COMMISSIONER OF INTERNAL REVENUE, PETITIONER V. ESTATE OF ADA E.
VAN HORNE, DECEASED, ROBERT L. FARMER AND RICHARD R. COLE, EXECUTORS

No. 83-1561

   In the Supreme Court of the United States

   October Term, 1983

   The Solicitor General, on behalf of the Commissioner of Internal
Revenue, petitions for a writ of certiorari to review the judgment of
the United States Court of Appeals for the Ninth Circuit in this case.

   Petition for a Writ of Certiorari to the United States Court of
Appeals for the Ninth Circuit

            TABLE OF CONTENTS
   Opinions below
   Jurisdiction
   Statute and regulation involved
   Statement
   Reasons for granting the petition
   Conclusion
   Appendix

                            OPINIONS BELOW

   The opinion of the court of appeals (App., infra, 1a-7a) is
reported at 720 F.2d 1114.  The opinion of the Tax Court (App., infra,
9a-29a) is reported at 78 T.C. 728.

                             JURISDICTION

   The judgment of the court of appeals (App., infra, 8a) was entered
on November 22, 1983.  On February 16, 1984, Justice Rehnquist
extended the time within which to file a petition for a writ of
certiorari to and including March 20, 1984.  The jurisdiction of this
Court is invoked under 28 U.S.C. 1254(1).

                    STATUTE AND REGULATION INVOLVED

   The relevant portions of Section 2053 of the Internal Revenue Code
of 1954 (26 U.S.C.), and of Section 20.2053 of the Treasury
Regulations on Estate Tax (26 C.F.R.), are set out in a statutory
appendix (App., infra, 30a-31a).

                          QUESTION PRESENTED

   Section 2053(a)(3) of the Internal Revenue Code provides that, in
determining the net estate subject to federal estate tax, a deduction
shall be allowed "for claims against the estate." The question
presented is whether this Section permits an estate to deduct its
date-of-death, actuarial estimate of the amount of a claim, or whether
its deduction should be limited to the lesser amount actually payable
and actually paid, in light of events occurring after the decedent's
death, to satisfy the claim in full.

                               STATEMENT

   Ada E. Van Horne died on September 4, 1976.  At that time, she was
obligated under a divorce decree to pay her ex-husband, James, spousal
support of $5,000 per month for the remainder of his life.  The
divorce decree provided that this obligation would not be modified by
James's remarriage or by Ada's death, and that upon her death it would
become a charge against her estate.  App., infra, 91-10a.

   On October 29, 1976, James timely filed a creditor's claim for
continuation of his monthly support payments (App., infra, 10a). His
claim sought "$5,000 per month for the balance of (his) life," and was
approved by the probate court two months later (TCX 4-D;  App., infra,
10a).  James's claim for support had a stipulated actuarial value,
based on his life expectancy, of $596,387 at the date of Ada's death.
App., infra, 11a;  see Treas. Reg. Section 20.2031-10 Table A(1).

   James was suffering from a liver ailment when Ada died, but he had
no reason to believe that he was terminally ill.  In March, 1977,
however, six months after her death, his health began to decline and
he was hospitalized.  App., infra, 3a, 10a.  He died of liver cancer
on April 20, 1977, after receiving only $35,000 from Ada's estate
pursuant to the spousal support decree (App., infra, 2a-3a, 11a).

   Ada's executors timely filed a federal estate tax return on June 1,
1977.  Section 2053(a)(3) of the Code /1/ provides that, in
determining the net estate subject to estate tax, there shall be
allowed a deduction "for claims against the estate." Relying on that
Section, the estate took a deduction in the amount of $596,387 -- the
full actuarial value of James's claim for support, computed as of the
date of Ada's death -- on account of the estate's spousal support
obligation (App., infra, 11a).  The Commissioner on audit disallowed
the bulk of this deduction, determining that only $35,000 -- the
amount actually payable, and actually paid, to James in complete
satisfaction of his claim -- was properly deductible under Section
2053(a)(3) (App., infra, 2a-3a).  Based upon this and other
determinations, the Commissioner asserted a deficiency in federal
estate tax of $448,828 (TCX A).

