to Decedent’s death, that Exxon had a

cause of action against the royalty owners.                Thus, the Estate was

not claiming a deduction for a potential claim without an existing

claimant —— or, conversely, an identifiable claimant without a

cognizable claim.41         The actual value of Exxon’s claim prior to

        40
      Cf. Covey v. Commercial Nat. Bank of Peoria, 960 F.2d 657,
660 (7th Cir. 1992) (“Discounting a contingent liability by the
probability of its occurrence is good economics and therefore good
law . . .”).
      41
      Our prior decision in Estate of Hagmaann v. Commissioner, 60
R.C. 465 (1973), aff’d per curiam, 492 F.2d 796 (5th Cir. 1974),
can be distinguished on this basis.

                                          20
either settlement or entry of a judgment is inherently imprecise,

yet “even a disputed claim may have a value, to which lawyers who

settle cases every day may well testify, fully as measurable as the

possible         future   amounts   that     may     eventually      accrue   on    an

uncontested claim.”42

     In fact, when addressing situations that are the obverse of

the one      in    the    instant   case,    i.e.,    when     the   decedent-estate

taxpayer is a plaintiff rather than a defendant in a pending

lawsuit,     the     Commissioner     has    considered        himself   capable    of

determining the value of a pending lawsuit in exact dollars and

cents, even when the claim has not been reduced to judgment.43

Furthermore, courts have consistently held that “inexactitude is

often a      byproduct      in   estimating      claims   or    assets   without    an

established market and provides no excuse for failing to value the

claims . . . in the light of the vicissitudes attending their

recovery.”44

     In light of the foregoing analysis, we hold that the Tax Court

erred reversibly when it determined that the amount that the Estate

ultimately paid Exxon ($681,840) in a settlement achieved fifteen

months after Decedent’s death set the value of the Estate’s §

2053(a)(3) deduction.            On remand, the Tax Court is instructed

neither to admit nor consider evidence of post-death occurrences

     42
          Gowetz v. Commissioner, 320 F.2d 874, 876 (1st Cir. 1976).
    43
      See Estate of Davis v. Commissioner, T.C. Memo. 1993-155, 65
T.C.M. 2365.
            44
          Estate of Curry            v.     Commissioner,       74 T.C. 540,   551
(1980)(emphasis added).

                                            21
when determining the date-of-death value of Exxon’s claim.                    As the

Commissioner has recognized in the context of valuing closely-held

businesses,

      [a] determination of fair market value, being a question
      of fact, will depend upon the circumstances in each case.
      No formula can be devised that will be generally
      applicable to the multitude of different valuation issues
      arising in estate and gift tax cases. . . .       A sound
      valuation will be based upon all the relevant facts, but
      the elements of common sense, informed judgment and
      reasonableness must enter into the process of weighing
      those    facts    and   determining    their    aggregate
      significance.45

We find these words instructive to this case because, like a

closely-held      business,   every      lawsuit   is    unique;       thus   it   is

incumbent on each party to supply the Tax Court with relevant

evidence of pre-death facts and occurrences supporting the value of

the Exxon claim advocated by that party.

C.    Post-Death Income Tax Relief as an Estate Asset

      We turn next to the question whether the income tax relief

eventually afforded to the Estate for the sum paid in settlement to

Exxon should be (1) listed on the Form 706 as an asset of the

Estate, or (2) just one of any number of factors to be considered

in   valuing     Exxon’s   claim   for    purposes      of   the   §    2053(a)(3)

deduction. Section 1341 of the Code allows an income tax deduction

to a taxpayer who previously received taxable income under a claim

of right, but who must later repay some or all of that income.                     For

cash method taxpayers, the deduction is taken when computing the

      45
           Rev. Rul. 59-60, 1959-1 C.B. 237.

                                         22
income tax liability for the year of the repayment.46            The parties

stipulated that, as a payer of income tax, the Estate “is entitled

to claim an additional income tax deduction for certain amounts

paid to Exxon in 1992 in settlement of the Exxon claim pursuant to

§§ 1341(a)(1) through (5).”

