Appeal from the Decision of the United States Tax Court.
Sprecher, Circuit Judge,*fn** Swygert, Senior Circuit Judge, and Marshall, District Judge.**fn**
This is an appeal by the Estate of Bessie L. Thompson from a decision of the United States Tax Court sustaining the Commissioner of Internal Revenue's assessment of an estate tax deficiency of $12,724.07. The Tax Court agreed with the Commissioner that $50,000 which petitioner reported on its federal estate tax return as a claim against the estate, was not deductible under § 2053(a)(3) of the Internal Revenue Code of 1954, 26 U.S.C. § 2053(a)(3). We have jurisdiction under 26 U.S.C. § 7482(a). The decision of the Tax Court is reversed.
The facts are uncontroverted. They were adduced in the Tax Court by way of a stipulation, agreed exhibits and uncontroverted testimony.
On May 28, 1974 Bessie L. Thompson borrowed $50,000 from the Clinton County Bank and Trust Company of Frankfort, Indiana, executing a promissory note in the principal amount of $50,000 with annual interest at 8 1/2% due May 28, 1975.
Bessie L. Thompson died testate in June 1974, a resident of Frankfort, Clinton County, Indiana. Terrence R. Moses, her grandson, was appointed executor of her estate. Her will was admitted to probate in the Circuit Court of Clinton County on September 4, 1974. Notice to creditors was first published pursuant to Indiana law on September 18. On March 17, 1975 the executor filed a United States estate tax return with the Internal Revenue Service in which the $50,000 note was listed as a deductible claim against the estate.
At the time of Thompson's death the estate did not have sufficient cash to pay either the $50,000 note or its federal estate tax. Consequently, some time prior to March 7, 1975, the executor and a representative of the Clinton County Bank discussed the handling of the $50,000 note and the cash needs of the estate. It was agreed that the interest accruing on the note would be added to the principal, that the bank would loan the estate an additional $10,000, and that when the note matured the estate would execute a renewal note in the amount of $50,000 plus accrued interest. On March 7, 1975, the bank loaned the estate the additional $10,000, enabling the estate to pay the estate tax due on the return filed that date.
On May 30, 1975, the estate, by the executor executed a note payable to the bank in the amount of $54,332.64 at 9% interest due May 30, 1976. The proceeds of this note were applied by the bank in full payment of the principal and accrued interest of the note which Bessie L. Thompson had executed prior to her death. In each of the next three years, the executor executed a renewal note on behalf of the estate. Each of the notes matured one year after execution and each was at 9% interest. The proceeds from each of the subsequent notes were applied in payment of the principal of the immediately preceding note. Accrued interest was paid by a check drawn on the account of the estate.
At no time did the bank file a formal claim with the Circuit Court of Clinton County with respect to the $50,000 note which Bessie L. Thompson had executed prior to her death.
On June 1, 1979 the executor and the Clinton County Bank and Trust Company jointly petitioned the Circuit Court of Clinton County for authority to satisfy an obligation of the estate. The petition, which was verified by the executor and an officer of the bank, alleged that Bessie L. Thompson had executed a $50,000 note to the bank on May 28, 1974; that the bank had not filed a claim with the court for payment of the note "but the executor orally acknowledged the note as the estate's obligation prior to the six month claim filing deadline on March 18, 1975"; that on May 30, 1975 the executor had executed a renewal and replacement note in the amount of $54,332.64; and that annually thereafter renewal notes were executed. Both petitioners "acknowledge[d] and agree[d] that the said obligation which began as Note 1 [the note executed by Bessie L. Thompson on May 28, 1974], and is now in the form of Note 3 [the last renewal note], was a valid obligation of Bessie L. Thompson at the time of her death and should now be paid in full to the bank as a legal obligation of the estate, notwithstanding the bank's failure to formally file a claim." Jt. Ex. 15-O. The petition was served upon all interested parties including the District Director of Internal Revenue.
On June 27, 1979 the joint petition came on for hearing before the Circuit Court of Clinton County. No objections were made. The court found "that the note of Bessie L. Thompson dated May 28, 1974 and payable to the Clinton County Bank was a valid obligation of Bessie L. Thompson at the date of her death; the executor for the estate acknowledged and allowed the said indebtedness as an obligation of the decedent's estate prior to March 18, 1975; that the said indebtedness was renewed by the executor on behalf of the estate, with interest, on May 30, 1975; . . . that the indebtedness heretofore described should now be paid by the executor as an obligation of the estate." Jt. Ex. 17-Q. Accordingly, the court directed that the then outstanding note "be paid and satisfied as a valid obligation of the decedent existing at the time of her death and properly allowed by the executor." Id.
On November 28, 1977 the Commissioner issued a notice of deficiency denying the deductibility of the original $50,000 note and assessing a consequent estate tax deficiency in the amount of $12,724.07. The estate sought review in the Tax Court which approved the Commissioner's determination. Both the Commissioner and the Tax Court reasoned that because the bank had not filed a claim with the Circuit Court of Clinton County within six months from the date notice of death was first given to creditors, the bank's claim was not deductible under 26 U.S.C. § 2053(a). Thus, both the Commissioner and the Tax Court in deciding the issue of deductibility took into consideration events occurring subsequent to the death of Bessie L. Thompson.
In this court, the parties have urged that this case turns on the question whether in deciding the deductibility of claims for a sum certain which are legally enforceable as of the date of the death of the decedent, the Commissioner may take into account post-death events. The Commissioner argues that he may, the estate that he may not. Compare Propstra v. United States, 680 F.2d 1248 (9th Cir. 1982); Russell v. United States, 260 F. Supp. 493, 499 (N.D. Ill 1966); Winer v. United States, 153 F. Supp. 941 (S.D.N.Y. 1957), all holding that post death events may not be considered, with Gowetz v. Commissioner, 320 F.2d 874 (1st Cir. 1963); Commissioner v. Estate of Shively, 276 F.2d 372, 374 (2d Cir. 1960), Estate of Courtney, 62 T.C. 317 (1974); Estate of Hagman v. Commissioner, 60 T.C. 465 (1973), aff'd, 492 F.2d 796 (5th Cir. 1974) all holding post death events may be considered. Commentators have also expressed differing views regarding the issue. See e.g., Palmquist, The Estate Tax Deductibility of Unenforced Claims Against a Decedent's Estate, 11 Gonzaga L.Rev. 707 (1976); Comment, Estate and Income Tax: Claims Against the Estate and Events Subsequent to Date of Death, 22 U.C.L.A. L.Rev. 654 (1975); Comment, Effect of Events Subsequent to the Decedent's Death on the Valuation of Claims Against His Estate Under § 2053 of the Federal Estate Tax, 1972 Ill. ...