DePaoli v. C.I.R.
| Decision Date | 31 July 1995 |
| Docket Number | No. 94-9015,94-9015 |
| Citation | 62 F.3d 1259 |
| Parties | -5881, 95-2 USTC P 60,205 Quinto DePAOLI, Jr., Estate of Quinto DePaoli, Deceased, Soila DePaoli and Rachel Craig, Personal Representatives, Petitioners-Appellants, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee. |
| Court | U.S. Court of Appeals — Tenth Circuit |
Towner Leeper, El Paso, TX, for petitioners-appellants.
William J. Patton (Loretta C. Argrett and Richard Farber with him, on the brief) of the U.S. Dept. of Justice, Tax Div., Washington DC, for respondent-appellee.
Before EBEL, Circuit Judge, McWILLIAMS, Senior Circuit Judge, and JENKINS, Senior District Judge. *
This case arises out of the taxpayers' efforts to escape estate taxes by disclaiming a testamentary transfer of property. The Tax Court held the purported disclaimer invalid for estate tax purposes, subjecting the taxpayers to liability not only for estate taxes but also for a gift tax and an addition to tax under section 6651(a)(1) of the Internal Revenue Code. See 66 T.C.M. (CCH) 1493, 1993 WL 500190 (1993). The taxpayers appeal. We have jurisdiction under I.R.C. Sec. 7482(a)(1) and reverse.
Quinto DePaoli, Sr., a resident of New Mexico, died in 1987. He was survived by his wife, Soila DePaoli, and his only son, Quinto DePaoli, Jr. Quinto Senior's will left his entire estate to Quinto Junior. The will was formally probated on December 30, 1987. On July 21, 1988, shortly before the estate tax return was due, Soila and Quinto Junior moved to have the probated will set aside. They claimed that the original will had been destroyed, that the will admitted to probate was actually a duplicate copy and that Quinto Senior had intended to make a new will leaving Quinto Junior the greatest amount he could receive without any tax liability (namely, $600,000) and leaving the bulk of the estate to Soila but that he had died before he could execute the new will. Quinto Junior acknowledged that he could claim a substantial part of the estate but agreed to receive only $600,000 to settle the will contest. The probate court granted the motion and ordered the estate distributed accordingly.
The federal estate tax return filed for Quinto Senior's estate indicated that the entire estate passed to Soila, less certain expenses and a $600,000 bequest to Quinto Junior. The bequest to Soila was classified as a deductible bequest to a surviving spouse. The return indicated that no property passed to the surviving spouse as a result of a qualified disclaimer under I.R.C. Sec. 2518(b), and no written disclaimer was attached to the return. The return indicated that no tax was due, since the tax on the $600,000 taxable estate was within the unified credit available to the estate.
The Commissioner denied the entire marital deduction on the grounds that Quinto Senior's will, as probated, bequeathed all his property to his son and the agreement between Quinto Junior and Soila was invalid. The Commissioner also determined that the agreement between Quinto Junior and Soila constituted a taxable gift for gift tax purposes and assessed an addition to tax against Quinto Junior under I.R.C. Sec. 6651(a)(1) for failing to file a gift tax return. 1
The Tax Court upheld the Commissioner's determinations. The court held that Quinto Junior's agreement to forego all but $600,000 of his father's estate did not entitle the estate to the marital deduction because the portion of the estate passing to Soila passed to her from Quinto Junior and not from Quinto Senior. The court further held that the property passing to Soila constituted a taxable gift from Quinto Junior, making Quinto Junior liable for the federal gift tax. Finally, the court held that Quinto Junior's failure to file a gift tax return was not "due to reasonable cause" and that Quinto Junior was therefore liable for an addition to tax under I.R.C. Sec. 6651(a)(1). The Tax Court concluded that the deficiency in estate tax due was $1,633,250, the deficiency in gift tax due was $1,297,750 and the addition to tax was $324,438. Quinto Junior, the estate, and Quinto Senior's personal representatives (Soila and Rachel Craig) appealed.
The appellants claim that the Tax Court erred by denying the estate a marital deduction. They claim that, as a result of Quinto Junior's disclaimer of his property rights under Quinto Senior's will, Quinto Senior's property passed to his surviving spouse (Soila) as a matter of law and was therefore properly deducted. 2 The parties agree that this issue is subject to de novo review.