     According     to   §   2031,   “[t]he   value   of   the   gross   estate

[includes] the value at the time of his death of all property, real

or personal, tangible or intangible, wherever situated.”                Section

2033 provides further that “the gross estate shall include the

value of all property to the extent of the interest therein of the

decedent at the time of his death.”47         Neither the parties nor the

Tax Court has referred us to any case law addressing whether the

potential or inchoate right to future income tax relief under §

1341 is, pursuant to the I.R.C. and the Regs, an asset of the

estate —— and     we have found none on our own.

     The Estate contends that the date-of-death potentiality of §

1341 income tax relief is not an asset of Decedent’s gross estate.

It reasons that, as a cash method taxpayer, an estate is not

allowed a deduction under § 1341 unless and until it actually pays

a claim that exists at death.        Here, the Exxon claim was involved

in hotly-contested litigation at the time Decedent died; there was

no guarantee that anything would ever be paid on the claim; and in

fact the repayment did not occur until fifteen months after her

     46
          See § 1341(a).
    47
      Regulations under § 2033 provide illustrative examples, none
of which are on point. See Reg. 20.2033-1(b).

                                      23
death.      The critical time for ascertaining both the existence and

value of assets includable in the gross estate is “at the time of

[the taxpayer’s] death.”48        The Estate thus concludes that the §

1341 income tax deduction, which was eventually allowed in 1992,

did not exist as of death and, accordingly, cannot be included

retroactively as an asset of her gross estate.

      The Commissioner disagrees, insisting that the contingent

right to income tax relief is an asset of the Estate.           For support,

he cites cases holding that the value of a viable but unasserted

income-tax-refund claim held by a decedent’s estate for tax years

predating death is a gross estate asset.49            The Commissioner does

not   argue     that   the   presence   of   a   contingency   ——   i.e.,   the

possibility, extant on the date of Decedent’s death, that one of

her defenses to Exxon’s claim would succeed —— is irrelevant.50

Rather, according to the Commissioner, the contingent nature of the

§ 1341 benefit should affect its valuation but not its existence or

its characterization as an asset of the Estate.

      The Commissioner acknowledges that, as cash method taxpayers,

      48
           See §§ 2031, 2033
      49
      See Bank of California v. Commissioner, 133 F.2d 428, 432-33
(9th Cir. 1943) (“We conclude that the Board [of Tax Appeals]
should have found the fair market value of decedent’s [income tax
refund] claim at the time of her death and should have included
that value in determining the value of her gross estate.”); Estate
of Chisholm v. Commissioner, 26 T.C. 253, 257 (1956) (The refund
claim resulting from an income tax overpayment “was valuable
property and a part of his estate at the time he died.”).
           50
        If Decedent or the Estate were successful in defending
against Exxon’s claim then there would be no repayment and,
therefore, no deduction under § 1341.

                                        24
neither the Decedent nor the Estate would ever be entitled to

income tax relief unless Exxon were repaid, and then only in the

year of repayment.     He contends, however, that there is no such

predicate for including the right to future income tax relief as an

asset when computing estate taxes.51     Finally, the Commissioner

urges that the Estate’s position on this issue is at odds with its

position regarding the propriety of deducting Exxon’s claim under

§ 2053(a)(3).   In the Commissioner’s words, “the deduction for

Exxon’s claim and the offsetting tax relief obtained under § 1341

were interdependent tax consequences resulting from the settlement

of a single claim against the decedents estate.”

     The Tax Court agreed with the Commissioner.   It held that the

right to income tax relief under § 1341 had some value at the time

of Decedent’s death.   That the right was subject to a contingency,

the court reasoned, may diminish its date-of-death value, but

should not prevent it from being included as an asset of Decedent’s

gross estate.

     We agree with the Commissioner and the Tax Court that the

contingent right to future income tax relief under § 1341, based on

pre-death events, is a factor that must be taken into account in

connection with the Estate and that the contingent nature of the

benefit merely affects its date-of-death value.       We disagree,

however, with the way that they would take the § 1341 benefit into

    51
      See, e.g., Bank of California v. Commissioner, 133 F.2d 428,
432 (9th Cir. 1943) (holding that a claim for an income tax refund
that had not been asserted at death was a property right to be
included in determining the value of the gross estate); United
States v. Simmons, 346 F.2d 213 (5th Cir. 1965).

