Estate of Lena G. Lazar, Deceased, Joseph C. Chapman, Executor, Petitioner v. Commissioner of Internal Revenue, Respondent, 58 T. C. 543 (1972)

Settlement payments to resolve claims to share in an estate are not deductible as claims against the estate for estate tax purposes.

Summary

Lena Lazar entered into an agreement with her husband Milton to bequeath three-fourths of her estate to his nieces and nephews. After Milton’s death, Lena made a will that did not comply with this agreement, leading to a dispute settled by a $150,000 payment to Milton’s relatives. The Tax Court held that this payment was not deductible under Section 2053(a)(3) of the Internal Revenue Code, as it was a distribution to share in the estate rather than a claim against it. The decision emphasized that such payments do not qualify for deductions as they are not claims against the estate but rather distributions to potential beneficiaries.

Facts

In 1947, Milton Lazar, knowing his death was imminent, insisted that his wife Lena enter into an agreement to leave three-fourths of her estate to his nieces and nephews in exchange for him maintaining her as his sole heir. Most of their property was held as tenants by the entirety. After Milton’s death, Lena made several wills complying with the agreement until 1963 when she was advised that the agreement was invalid. Her final will, executed shortly before her death in 1965, did not comply with the agreement. Milton’s relatives contested the will, leading to a $150,000 settlement payment to them.

Procedural History

The executor of Lena’s estate claimed a deduction for the $150,000 payment on the estate tax return, which the Commissioner disallowed. The Tax Court reviewed the case, and prior state court proceedings had already determined that the payment was not deductible under Pennsylvania inheritance tax law. The Tax Court’s decision affirmed the Commissioner’s disallowance of the deduction.

Issue(s)

1. Whether the $150,000 paid to Milton’s relatives was deductible as a claim against the estate under Section 2053(a)(3) of the Internal Revenue Code?
2. If the payment was considered a claim against the estate, whether it was supported by adequate and full consideration in money or money’s worth as required by Section 2053(c)(1)(A)?
3. Whether any part of the $150,000 settlement was paid in settlement of the rights of the claimants as third-party beneficiaries of the agreement between Lena and Milton?

Holding

1. No, because the payment was made to settle a claim to share in the estate, not a claim against it.
2. No, because even if it were considered a claim against the estate, it lacked adequate and full consideration in money or money’s worth.
3. No, because the settlement did not specifically apportion any amount to third-party beneficiary rights, and no evidence supported such an apportionment.

Court’s Reasoning

The court distinguished between claims against the estate and claims to share in the estate. It determined that the $150,000 payment was a distribution to potential beneficiaries rather than a claim against the estate. The court noted that the settlement was to resolve disputes over the validity of Lena’s will, not to enforce a claim based on the 1947 agreement. The court also found that the agreement lacked adequate and full consideration in money or money’s worth because Milton’s estate was largely held as tenants by the entirety, over which he had no testamentary power. The court further noted that the settlement did not apportion the payment specifically to third-party beneficiary rights, thus failing to establish the deductibility of the payment.

Practical Implications

This decision clarifies that estate tax deductions are not available for payments made to settle disputes over the distribution of an estate, as opposed to claims against the estate. Attorneys must carefully distinguish between these types of claims when advising executors on estate tax returns. The ruling also underscores the importance of ensuring that any agreement purporting to bind an estate is supported by adequate consideration to be deductible. Future cases involving similar disputes over estate distributions should consider this precedent when determining the deductibility of settlement payments. Additionally, this case highlights the need for clear apportionment in settlement agreements to establish the basis for any potential deductions.