Estate of McMorris v. Comm. Of Internal Revenue, 99-9031

• Decision Date: 20 March 2001
• Docket Number: No. 99-9031,99-9031
• Citation: 243 F.3d 1254
• Parties: (10th Cir. 2001) ESTATE OF EVELYN M. McMORRIS, Deceased; JERRY D. McMORRIS, Personal Representative, Petitioner-Appellant, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee
• Court: U.S. Court of Appeals — Tenth Circuit

Page 1254

243 F.3d 1254 (10th Cir. 2001)

ESTATE OF EVELYN M. McMORRIS, Deceased; JERRY D. McMORRIS, Personal Representative, Petitioner-Appellant, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee.

No. 99-9031

UNITED STATES COURT OF APPEALS TENTH CIRCUIT

March 20, 2001

Appeal from United States Tax Court. (No. 1969-95) [Copyrighted Material Omitted] Kevin L. Brown, Jones & Keller, P.C. (Edward T. Lyons, Jr., and M. Brian Cavanaugh, Jones & Keller, P.C.; John R. Wilson and Peter J. Perla, Steiner, Darling, Hutchinson & Wilson LLP, with him on the brief), Denver, Colorado, for the appellant.

John A. Dudeck, Jr. (Jonathan S. Cohen with him on the brief), Department of Justice, Tax Division, Washington, D.C., for the appellee.

Before BRISCOE, HOLLOWAY, and POLITZ,¹ Circuit Judges

BRISCOE, Circuit Judge.

The Estate of Evelyn M. McMorris appeals a tax court decision in favor of the Commissioner of Internal Revenue. The tax court held that the Commissioner properly considered an event occurring after the death of Evelyn McMorris in disallowing her estate's deduction pursuant to 26 U.S.C. 2053(a)(3) for payment of federal and state income taxes owed at the time of her death. Exercising jurisdiction under 26 U.S.C. 7482(a)(1), we reverse and remand with directions to vacate the deficiency assessment at issue here and to recalculate any remaining unrelated deficiencies owing.

I.

The facts are undisputed. Donn McMorris, Evelyn's husband, died in 1990, and Evelyn received 13.409091 shares of stock in NW Transport Service, Inc., from his estate. The stock was reported in Donn's estate tax return at an appraised value of $1,726,562.50 per share as of the date of his death and that value became Evelyn's basis in the stock.² Evelyn, through her conservator Jerry McMorris, entered into an agreement with NW Transport to redeem the stock for $29,500,000.00 (approximately $2,200,000.00 per share), payable over 120 months at ten percent interest.

Evelyn died in 1991, a resident of Colorado. In her federal estate tax return, her estate claimed deductions of $3,960,525.00 and $641,222.00, respectively, for her 1991 federal and state income tax liabilities. Federal income tax in the amount of $3,681,703.00 and Colorado income tax in the amount of $639,826.00 actually were paid with Evelyn's 1991 individual tax returns. A large part of the income reported on Evelyn's income tax returns resulted from the gain on redemption of the NW Transport stock.

In January 1994, the Commissioner issued a deficiency notice to Donn's estate disputing, among other things, the value of the NW Transport stock. Specifically, the Commissioner valued the stock at $3,618,040.00 per share. Donn's estate contested the Commissioner's determinations and, after lengthy negotiations, the parties reached a settlement in January 1996 for an increased value of the NW Transport stock at $2,500,000.00 per share as of Donn's death. This value became the new basis for the NW Transport stock redeemed by Evelyn. As a result of her increased basis, the taxable gain from Evelyn's redemption of the stock was eliminated and she realized a loss.

Evelyn's estate filed an amended 1991 federal individual income tax return seeking a refund of $3,332,443.00. The amended return reflected a loss from redemption of the NW Transport stock and eliminated certain dividend income reported on the original return. Meanwhile, Evelyn's estate was challenging a deficiency notice received in November 1994 concerning an unrelated gift deduction in the amount of $140,000.00 in her estate tax return.³ The estate contested the deficiency in tax court and that litigation was ongoing when Evelyn's amended 1991 federal income tax return was filed in January 1996.

In March 1996, the Commissioner filed an amended answer in Evelyn's estate tax litigation, asserting an increased deficiency in estate taxes. According to the Commissioner, the estate was no longer entitled to deduct Evelyn's 1991 federal and state individual income taxes because those liabilities were subject to refunds. Indeed, the Commissioner approved a $3,330,778.00 refund of Evelyn's 1991 federal income taxes in 1997, but the record filed with this court does not indicate that her estate filed an amended 1991 state income tax return or a protective refund claim with the Colorado Department of Revenue.