                                 25
account on the Form 706.         If required to repay some amount to

Exxon,    the   Estate   would    be        entitled   automatically   to   a

corresponding income tax deduction (or refund) in the year of the

repayment.52    Once Exxon’s claim against the Estate was liquidated,

the value of the § 1341 income tax relief (if any) could be

computed to the penny.

     We have already held today that Exxon’s claim can be valued

with sufficient certainty to entitle the Estate to a deduction

under § 2053(a)(3), and that the appropriate inquiry is to the

claim’s value as of the date of Decedent’s death.               It would be

incongruous for us to hold on the one hand —— as we have —— that

the Estate can take a deduction for Exxon’s claim based on an

appraisal of its date-of-death value, while holding on the other

hand (as the Commissioner urges) that the inextricably intertwined

income tax benefit that will flow to the Estate only when and if it

pays this amount should be treated separately, as an asset, or ——

even worse —— totally ignored (as the Estate urges).

     The Commissioner calls the benefit under § 1341 and the

deduction under § 2053 “interdependent,” and the Tax Court accepted

this characterization.     On this much, we agree, but our agreement

leads inexorably to the conclusion that the value, for estate tax

purposes, of the contingent § 1341 deduction is not a separate,

free-standing asset of the Estate but is one among any number of

     52
      Section 1341 is inapplicable if it does not afford at least
a $3,000 deduction. See § 1341(a)(3). The only way the estate
would be unable to claim a § 1341 deduction would be if the
repayment did not surmount this de minimus threshold.

                                       26
factors to be considered in appraising the date-of-death value

eventually assigned to Exxon’s claim for purposes of the deduction

allowed under § 2053(a)(3): Both the § 2053(a)(3) estate tax

deduction and the eventual § 1341 income tax benefit hinge on the

likelihood   and   quantum   of   the   same   event   ——   a   judgment   (or

compromise) in favor of Exxon.53         Of course, once the Tax Court

determines, on remand, the gross value of the Exxon claim for

purposes of § 2053(a)(3), calculation of the § 1341 income tax

benefit becomes a simple mathematical calculation, the result of

which will diminish the gross value of the Exxon claim, dollar for

dollar, to produce a net deduction from the Estate.                   That in

hindsight either figure might prove to have missed the mark,

whether widely or narrowly, is of no moment; after all, property of

an estate frequently sells for a price that is greater or less than

the appraised value used in the Form 706.

     The   willing   buyer-willing       seller   standard      of   valuation

prescribed by Treasury Regulations promulgated under § 203154 is

“nearly as old as the federal income, estate, and gift taxes

    53
      The Tax Court did, in fact, use the same “estimate” of value
to compute both the estate tax deduction and the concomitant income
tax deduction cum gross estate asset —— the post-death settlement.
But, as we reject the value assigned to Exxon’s claim for purposes
of the § 2053(a)(3) deduction, so too must we reject the automatic
use of the settlement value as the basis for calculating the value
of the contingent § 1341 income tax relief. See §§ 2031, 2033
(gross estate assets are valued as of “the time of [the taxpayer’s]
death.”).
     54
      “The fair market value is the price at which the property
would change hands between a willing buyer and a willing seller,
neither being under any compulsion to buy or to sell and both
having reasonable knowledge of the relevant facts.”      Reg. §
20.2031-1(b).

                                    27
themselves.”55      We perceive no reason why this standard should

presume that the participants in the hypothetical transaction would

not account for the net tax effect —— including the § 1341 benefit

—— that would flow from a judgment against the hypothetical estate.

     This view is consistent with the gift tax decision of the

Second Circuit in Eisenberg v. Commissioner,56 which held that when

valuing a gift of corporate stock, the potential future capital

gains tax liability that would result from a corporate liquidation

can be considered.57     In the instant case, the tax event that was

looming on the horizon at the date of death is the converse of the

one in Eisenberg: Rather than a potential future tax detriment, as

was the case in Eisenberg, here there was a potential future tax

benefit to the Estate, which would ripen in the event that it were

to repay to Exxon, in whole or in part.            Nevertheless, the

reasoning of the Eisenberg court is equally applicable:

     Fair market value is based on a hypothetical transaction
     between an willing buyer and a willing seller, and in
     applying this willing buyer-willing seller rule, “the
     potential transaction is to be analyzed from the
     viewpoint of a hypothetical buyer whose only goal is to
     maximize his advantage.     Courts may not permit the
     positing of transactions which are unlikely and plainly
     contrary to the economic interest of a hypothetical
     buyer.”58

Treasury Regulations dictate, and countless authorities reaffirm,

     55
          United States v. Cartwright, 411 U.S. 546, 551 (1973).
     56
          155 F.3d 50 (1998).
     57
          See id.
    58
      Id. at 57 (quoting Estate of Curry v. United States, 706 F.2d
1424, 1428 (7th Cir. 1983) (citations and alterations omitted)).