   The executors sought a redetermination of the deficiency in the Tax
Court, which upheld the estate's actuarial computation of the
deduction (App., infra, 9a-29a).  The Tax Court discerned "much
confusion and diversity of views" as to the role of post-death events
in computing estate tax deductions (id. at 19a), finding the cases
"not easily reconciled with one another" and comparing the search for
a consistent course of decision to "picking one's way through a
minefield" (id. at 21a).  The court acknowledged that consideration of
post-death events would be proper if James, at Ada's death, had held
"only a potential, unmatured, contingent, or contested claim that
required further action * * * before it became a fixed obligation of
the estate" (id. at 19a).  In cases of contested or contingent claims,
the court reasoned, post-death developments must necessarily be
consulted because they "determine whether or to what extent such
'claims' actually ripen() into enforceable claims that (can) be
deducted at all" (id. at 16a-17a).  But the court distinguished such
cases, asserting that the issue involved here was not "the
enforceability of the claim," but "the valuation of an enforceable
claim" (id. at 16a (emphasis in original)).  Viewing the issue as one
of valuation, the Tax Court believed its decision to be controlled by
this Court's reasoning in Ithaca Trust Co. v. United States, 279 U.S.
151 (1929), which involved the valuation of a charitable bequest
rather than of a claim against the estate.  Based on its
interpretation of Ithaca Trust, the Tax Court held that "the value of
James'(s) life interest (must) be computed actuarially as of the date
of the decedent's death and not on the basis of his unexpected death
seven months thereafter" (App., infra, 19a).  /2/

   The Ninth Circuit unanimously affirmed (App., infra, 1a-7a).  It
noted "the conflicting authorities and commentators who have addressed
this issue," but found "those authorities holding post-death events
irrelevant * * * to be persuasive" (id. at 4a-5a n.1).  The court held
" 'as a matter of law (that), when claims are for sums certain, and
are legally enforceable as of the date of death, post-death events are
not relevant in computing the permissible deduction.' " Id. at 4a
(quoting Propstra v. United States, 680 F.2d 1248, 1254 (9th Cir.
1982)).

                   REASONS FOR GRANTING THE PETITION

   The court of appeals has decided an important question of federal
tax law in a way that conflicts with the decisions of at least five
other circuits.  The decision below is erroneous, permitting
respondent to deduct $596,000 on account of a claim that it satisfied
in full by paying only $35,000.  The issue recurs frequently, since
questions as to the effect of post-death events on claims against the
estate arise in virtually every estate tax audit.  Review by this
Court is therefore appropriate.

   1. In holding that post-death events are irrelevant, as a matter of
law, in determining the amount deductible under Section 2053(a)(3) on
account of a surviving spouse's claim for alimony, the decision below
squarely conflicts with decisions of the Second Circuit and the former
Court of Claims.  In Estate of Chesterton v.  United States, 551 F.2d
278, cert. denied, 434 U.S. 835 (1977), the Court of Claims held that,
where the estate's obligation to pay alimony is terminated by the
surviving spouse's remarriage, the estate may not deduct the full
date-of-death actuarial value of the spouse's alimony claim, but may
deduct only the (lesser) amount actually paid in satisfaction thereof
(551 F.2d at 279-282).  The Second Circuit had previously reached the
same result, on substantially identical facts, in Commissioner v.
Estate of Shively, 276 F.2d 372 (1960).  It held that "where, prior to
the date on which the estate tax return is filed, the total amount of
(the surviving spouse's alimony) claim against the estate is clearly
established under state law, the estate may obtain * * * no greater
deduction than the established sum, irrespective of whether this
amount is established through events occurring before or after the
decedent's death" (276 F.2d at 375).  /3/

