Question

Before her death, Lucy entered into the following transactions. Lucy borrowed $600,000 from her brother, Irwin, so that Lucy could start a business. The loan was on open account, and no interest or due date was provided for. Under applicable state law, collection on the loan was barred by the statute of limitations before Lucy died. Because the family thought that Irwin should recover his funds, the executor of the estate paid him $600,000. Lucy promised her sister, Ida, a bequest of $500,000 if Ida would move in with her and care for her during an illness (which eventually proved to be terminal). Lucy never kept her promise; her will was silent on any bequest to Ida. After Lucy’s death, Ida sued the estate and eventually recovered $600,000 for breach of contract. Partial list of research aids: 2053. Reg. §§ 20.2053–4(d)(4) and (7). Estate of Allie W. Pittard, 69 T.C. 391 (1977). Joseph F. Kenefic, 36 TCM 1226, T.C.Memo. 1977–310. Hibernia Bank v. U.S., 78–2 USTC ¶13,261, 42 AFTR 2d 78–6510, 581 F.2d 741 (CA–9, 1978).

Prepare a Tax File memo for Bill Jones, Executor, of the Estate, addressing each transaction. Prepare a Client letter for Bill Jones with your conclusions.

Answer 1

Prepare a Tax File memo for Bill Jones, Executor, of the Estate, addressing each transaction. Prepare a Client letter for Bill Jones with your conclusions.

For § 2053 deduction purposes, the claims of persons related to the decedent are highly suspect—particularly in this case where the loan is not evidenced by a writing. Here, however, the existence of the loan appears to be corroborated by members of the family. But even if the loan’s existence is recognized, the fact that a repayment can be avoided by invoking the statute of limitations, will preclude its deductibility under § 2053. See Reg. §§ 20.2053–4(d)(4) and (7).

Ida’s recovery of $600,000 should be deductible as a claim against the estate under § 2053(a)(3). In essence, it was in the nature of a debt that Lucy owed at the time of her death.

Since Ida’s recovery represents payment for services she rendered to Lucy, such amount is includible in her gross income under § 61(a)(1). See Joseph F. Kenefic (citation given in the research aids).