Comm'r of Internal Revenue v. Smith, 98-60313
| Citation | 198 F.3d 515 |
| Decision Date | 15 December 1999 |
| Docket Number | No. 98-60241,No. 98-60313,98-60313,98-60241 |
| Parties | (5th Cir. 1999) ALGERINE ALLEN SMITH, Estate of Deceased; JAMES ALLEN SMITH, EXECUTOR, Petitioner-Appellant, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee. COMMISSIONER OF INTERNAL REVENUE, Petitioner-Appellant, v. ALGERINE ALLEN SMITH, Estate of Deceased; JAMES ALLEN SMITH, EXECUTOR, Respondent-Appellee |
| Court | United States Courts of Appeals. United States Court of Appeals (5th Circuit) |
Harold A. Chamberlain (argued), Houston, TX, Michael Christopher Riddle, Riddle & Brazil, Houston, TX, for Estate of Smith.
Michelle B. O'Connor (argued), Jonathan S. Cohen, U.S. Dept. of Justice, Tax Division Appellate Section, Charles Casaza, Clerk, U.S. Tax Court, Washington, DC, for C.I.R.
Stuart L. Brown, Chief Counsel, Internal Revenue Service, Washington, DC, for C.I.R. in docket No. 98-60313.
Appeals from the United States Tax Court
Before WIENER, DeMOSS and PARKER, Circuit Judges.
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 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.
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 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, 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 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 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 disputed on the date of Decedent's death, the Estate was entitled to deduct...
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