   The decision below likewise conflicts with a long line of cases
holding post-death events relevant in determining the validity and
amount of "claims against the estate" generally.  Although a creditor
may have a valid claim as of the date of the testator's death, his
claim may disappear, or be reduced, in light of subsequent
developments.  The creditor, for example, may fail to present his
claim timely under state law, causing it to become void.  He may waive
his claim, settle it with the executors for a lesser sum, or obtain
satisfaction from a party other than the estate.  With near unanimity,
the courts of appeals have held that the estate in such circumstances
may not deduct the theoretical date-of-death value of the claim, but
may deduct only the lesser amount, if any, that it actually pays to
satisfy the claim in full.  E.g., Commissioner v. State Street Trust
Co., 128 F.2d 618, 621-622 (1st Cir. 1942) (where claim was
subsequently reduced by compromise agreement, deduction limited to
amount actually paid);  Estate of Hagmann v. Commissioner, 60 T.C.
465, 466-469 (1973), aff'd per curiam, 492 F.2d 796 (5th Cir. 1974)
(where claim became void because not timely presented, deduction
denied in full);  Jacobs v. Commissioner, 34 F.2d 233, 235-236 (8th
Cir.), cert. denied, 280 U.S. 603 (1929) (where claimant abandoned
contractual claim for bequest under will, deduction denied in full);
Estate of Metcalf v. Commissioner, 7 T.C. 153, 160-162 (1946), aff'd
by order, 47-2 U.S. tax Cas. (CCH) Paragraph 10,566 (6th Cir. 1947)
(where claims for taxes and interest were subsequently settled for
lesser amounts, deduction limited to amounts actually paid).  Contra,
Propstra v. United States, 680 F.2d 1248, 1253-1256 (9th Cir. 1982)
(approving deduction of date-of-death amount of claim, even though
subsequently compromised for lesser sum);  Commissioner v. Strauss, 77
F.2d 401, 405 (1935), opinion withdrawn, 81 F.2d 1016 (7th Cir. 1936)
(approving deduction of claim allowable under state law, but never
presented to probate court and never paid).  /4/

   2. The courts below erred in holding, contrary to the majority
view, that post-death events are irrelevant as a matter of law in
computing deductions for "claims against the estate." That holding is
at odds with the structure and purpose both of Section 2053 and of the
Treasury Regulations.  And to hold that a payment of $35,000 entitles
one to a deduction of $596,000 works no small affront to common sense.

   a. Section 2053(a) provides that, in determining the taxable estate
subject to estate tax, the gross estate shall be reduced by amounts
paid for "funeral expenses," "administration expenses," "claims
against the estate," and certain mortgages, to the extent that payment
of these items is "allowable by the laws of the jurisdiction * * *
under which the estate is being administered." In permitting a
deduction for these items, Section 2053(a) is designed to limit the
incidence of the estate tax to " 'what of value passes from the dead
to the living.' " Estate of Hagmann, 60 T.C. at 467 (quoting Jacobs v.
Commissioner, 34 B.T.A. 594, 597 (1936)).  Stated conversely, the
Section aims to exclude from tax amounts that are diverted from the
estate's beneficiaries to satisfy specified obligations -- be they
burial costs, executor's commissions, legal fees, or claims against
the estate -- that are traceable to the decedent or that arise by
virtue of his death.  See, e.g., Estate of Shively, 276 F.2d at 375;
Estate of Hagmann, 60 T.C. at 467-468.

   The structure and purpose of Section 2053 show that post-death
events -- specifically, events affecting payment or nonpayment -- must
be considered in determining the deductibility of these items.  Events
occurring after the testator's death are obviously relevant (generally
they are the only events that are relevant) in determining the
estate's funeral and administration costs, and the statute's language
suggests no basis for treating "claims against the estate"
differently.  /5/ Section 2053 expressly requires actual payment as a
precondition to deduction of certain items.  /6/ And it would be
contrary to the statute's purpose to permit a deduction for items that
are not actually paid, since an item not paid does not reduce "what of
value passes from the dead to the living" (Estate of Hagmann v.
Commissioner, supra), and thus offers no justification for reducing
the estate tax.

   The regulations interpreting Section 2053 confirm this construction
of the statute.  They define "claims against the estate" as "personal
obligations of the decedent existing at the time of his death, whether
or not then matured," and permit claims to be deducted only if they
are "enforceable against the * * * estate.".  Treas. Reg. Section
20.2053-4.  In referring to the uncertain maturity and enforceability
of claims at the time of death, the regulations necessarily
contemplate reference to events occurring thereafter.  The regulations
explicitly require actual payment of funeral expenses, executor's
fees, and other items specified in Section 2053(a).  /7/ If the exact
amount of an expenditure is not known when the return is filed, the
regulations, on certain conditions, permit the deduction of estimated
amounts, but only if the item is "ascertainable with reasonable
certainty, and will be paid." Treas. Reg. Section 20.2053-1(b)(3).
Estimated deductions are "subject to modification as the facts may
later require." Treas. Reg. Section 20.2053-3(b)(1) (executor's
commissions);  Treas. Reg. Section 20.2053-3(c)(1) (attorney's fees).
Such modifications may be effected either during the audit process or
in subsequent litigation.  See Treas. Reg. Sections 20.2053-1(b)(3),
20.2053-3(b)(1), (c)(1) and (c)(2).