                                   28
that    “[a]ll     relevant     facts   and    elements      of    value    as   of   the

applicable valuation date shall be considered in every case.”59

       We perceive no reason to believe that a seller seeking to make

the best        possible   trade   would      ignore   the    income       tax   benefit

associated with a set of transactions; to the contrary, we agree

with the Second Circuit that “a hypothetical willing [seller],

having reasonable knowledge of the relevant facts, would take some

account of the tax consequences . . . in making a sound valuation

of the property”60 —— here, the income tax benefit afforded to the

Estate by § 1341.61

       Thus,     on   remand,    when   appraising     the        net   value    of   the

deduction allowed the estate under § 2053(a)(3), account must be

taken of the § 1341 income tax benefit that would have inured to

the benefit of the Estate if it had ultimately been held liable (or

settled) for a sum equal to the appraised date-of-death gross value

of Exxon’s claim.62

       59
            Reg. § 20.2031-1(b).
       60
155 F.3d at 57.
       61
      Obviously, the position of a defendant in a pending lawsuit
is not a thing commonly bought or sold. There is certainly no
ready market in which the Estate could pay another to assume its
place as the subject of Exxon’s claim. We have held, however, that
the willing buyer-willing seller method applies to all questions of
valuation, even when, as a realistic matter, the subject property
might not be sold or assigned at all.        See United States v.
Simmons, 346 F.2d 213, 216 (5th Cir. 1965); cf. United States v.
Cartwright, 41 U.S. 546, 549 (1973) (applying the willing buyer-
willing seller valuation rule although “[p]rivate trading in mutual
fund shares is virtually nonexistent.”).
        62
       We are aware, of course, that in holding that the § 1341
income tax benefit is not an estate asset but is a factor affecting
the value of the § 2053(a)(3) estate tax deduction, we do not

                                         29
D.   Discharge-of-Indebtedness Income

     We next address the Commissioner’s cross appeal, urging that

the general    rule   that    gross   income   includes    income   from   the

discharge of indebtedness has potential application in this case.

More specifically, the Commissioner argues that if the Estate

prevails on the § 2053(a)(3) deduction issue, i.e., if, despite

having actually paid “only” $681,840 to settle Exxon’s claim, the

Estate is allowed to deduct $2.48 million, then pursuant to §

61(a)(12) the Estate will have had income from the discharge of

indebtedness equal to the difference between the settlement payment

and the deduction (approximately $1.8 million).

     The    Commissioner     styles   his   cross-appeal   as   “protective”

because it relates to an assessment that will remain inchoate

unless the Estate is eventually permitted to assign a value to the

deduction that is greater than the actual settlement payment of

$681,840.    The Commissioner acknowledges that a deduction equal to

or less than $681,840 would not, under his theory, result in debt

discharge income.     As the Tax Court held that the § 2053(a)(3)

estate tax deduction was limited to the settlement payment of

$681,840, the court did not address this issue.            If on remand the

value of the § 2053(a)(3) deduction determined by the Tax Court

exceeds $681,840, the discharge-of-indebtedness income issue will

require resolution. For reasons of judicial economy, we resolve it

change the “bottom line” of the Form 706. But that is not our
concern; our effort today is aimed at getting the tax treatment
“right,” regardless of the revenue result.

                                      30
now.63

     The discharge-of-indebtedness doctrine applies when a taxpayer

who has incurred a financial obligation is thereafter relieved of

liability, in whole or in part.              When that happens, the taxpayer

recognizes taxable income equal to the difference between the

initial obligation and the amount, if any, paid to discharge that

obligation.64         A necessary prerequisite to applying the doctrine,

then,         is   that   the   taxpayer   shall   have   incurred   a   financial

obligation.

