- 16 -
calculation of damages to a special master. Exxon claimed that
it was owed a total of $2.48 million by the estate. Exxon
settled with the estate 15 months after decedent died for
$681,840.
The Commissioner determined a deficiency, asserting that the
estate was allowed to deduct only the amount paid in settlement
because Exxon’s claim was pending at the time of decedent’s
death, and therefore the amount of the decedent’s liability on
that claim was then uncertain. The Tax Court agreed with the
Commissioner’s conclusion. See Estate of Algerine Smith v.
Commissioner, 108 T.C. 412 (1997). The Court of Appeals, in
reversing, vacating, and remanding the Tax Court’s original
decision, concluded that the estate was entitled to deduct more
than the settlement amount, but that the estate was not permitted
to deduct the full amount that was being claimed by Exxon at
decedent's death. Further, the Court of Appeals determined that
the income tax relief afforded by section 1341 upon the payment
of the settlement amount should offset the $2.48 million claim in
calculating the amount of the deduction. Applying the willing
buyer-willing seller test, the Court of Appeals stated that “We
perceive no reason why this standard [willing buyer-willing
seller test] should presume that the participants in the
hypothetical transaction would not account for the net tax
Page: Previous 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 NextLast modified: May 25, 2011