   b. The vast majority of courts that have addressed the question
have interpreted these Code and regulatory provisions, correctly, to
require that post-death events be considered in determining the
deductibility of claims against the estate, just as they are
considered in determining the deductibility of funeral expenses, legal
fees, executor's commissions, taxes, and other items specified in
Section 2053(a).  The results in these cases do not turn on any
distinctive characteristics of the particular claims in question.  See
Estate of Chesterton, 551 F.2d at 282 (reviewing cases).  Rather,
their common thread is the principle that "(t)he claims which Congress
intended to be deducted were actual claims, not theoretical ones"
(Jacobs, 34 F.2d at 235), and that deduction of "merely technical
claims which disappear in the light of subsequent circumstances should
not be allowed" (Estate of Hagmann, 60 T.C. at 469).  This principle
follows directly from Section 2053's purpose -- to exempt from tax
that portion of the decedent's estate that does not pass to his
beneficiaries.  As the Second Circuit put it in Estate of Shively (276
F.2d at 375), this purpose obviously --

      would not be served if a deduction were permitted for claims * *
      * which, though having vitality as of date of death, could never
      be enforced as of the date the estate tax return is filed.  The
      property which might have been subject to such a claim were it
      enforceable is now certain to pass (to the decendent's
      beneficiaries).  To permit an estate such a deduction under
      these circumstances would be to prefer fiction to reality and
      would defeat the clear purpose of Section (2053).

   c. In rejecting the majority view as to the relevancy of post-death
events, the courts below (App., infra, 3a, 5a-6a, 17a-19a) relied
primarily on this Court's decision in Ithaca Trust Co. v. United
States, 279 U.S. 151 (1929).  That case involved the construction of
the predecessor of Section 2055, which governs the deduction for
charitable bequests.  The decedent's will left a life estate to his
wife, remainder to charity.  The wife died shortly after her husband
did, so that her life estate turned out to be much smaller -- and the
charitable remainder concomitantly larger -- than the actuarial
expectation.  279 U.S. at 154.  The Court nevertheless held that the
estate's charitable deduction had to be computed by subtracting the
actuarial value of the wife's life estate, computed at the time of her
husband's death, rather than by subtracting the smaller amount
actually paid to her.  Justice Holmes, writing for a unanimous Court,
acknowledged that, on "first impression it is absurd to resort to
statistical probabilities when you know the fact," but held this
impression "due to inaccurate thinking," since "(t)he estate so far as
may be is settled as of the date of the testator's death." 279 U.S. at
155.

   Ithaca Trust has no application here because it involved, not the
deduction for "claims against the estate" under Section 2053(a)(3),
but the deduction for charitable bequests under Section 2055.  Aside
from the Ninth Circuit, every court of appeals that has considered the
relevance of Ithaca Trust in the Section 2053(a) context has
distinguished it on this ground.  E.g., Estate of Chesterton, 551 F.2d
at 279-282;  Estate of Hagmann v. Commissioner, 60 T.C. 465, 466-467
(1973), aff'd per curiam, 492 F.2d 796 (5th Cir. 1974);  Jacobs, 34
F.2d at 235-236.  Compare Estate of Shively, 276 F.2d at 374 with id.
at 375-376 (Moore, J., dissenting).  /8/ The operation of Section
2053(a) precludes a generalized application of Ithaca Trust, since the
bulk of the expenses it makes deductible -- funeral expenses,
executor's commissions, attorney's fees and other expenses of
administering the estate -- plainly require consideration of
post-death events.  And the Tax Court below itself recognized that
Ithaca Trust can not apply generally in determing the deductibility of
"claims against the estate," since it acknowledged that post-death
events must necessarily be considered in determining the deductibility
of contingent or contested claims.  See App., infra, 22a.