     If, in this case —— as the Estate urges —— Exxon possessed

“enforceable contractual rights” against the Estate for a fixed

sum, the doctrine would have potential application because the

Estate would have incurred a financial obligation.                   But, we have

already rejected the Estate’s assertion that Exxon’s claim could be

so characterized. Rather, this case involves an unliquidated claim

for contribution or restitution, the actual value of which was not

ascertained until the case settled.                To be sure, the Estate was

better off paying Exxon $681,840 in settlement than it would have

been had it capitulated while Exxon was claiming more than four

times that sum.            For this benefit to constitute income from the

discharge of indebtedness, however, there must first have been an

         63
       See Lunsford v. Price, 885 F.2d 236, 239 & n.12 (5th                  Cir.
1989); see also United States v. Marine Shale Processors, 81 F.3d
1361, 1369 n.8 (5th Cir. 1996); United States v. Carreon, 11 F.3d
1225, 1232 n.18 (5th Cir. 1994); Jones v. Diamond, 594 F.2d 997,
1026 (5th Cir. 1979).
     64
      See § 61(a)(12); United States v. Kirby Lumber Co., 284 U.S.
1 (1931); Preslar v. Commissioner, 167 F.3d 1323, 1327 (10th Cir.
1999); Zarin v. Commissioner, 916 F.2d 110 (3d Cir. 1990).

                                           31
indebtedness within the meaning of § 61(a)(12).             Here there was

not.

       Restating the point first articulated by Professors Bittker

and Thompson,65 the Supreme Court, in United States v. Centennial

Savings Bank FSB explained as follows:

       Borrowed funds are excluded from income in the first
       instance because the taxpayer’s obligation to repay the
       funds offsets any increase in the taxpayer’s assets; if
       the taxpayer is thereafter released from his obligation
       to repay, the taxpayer enjoys a net increase in assets
       equal to the forgiven portion of the debt and the basis
       for the original exclusion thus evaporates.66

Thus analyzed, the reason why the discharge-of-indebtedness concept

has no application to these facts becomes clear:             There were no

borrowed funds that were excluded from taxable income in the first

place.67       Rather, Decedent had paid income tax on Exxon’s royalty

payments when she received them.          There could be no release from an

obligation to repay —— that is, no “discharge” —— because, until

the parties settled the case, no such obligation actually existed.

       Our conclusion that there can be no discharge-of-indebtedness

income       is   supported   by   the   so-called   “contested   liability”

       65
      See Boris I. Bittker & Barton H. Thompson, Jr., Income from
the Discharge of Indebtedness: The Progeny of United States v.
Kirby Lumber Co., 66 CALIF. L. REV. 1159 (1978).
       66
            499 U.S. 573, 581 (1991).
       67
      We are not suggesting that the indebtedness must necessarily
arise from a loan. It is possible, for example, that had Exxon’s
claim been reduced to a final judgment, the judgment would
constitute an indebtedness. In any event, we are not faced with
and express no opinion regarding that situation.

                                         32
doctrine.68    This doctrine “rests on the premise that if a taxpayer

disputes a debt in good faith, a subsequent settlement of the

dispute is ‘treated as the amount of debt cognizable for tax

purposes.’”69      Recently   the   Tenth   Circuit   found   the   doctrine

inapplicable in Preslar v. Commissioner.70             The Preslar court

criticized the Third Circuit’s reliance on the contested liability

doctrine in Zarin v. Commissioner.71         In Zarin, the taxpayer had

received casino chips purportedly worth $3.4 million.           The casino

had, however, violated New Jersey gaming regulations by extending

credit to Zarin.     Thus when the casino made a claim against Zarin

to recoup the debt, it was less than certain to succeed.             Relying

on N. Sobel, Inc. v. Commissioner,72 the Zarin court concluded that

when Zarin paid the casino $500,000 to settle the matter, the

settlement served to “fix the amount of the debt.”73

     Preslar criticized Zarin for not recognizing the difference

that the Preslar court perceived between disputes about the amount

of the debt on the one hand and the enforceability of a claim for

a sum certain on the other.          As the Preslar court more fully

    68
      Alternatively called the “disputed debt” doctrine. See 1 B.
Bittker and L. Lokken, Federal Taxation of Income Estates and
Gifts, ¶ 7.2.5 (3d ed. 1999).
     69
      Preslar v. Commissioner, 167 F.3d 1323, 1327 (2d Cir. 1999)
(quoting Zarin v. Commissioner, 916 F.2d 110, 115 (3d Cir. 1990)).
     70
167 F.3d at 1327.
     71
          916 F.2d 110 (3d Cir. 1990).
     72
          40 B.T.A. 1263, 1939 WL 101 (1939).
     73
916 F.2d at 115.

