- Ninth Circuit Reverses District Court on Deductibility of Palimony Claim - Estate of Shapiro v. Comm’r, 107 AFTR 2d 2011-942 (9th Cir. February 22, 2011)
- April 28, 2011
- Law Firm: Proskauer Rose LLP - New York Office
In Shapiro, the Ninth Circuit determined that an estate was entitled to a deduction for a palimony suit filed against the decedent. The decedent and the claimant lived together for 22 years. During that time, they resided together in the decedent’s home. The decedent paid for all of the claimant’s living expenses and gave her a weekly allowance. The claimant cooked, cleaned and managed the household. After the claimant discovered that the decedent was involved with another woman, she filed suit, asserting breach of contract. The decedent died while the suit was pending. The estate won the case against the claimant. She appealed, and the estate ultimately settled for $1 million. Sometime after the settlement, the estate filed for an estate tax refund, claiming that it was entitled to a deduction of $8 million for the value of the claim. The IRS disallowed any deduction for the claim.
The estate brought suit in the U.S. District Court of Nevada seeking a refund of approximately $2 million, based on their expert’s valuation of the claim at just over $5 million as of the date of the decedent’s death. The District Court held that the claimant’s homemaking services did not provide sufficient consideration to support a cohabitation contract between them, and that therefore, an estate tax deduction for the value of the claim was properly disallowed. The District Court also determined that the estate was estopped from claiming a deduction greater than the amount it paid in the settlement.
The Ninth Circuit reversed. It agreed that a claim founded on a contact or agreement is only deductible to the extent it is contracted for adequate and full consideration. However, the Ninth Circuit disagreed with the District Court’s finding that the claimant’s services had a zero value as a matter of law. Instead, it found that the claimant’s homemaking services could be quantified, and it remanded the case to the District Court to determine the appropriate amount. In addition, the Ninth Circuit found that the estate was not estopped from claiming a deduction in excess of the settlement amount. The court stated that the estate was within its rights to deduct the value of a yet-to-be determined claim without waiving the right to contest the validity of the claim in state court.