Estate taxes are imposed on the value of a decedent's taxable estate. I.R.C. Sec. 2001. In determining the value of the taxable estate, the value of property that passes to a surviving spouse is deducted. Id. Sec. 2056(a). If property passes from a decedent to someone other than the surviving spouse and that person makes a "qualified" disclaimer that results in the surviving spouse being entitled to the property, the disclaimed interest is treated as passing directly from the decedent to the surviving spouse and therefore qualifies for the marital deduction. See Treas.Reg. Sec. 20.2056(d)-1(b).
To qualify, a disclaimer must meet certain requirements, chief of which, for purposes of this appeal, is that, as a result of the disclaimer, the interest passes to the surviving spouse "without any direction on the part of the person making the disclaimer." I.R.C. Sec. 2518(b)(4). The Tax Court held that Quinto Junior's agreement to forego all but $600,000 of his father's estate was not a qualified disclaimer because his interest would not have passed to Soila without his direction. 3
The requirement that the disclaimed property pass without any direction from the person making the disclaimer means that the disclaimer must result in a valid passing of the disclaimed interest to the surviving spouse by operation of state law. Federal law does not prescribe rules for the passing of disclaimed property interests, so any disclaimed property passing other than by operation of state law must be at the direction of the disclaimant. See Estate of Goree v. Commissioner, 68 T.C.M. (CCH) 123, 125-26, 1994 WL 379246 (1994); Estate of Bennett v. Commissioner, 100 T.C. 42, 67, 72-73, 1993 WL 19583 (1993).
Under New Mexico law, unless the decedent indicates otherwise in his will, any disclaimed property passes as if the disclaimant had predeceased the decedent. See N.M.Stat.Ann. Sec. 45-2-801(C) (Michie 1989 Repl.). 4 Under New Mexico's antilapse statute, if a devisee who is related to the testator by kinship is treated as if he had predeceased the testator, the devisee's "issue" who survive the testator by 120 hours "take in place of" the devisee. Id. Sec. 45-2-605. Thus, if Quinto Junior had "issue," his disclaimer would not have caused the disclaimed property to pass to his stepmother, Soila, by operation of law and therefore would not have been a qualified disclaimer under I.R.C. Sec. 2518(b) entitling the estate to the marital deduction.
Quinto Junior has never been married but has two illegitimate children--Thomas Derrick DePaoli and Christopher Noel Contreras DePaoli. Derrick was five years old at the time of Quinto Senior's death, and Christopher was four. The Tax Court concluded that the property Quinto Junior disclaimed would not have passed to Soila absent his agreement that Soila take the property but would have passed to Derrick and Christopher. The petitioners claim that Quinto Junior's illegitimate children were not his "issue" within the meaning of the antilapse statute and therefore would not have taken in his place as a result of his disclaimer.
The New Mexico Probate Code in effect at the time of Quinto Senior's death and Quinto Junior's disclaimer defines "issue" as "all of a person's lineal descendants of all generations, with the relationship of parent and child at each generation being determined by the definitions of child and parent contained in the Probate Code." N.M.Stat.Ann. Sec. 45-1-201(A)(21). The Probate Code defines "child" as "any individual entitled to take as a child under the Probate Code by intestate succession from the parent whose relationship is involved" and excludes stepchildren, foster children and grandchildren. Id. Sec. 45-1-201(A)(3). For purposes of intestate succession, the Probate Code provides that a child born out of wedlock is considered a "child" of the father if, among other things, "the reputed father has recognized the child in writing by an instrument signed by him, which shows upon its face that it was so signed with the intent of recognizing the child as an heir." Id. Sec. 45-2-109(B)(2). 5 The code makes declarations of deceased persons admissible to prove that such an instrument was lost or destroyed, as well as to prove the existence, contents and genuineness of such an instrument. The statute further provides, "Such declarations shall be corroborated by proof of general and notorious recognition of such child by the father." Id. Sec. 45-2-109(B)(2). Finally, the code defines "heirs" as "those persons ... who are entitled under the statutes of intestate succession to the property of a decedent." Id. Sec. 45-1-201(A)(17). Under the statutes of intestate succession, the part of the intestate estate not passing to the surviving spouse passes "to the issue of the decedent." Id. Sec. 45-2-103(A).
In other words, under New Mexico law as it existed in 1987 and 1988, an illegitimate child was considered "issue" of his natural father and therefore entitled to take in place of the natural father under the antilapse statute if the natural father recognized the child by a signed, written instrument that "shows upon its face" that the father signed it "with the intent of recognizing the child as an heir," id. Sec. 45-2-109(B)(2), that is, as someone entitled to succeed to the father's property under the intestate succession statutes, see ...
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