Evelyn's estate later conceded the Commissioner's original deficiency determination in its entirety (including disallowance of the $140,000.00 gift deduction). However, the estate refused to accept the Commissioner's view that the estate's deduction for Evelyn's income tax liabilities should be limited to the amount ultimately found to be due and owing by Evelyn. The estate instead took the position that post-death events may not be considered in determining the amount of its deduction for Evelyn's individual income tax liabilities because those liabilities were valid and enforceable claims against the estate at the time of Evelyn's death. Unable to resolve their differences, the parties submitted the case to the tax court on a fully stipulated basis.

The tax court held that the estate's deduction for Evelyn's 1991 federal income tax liability must be reduced by the amount actually refunded in 1997. According to the tax court, it was proper for the Commissioner to consider events occurring after Evelyn's death in calculating this deduction because the estate challenged Evelyn's individual income tax liability through her amended return. The tax court also held that the estate's deduction for Evelyn's 1991 Colorado income tax liability should be reduced to reflect the proper amount of tax after being adjusted downward as a result of her decreased federal taxable income. Although the record revealed that Evelyn's estate had not filed an amended Colorado income tax return and Evelyn had not received a refund of any 1991 state income taxes, the tax court reasoned that nothing prevented the estate from seeking such a refund on Evelyn's behalf. The tax court determined there was an estate tax deficiency of $1,581,593.00 based on the amounts set forth in (1) the original notice of deficiency, and (2) the increased deficiency arising from disallowance of the estate deductions for Evelyn's 1991 individual income tax liabilities. The estate appeals the latter deficiency determination.

II.

We review decisions of the tax court "in the same manner and to the same extent as decisions of the district courts in civil actions tried without a jury." 26 U.S.C. 7482(a)(1). Because this case was submitted to the tax court on a fully stipulated basis, we review the purely legal question presented by this appeal de novo. See Duke Energy Natural Gas Corp. v. Comm'r, 172 F.3d 1255, 1258 (10th Cir. 1999).

III.

Section 2053(a)(3) of the Internal Revenue Code authorizes a deduction for "claims against the estate" in calculating the value of a decedent's taxable estate. ⁴ There is no dispute in this case that unpaid income taxes incurred by a decedent prior to death may be deducted as a claim against the estate. See Treas. Reg. 20.2053-6(f). Rather, the disagreement centers on whether events occurring after a decedent's death may be considered in calculating that deduction. In particular, the parties debate the effect of the 1996 settlement between Donn's estate and the Commissioner on the value of the section 2053(a)(3) deduction taken by Evelyn's estate for her 1991 income taxes. The estate argues the settlement is not relevant because the value of its deduction should be determined as of Evelyn's death. The Commissioner counters that the settlement was properly considered because the deduction is limited to the actual amount of taxes Evelyn ultimately owed.

This is an issue of first impression in our circuit, notwithstanding the Commissioner's assertion to the contrary. Specifically, he observes that the Eighth Circuit resolved this issue in his favor in Jacobs v. Commissioner, 34 F.2d 233 (8th Cir. 1929), shortly after Congress divided the former Eighth Circuit into the new Tenth and Eighth Circuits.⁵ He argues that "under the statute that created the Tenth Circuit, Jacobs is a decision of the former Eighth Circuit and, thus, should be treated as binding precedent here." Appellee's Br. at 30. There are two fundamental problems with the Commissioner's argument. ⁶

First, unlike the Eleventh Circuit, which chose to adopt all decisions issued by the former Fifth Circuit before its October 1, 1981, split as binding precedent, see Bonner v. City of Prichard, 661 F.2d 1206, 1209 (11th Cir. 1981) (en banc), we have never held that the decisions of our predecessor circuit are controlling in this court.⁷ Second, even assuming we are bound by the decisions of the former Eighth Circuit, Jacobs does not fall within that category of cases. As the Commissioner concedes, the Eighth Circuit decided Jacobs almost four months after the Act creating our circuit took effect. Moreover, we are not persuaded by the Commissioner's argument that section 5(1) of that Act obligates us to treat the Eighth Circuit's post-split decision in Jacobs as a decision of the former Eighth Circuit simply because that case was argued and submitted prior to the effective date of the Act.⁸ That section states: "If any hearing before [the former Eighth Circuit] has been held in the case, or if the case has been submitted for decision, then further proceedings in respect of the case shall be had in the same manner and with the same effect as if this Act had not been enacted." 45 Stat. at 1348.

Notably, the Act creating the Eleventh Circuit contains nearly identical language, see Bonner, 661 F.2d at 1207-08, yet that circuit has never adopted the per se rule urged by the Commissioner in this case. The Eleventh Circuit has instead held that where an appeal was submitted before the split but decided by the Fifth Circuit thereafter, the decision has precedential effect only...