                                     33
explained,

     [t]he mere fact that a taxpayer challenges the
     enforceability of a debt in good faith does not
     necessarily mean he or she is shielded from discharge of
     indebtedness income upon resolution of the dispute. To
     implicate the contested liability doctrine, the original
     amount of the debt must be unliquidated. A total denial
     of liability is not a dispute touching upon the amount of
     the underlying debt.74

     We need not choose today between the broad view of the

contested liability doctrine accepted by the Third Circuit in Zarin

and the more narrow view taken by the Tenth Circuit in Preslar.

For here, both the amount and the enforceability of the debt were

contested vigorously by the Estate; it was not until settlement

that Exxon’s claim became liquidated.               Thus, even if we assume

arguendo that the view of the Preslar court is the correct one, the

contested     liability     doctrine    applies    here   and   buttresses   our

conclusion     that   the   Estate     did   not   realize   income   from   the

discharge of indebtedness.

     We are aware that our analysis of this issue has employed a

different temporal perspective than did our analysis of the issue

regarding when to value Exxon’s claim for purposes of the §

2053(a)(3) deduction allowed for claims against the estate.                  This

apparent inconsistency is explained by the fact that § 2053(a)(3)

is an estate tax provision whereas the discharge-of-indebtedness

doctrine is an income tax concept.           Unlike the estate tax which, by

its nature, is imposed only once (if at all), income tax is imposed

on an annual basis. And, for cash method income-taxpayers like the

     74
167 F.3d at 1328.

                                        34
Decedent and the Estate, income is reported only when it is

received.

E.    Motion to Amend

      The final issue presented by this appeal is whether the Tax

Court abused its discretion when it denied the Estate’s motion to

amend its petition.75 As noted, after the parties had submitted the

case to the Tax Court for decision, the Estate sought to amend its

petition.   Through the amendment, the Estate sought to assert that

the Commissioner was collaterally estopped from contesting the

validity of Exxon’s claim against the estate.              Specifically, the

Estate’s proffered amendment alleged that, in the Exxon litigation,

the    government   had   “obtained        an   actual   determination   that

overcharges had been paid to interest owners in the HFU as a result

of sale of oil in violation of the federal pricing regulations,”

and that this determination had established liability on the part

of the royalty owners.

      We have held that when exercising its discretion, the Tax

Court must consider “such factors as the timeliness of the motion,

the reasons for delay, whether granting the motion would result in

issues being presented in a seriatim fashion, and whether the party

opposing the motion would be unduly prejudiced.”76             We cannot say

that the Tax Court abused its discretion in applying these factors

       75
       Denial of motion to amend Tax Court petition reviewed for
abuse of discretion. See Durrett v. Commissioner, 71 F.3d 515, 518
(5th Cir. 1996).
      76
      Id. at 518 (citing Daves v. Payless Cashways, Inc., 661 F.2d
1022 (5th Cir. 1981)).

                                      35
to the instant case.      The only explanation offered by the Estate

for its tardiness is that it did not realize until after the case

had   been   submitted   that    it   should   have   raised   the   issue    of

collateral estoppel.     The Estate had ample time and opportunity to

discover and    raise    the    issue    before   submitting   the   case    for

decision; simple inadvertence falls short of a legally adequate

explanation for the Estate’s delay.           Accordingly, we hold that the

Tax Court did not abuse its discretion in denying the Estate’s

motion to amend.

                                        III

                                 CONCLUSION

      For the foregoing reasons, the rulings of the Tax Court are

reversed, the judgment vacated, and this case is remanded, with

instructions, for further proceedings consistent with this opinion.

REVERSED, VACATED, and REMANDED.

                                        36