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Palimony Claim a Valid Estate Debt
In Estate of Bernard Shapiro et al v. United States; No. 08-17491 (21 Feb 2011), the Ninth Circuit Court of Appeals reversed a summary judgment by a District Court in Nevada. The District Court had determined that the estate was not entitled to a deduction for a palimony claim.
Decedent Bernard Shapiro and Cora Jane Chenchark met in 1977 and lived together from that year until 1999. They never were married. In 1999, the decedent had a relationship with another woman and the two separated. Chenchark sued in Nevada court and claimed breach of contract and breach of fiduciary duty. She claimed that during the 22 year relationship, both parties had agreed to share equally in each other’s assets.
While the suit was pending, Bernard Shapiro passed away. The estate filed IRS Form 706 and paid $10,602,238 in estate and generation skipping tax. The Nevada Court ruled in favor of the estate on the palimony claim and Chenchark appealed. The estate then settled with Chenchark for approximately $1 million.
In June of 2003, the estate filed an action seeking a refund of approximately $2 million based on the assertion that the palimony claim was deductible. Following further proceedings, the estate claimed a potential refund of $4.86 million.
The District Court noted that there were no factual issues and therefore ruled based on the applicable law. In the view of the lower court, the love and homemaking management provided by Chenchark were not sufficient consideration under Nevada law to create a contract. Therefore, there was no deduction for the value of Chenchark’s claim against the estate. In addition, the District Judge ruled that there was an estoppel argument that precluded the estate from claiming in the palimony case that there was no consideration and then making the opposite claim in the estate tax case.
The Court of Appeals first reviewed the law on consideration. It noted that under both California and Nevada law, a promise to perform homemaking services is adequate to create consideration. Because Chenchark had managed the home and supervised the decedent’s maid, gardener and pool man, the court determined that there was sufficient performance to provide adequate consideration.
On the judicial estoppel issue, the court noted that the estate had opposed the contract claim on the palimony allegation. However, that did not cause the estate to relinquish a right to deduct the potential value of that claim on IRS Form 706.
Finally, Chenchark had filed notices of Lis Pendens against several of Shapiro’s properties. These properties had lower values as a result of the cloud on title. However, the estate had failed to raise that issue in a timely manner and was not permitted to raise it on appeal. Therefore, the Court of Appeals reversed the District Court grant of summary judgment on the deduction for the palimony claim and remanded it to the District Court.
Circuit Judge Tashima concurred in part and dissented in part. Judge Tashima noted that there is a difference between contract law for state property purposes and that which applies for federal tax purposes. Even though there may have been a valid contract under Nevada law supported by Chenchark’s homemaking activities, that does not necessarily qualify the estate for the deduction. If under Sec. 2053 there is a person who is a “natural object of bounty,” then a claim is permitted only if it is supported by “adequate and full consideration.”
Even though Chenchark supervised the maid, gardener and pool man, she never contributed to any funds to the partnership and therefore did not provide the full consideration required for federal tax purposes.
Source: Children’s Home Society of Florida Foundation
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