   In thus distinguishing Ithaca Trust, the courts have properly given
effect, not only to the necessary differences in the operation of
Sections 2053 and 2055, but also to Congress's differing purposes in
enacting the two sections.  In providing a deduction for charitable
bequests, Congress intended to encourage philanthropic behavior by
testators.  "Thus, before a charitable deduction will be permitted, it
must be said that, looking at the face of the will and the
circumstances existing at the time of the testator's death, the
possibilities that the charity will not take are so remote as to be
negligible." Underwood v. United States, 407 F.2d 608, 610 (6th Cir.
1969).  Accord, Commissioner v. Estate of Sternberger, 348 U.S. 187,
190-200 (1955);  Henslee v. Union Planters National Bank & Trust Co.,
335 U.S. 595, 598-600 (1949);  Humes v. United States, 276 U.S. 487,
493-494 (1928);  Treas. Reg. Section 20.2055-2(b).  Because Congress's
purpose was to influence testator behavior, the fact that a charity
might take property because of fortuitous post-death events would not
warrant a "windfall" deduction for the estate.  See Underwood, 407
F.2d at 610;  Bach v. McGinnes, 333 F.2d 979, 984 (3rd Cir. 1964).  It
is thus proper, in computing the deduction for charitable bequests
under Section 2055, to focus exclusively on the terms of the will and
the circumstances existing at the time of death, as this Court did in
Ithaca Trust.

   Completely different considerations pertain in computing deductions
under Section 2053.  Expenditures to discharge tax obligations,
mortgages, attorney's fees, funeral expenses, and claims against the
estate have nothing to do with the intent of the decedent.  Nor, for
the most part, can such expenditures be computed accurately until they
are incurred (often after the decedent's death) and allowed (by the
probate court during administration of the estate).  Section 2053, in
short, inherently involves consideration of events occuring after the
testator's death.  As the Eighth Circuit wrote in 1929, shortly after
Ithaca Trust was decided, "(i)t was * * * claims presented and allowed
or otherwise determined as valid against the estate and actually paid
or to be paid that Congress had in mind, when it provided for the
deduction * * * of 'claims against the estate' in determining the
value of the net estate for taxing purposes." Jacobs, 34 F.2d at 235.

   3. The question presented in this case has considerable
administrative importance.  The IRS advises that 43 similar cases,
involving more than $6 million in estate tax, are now pending
administratively or in the courts.  The question arises in virtually
every estate tax audit, since almost every estate has claims against
it, the validity and amount of which may be affected by settlement,
compromise, waiver, untimely presentation, disallowance, or other
post-death events.  Orderly and even-handed administration of the
estate tax requires that the IRS be permitted to rely on objective
evidence, obtained during the course of probate proceedings, in
determining the deductibility of putative "claims against the estate."
The decision below seriously impairs its ability to do so.

                              CONCLUSION

   The petition for a writ of certiorari should be granted.

   Respectfully submitted.

   REX E. LEE

      Solicitor General

   GLENN L. ARCHER, JR.

      Assistant Attorney General

   ALBERT G. LAUBER, JR.

      Assistant to the Solicitor General

   ROBERT A. BERNSTEIN

   TERRY L. FREDRICKS

      Attorneys

   MARCH 1984

   /1/ Unless otherwise noted, all statutory references are to the
Internal Revenue Code of 1954 (26 U.S.C.), as amended (the Code or
I.R.C.).

   /2/ Although the Tax Court upheld the estate's position on the
Section 2053(a)(3) issue, it determined a deficiency against the
estate on the basis of other items (App., infra, 25a-29a), and its
determination in the latter respect was upheld by the court of appeals
(App., infra, 6a-7a).  The Commissioner presents the Section
2053(a)(3) question alone for review.

