## Facts

- Algerine Allen Smith owned mineral interests leased to Exxon Corporation, which paid royalties based on regulated and market prices for oil and gas.
- After disputes over federal price controls, Exxon asserted it could seek reimbursement from royalty owners for allegedly excessive royalties if Exxon was liable for overcharges.
- Before Smith’s death, a federal district court opinion indicated Exxon had a legally valid reimbursement claim against royalty owners, but the amount remained unliquidated.
- Smith died on November 16, 1990; Exxon asserted an approximately $2.48 million claim against her estate.
- In 1991, the district court ruled in Exxon’s favor on liability and a damages calculation of $2,482,719 was submitted.
- The estate filed its federal estate tax return in July 1991 and claimed an I.R.C. § 2053(a)(3) deduction of $2,482,719 for Exxon’s claim.
- In February 1992, the estate settled with Exxon for $681,840 and paid that amount in March 1992.
- The IRS allowed only the settlement amount as the deduction and issued a deficiency for the difference.

## Issues

1. Under I.R.C. § 2053(a)(3), must a deduction for a contested or unliquidated claim be measured by the amount later paid, or by the claim’s fair market value as of the decedent’s date of death?
2. May post-death events, including the eventual settlement, be used to determine the deductible amount of a claim against the estate?

## Decision

- The Fifth Circuit reversed the Tax Court and remanded.
- The court held that the deductible amount for a contested or contingent claim under § 2053(a)(3) is the claim’s fair market value as of the date of death.
- The court instructed that, in valuing the claim at death on remand, the Tax Court may not admit or consider post-death events, including the later settlement amount.
- The court rejected both extremes: deducting the full asserted claim amount simply because it was claimed, and limiting the deduction to the later settlement payment.

## Legal Principles

- Federal estate tax valuation is fixed at the decedent’s date of death; later events generally do not retroactively determine value.
- A contested or uncertain claim can have a determinable fair market value at death based on then-known facts and probabilities.
- For § 2053(a)(3) “claims against the estate,” the proper measure is the claim’s date-of-death fair market value, not the amount ultimately paid after death.
- Post-death occurrences (such as litigation outcomes or settlements) are inadmissible for determining the claim’s date-of-death value, even if they would make valuation easier.

## Conclusion

The Fifth Circuit required that a § 2053(a)(3) deduction for a contested claim be based on the claim’s fair market value at the decedent’s death and barred reliance on post-death settlement or litigation developments to set the deductible amount.


Estate of Smith v. Commissioner, 198 F.3d 515 (5th Cir. 1999)