Rev. Rul. 83-54

1983-1 C.B. 229.

                       Internal Revenue Service
                                 Revenue Ruling

                   DEDUCTIONS;  CLAIM BASED ON COLLUSIVE SUIT

                           Published: March 28, 1983

SECTION 2053. - -EXPENSES, INDEBTEDNESS, AND TAXES, 26 CFR 20.2053-1: Deductions for expenses, indebtedness, and taxes; in general

  Deductions;  claim based on collusive suit.  No deduction is allowable under section 2053(a)(3) of the Code for a claim that is based upon a judgment resulting from a collusive lawsuit which was instituted by the decedent's child against the decedent before the decedent's death.

ISSUE

  Under the circumstances described below, is a payment by an estate in satisfaction of a judgment resulting from a prearranged lawsuit deductible under section 2053(a)(3) of the Internal Revenue Code?

FACTS

  A financial planner devised a plan for D designed to limit federal estates taxes.  In 1977, pursuant to the plan, A, D's child, sued D for $100x.  A's claim was not meritorious.  D did not contest the suit and a state court judgment was awarded to A for $100x.

  In 1982, D died.  A presented a claim to D's estate based on the 1977 judgment.  D's estate paid the claim and deducted it from the gross estate under section 2053(a)(3) of the Code.

LAW AND ANALYSIS

  Section 2053(a)(3) of the Code provides for an estate tax deduction for the amount of claims against the estate as are allowable

by the laws of the state under which the estate is being administered.  These deductions, when founded on a promise or agreement, are limited by section 2053(c)(1) to the extent that the obligations are contracted bona fide and for adequate and full consideration in money or money's worth.

  Section 20.2053-1(b)(2) of the Estate Tax Regulations provides that a consent decree before a local court will be accepted as a basis for an estate tax deduction under section 2053 of the Code, provided the consent decree was a bona fide recognition of the validity of the claim and was accepted by the court as satisfactory evidence upon the merits.  The regulation provides that claims that are mere cloaks for a gift are not deductible.

  In Estate of Bath v. Commissioner, T.C.M. 1975-102, the decedent's son sued the estate alleging that the decedent had promised him 1/3 of her estate in return for certain personal services.  After a local court hearing, the son obtained a state court judgment for the amount of his claim.  The estate sought to deduct the claim under section 2053(a)(3) of the Code.  The Tax Court determined that the state court trial was not a bona fide contest, since the estate did not actively contest the claim, in part, because it thought it could deduct the amount of the claim for federal estate tax purposes.  Therefore, the Tax Court disregarded the state court proceeding, evaluated the facts and applicable state law concerning the purported claim, and determined that the son did not have a valid claim under state law.  Accordingly, the Tax Court held that the amount distributed to the son in satisfaction of the state court judgment was a substitute for an inheritance and was not deductible under section 2053.

  In the instant case, A's lawsuit was instituted at the suggestion of a financial planner.  The suit was without merit. Although the suit here was instituted against the decedent, rather than against the decedent's estate as in Estate of Bath, cited above, the parties in the instant case, as in Estate of Bath, intended that the result of the suit would be to permit the transfer of property to the decedent's heirs free of federal estate and gift taxes.  The suit was merely a cloak for a gift and is not deductible under section 2053 of the Code.  See Estate of Bath, cited above.

HOLDING

  A payment by an estate in satisfaction of a judgment resulting from a prearranged lawsuit is not deductible under section 2053(a)(3) of the Code.

Rev. Rul. 83-54, 1983-1 C.B. 229.