   /3/ The Tax Court attempted to distinguish these cases (App.,
infra, 23a-24a n.8) on the ground that the alimony was terminated
there "by a wholly volitional act, namely, remarriage," whereas the
alimony was terminated here by the surviving spouse's death.  This is
a distinction without a difference.  The Tax Court speculated that the
Chesterton and Shively courts might have rejected date-of-death
valuation because the "volitional" nature of the post-death event made
an actuarial estimate of the alimony claim difficult.  See App.,
infra, 24a n.8.  This speculation is unfounded.  In fact, the parties
stipulated as to the actuarial value of the surviving spouse's alimony
claim in each case.  See 551 F.2d at 278;  276 F.3d at 373-374.  See
also Gowetz v. Commissioner, 320 F.2d 874, 875 (1st Cir. 1963) (noting
that the parties had stipulated as to the actuarial value of the
surviving spouse's alimony claim, but finding it unnecessary to reach
the question presented here).  Moreover, even if the "volitional"
nature of the post-death event would complicate date-of-death
valuation on the facts of a particular case, that difficulty would not
make any difference in determining whether post-death events are
relevant in valuing "claims against the estate" as a matter of law.
Obviously, a claim terminable by a "volitional" act would have to be
evaluated in some way for estate tax purposes if the terminating event
has not occurred;  the question there, as here, is whether that
hypothetical valuation should still govern in cases where a post-death
event has resulted in actual payment of the claim in full.

   /4/ The Tax Court attempted to distinguish some of these cases
(App., infra, 16a, 19a-22a) on the theory that they involved
"potential, unmatured, contingent, or contested claim(s).," and that
post-death events were considered in determining the claims'
enforceability, as opposed to their valuation.  This distinction is
illusory.  In each of the cited cases, the claim in question was
neither contested nor hypothetical, but was valid and enforceable at
the time of the testator's death;  the fact that a creditor
subsequently compromises, waives, or fails to present his claim does
not make it "contingent" retroactively.  See, e.g., Estate of Hagmann,
60 T.C. at 466, 468.  Where claims for future payments are concerned,
moreover, the difference between determining the value of an
enforceable claim, and determining the enforceability of a contingent
claim, is often hard to see.  Almost any claim could be styled
"contingent," or not, depending on whether the post-death event is
labeled a "condition precedent" or a "condition subsequent" to
liability.  (In the present case, for example, James's claim for
support could be viewed as an "enforceable claim" to alimony for life,
or as a "contingent claim" to an indeterminate number of monthly
alimony payments, each conditioned on his continued survival.  Under
either view, James could have compromised, waived, or failed to
present his claim, no less than the creditors in the cases the Tax
Court sought to distinguish.) The language of Section 2053 provides no
basis for treating "claims against the estate" differently depending
on whether their valuation or their enforceability is at issue.  And
tax policy does not favor an interpretation that causes the outcome to
turn on such metaphysical distinctions.

   /5/ Indeed, this Court, construing the predecessor of Section
2053(a), has held that "(t)he interpretation of 'administration
expenses' under Section 812(b)(2) (of the 1939 Code) involves
substantially the same considerations that determine the
interpretation of 'claims against the estate' under Section
812(b)(3)." United States v. Stapf, 375 U.S. 118, 134 (1963).

   /6/ See I.R.C. Section 2053(b) (permitting deduction for expenses
incurred in administering property not subject to claims if "such
amounts are paid" before the statute of limitations expires);  I.R.C.
Section 2053(d)(1)(B) (permitting deduction for death taxes "imposed
by and actually paid to" foreign countries).

   /7/ See, e.g., Treas. Reg. Section 20.2053-2(a) (allowing deduction
of such amounts for funeral expenses as "are actually expended");
Treas. Reg. Section 20.2053-3(a) (allowing deduction for such
administration expenses "as are actually and necessarily, incurred");
Treas. Reg. Section 20.2053-3(b)(1) and (c)(1) (allowing deduction for
executor's commissions and attorney's fees "in such an amount as has
actually been paid or * * * at the time of filing the estate tax
return may reasonably be expected to be paid");  Treas. Reg. Section
20.2053-6(d) (allowing deduction for certain accrued gift taxes "to
the extent that the obligation is enforced against the decedent's
estate");  Treas. Reg., Section 20.2053-10(a) (allowing deduction for
death taxes "actually paid to any foreign country").

   /8/ The Seventh Circuit, the only other court of appeals that has
held post-death events irrelevant in computing the deduction for
claims against the estate, based its holding on its interpretation of
Section 2053's predecessor, and did not mention Ithaca Trust.  See
Commissioner v. Strauss, 77 F.2d at 405.

                               APPENDIX