## Facts

- Quinto DePaoli, Sr., a New Mexico resident, died in 1987.
- He was survived by his wife, Soila DePaoli, and his son, Quinto DePaoli, Jr., who had two nonmarital children.
- Quinto Sr.’s will left his entire estate to Quinto Jr., and the will was admitted to probate in New Mexico.
- Before the federal estate tax return was due, Soila and Quinto Jr. initiated state-court proceedings seeking to set aside the probated will, alleging the original will had been destroyed and that Quinto Sr. intended a different disposition.
- The state-court proceeding resulted in an arrangement under which Quinto Jr. would take $600,000 and Soila would receive the balance of the estate.
- On the federal estate tax return, the estate treated Quinto Jr. as having disclaimed his inheritance above $600,000 and treated the remaining property as passing to Soila (through intestate succession) and qualifying for the federal estate tax marital deduction.
- The IRS denied the marital deduction for the portion passing to Soila, assessed additional estate tax, treated the transfer of value from Quinto Jr. to Soila as a taxable gift, and imposed an addition to tax under I.R.C. § 6651(a)(1) on Quinto Jr. for failing to file a gift-tax return.
- The Tax Court ruled for the Commissioner, concluding the disclaimer was not a qualified disclaimer under I.R.C. § 2518; Quinto Jr. appealed.

## Issues

1. Whether Quinto Jr.’s renunciation of the estate above $600,000, effectuated through the state probate proceeding, satisfied I.R.C. § 2518 as a qualified disclaimer so that the disclaimed property was treated as passing from the decedent to Soila and qualified for the estate tax marital deduction.
2. If the renunciation was not a qualified disclaimer, whether the value received by Soila was a taxable gift from Quinto Jr., supporting the gift-tax assessment and the § 6651(a)(1) addition to tax for failure to file a gift-tax return.

## Decision

- The Tenth Circuit reversed the Tax Court.
- The court held that Quinto Jr.’s renunciation operated as a qualified disclaimer under I.R.C. § 2518 in the circumstances presented.
- Because the disclaimer was qualified, the property above $600,000 was treated as passing from Quinto Sr. to Soila for federal tax purposes, and the marital deduction applied to that portion.
- The court rejected the Commissioner’s gift-tax theory and set aside the related § 6651(a)(1) addition to tax premised on a failure to file a gift-tax return.

## Legal Principles

- State law determines the nature of the parties’ property interests in an estate; federal law determines the tax results that follow from those state-law interests.
- Under I.R.C. § 2518, a qualified disclaimer is an irrevocable refusal to accept an interest in property that meets statutory requirements, including timing and that the disclaimed interest passes without direction by the disclaimant.
- When a beneficiary’s renunciation satisfies § 2518, the disclaimed property is treated as if it passed directly from the decedent to the next recipient under governing state law, which can permit an estate tax marital deduction where the surviving spouse takes the disclaimed property.
- If a renunciation is a qualified disclaimer, the disclaimant is not treated as making a transfer of the disclaimed property; therefore, gift tax and a penalty for failing to file a gift-tax return cannot rest on the theory that the disclaimant made a taxable gift.

## Conclusion

The Tenth Circuit held that Quinto Jr.’s renunciation of the portion of his father’s estate above $600,000 qualified under I.R.C. § 2518, so the disclaimed property was treated as passing from Quinto Sr. to Soila and was eligible for the marital deduction; as a result, the Commissioner’s gift-tax assessment and the § 6651(a)(1) addition to tax were improper, and the Tax Court’s judgment was reversed.


DePaoli v. C.I.R., 62 F.3d 1259 (1995)