## Facts

- Antonio J. Palumbo created the A.J. and Sigismunda Palumbo Charitable Trust in 1974.
- Palumbo executed multiple wills over time; his prior wills consistently left the residuary estate to the Charitable Trust.
- Palumbo executed a final will in 1999 that omitted a residuary clause.
- After Palumbo died in 2002, his son asserted the residuary estate passed by intestacy because of the missing residuary clause.
- The Trust asserted the omission was a scrivener’s error and that Palumbo intended the Trust to receive the residue, consistent with his earlier wills.
- The parties litigated in Pennsylvania Orphans’ Court and reached a settlement approved by that court.
- Under the settlement, the son received $5.6 million and certain real property; the Charitable Trust received $11,721,141 from the residuary estate.
- The Orphans’ Court found the omitted residuary clause was a scrivener’s error and approved the settlement as reflecting Palumbo’s charitable intent.
- The Estate filed a federal estate tax return claiming an I.R.C. § 2055 charitable deduction for the $11,721,141 distribution to the Trust.
- The IRS disallowed the deduction, asserting the son was the residuary taker under state intestacy rules and the Trust’s receipt was therefore a transfer from the son, not from the decedent or the estate.
- The Estate paid the assessed tax and sued for a refund; both sides moved for summary judgment.

## Issues

1. Whether the estate’s $11,721,141 distribution to the Charitable Trust under a court-approved settlement qualifies for the federal estate tax charitable deduction under I.R.C. § 2055.
2. Whether federal tax law should respect a state court decree approving a settlement that construed or reformed a will to correct a scrivener’s error and effectuate the decedent’s intent.

## Decision

- The court granted summary judgment to the Estate and denied the government’s cross-motion.
- The court held the Estate was entitled to a charitable deduction under § 2055 for the $11,721,141 transferred to the Charitable Trust.
- The court ordered a refund of estate taxes attributable to the disallowed deduction, plus statutory interest.
- The court treated the Trust’s recovery as arising from the decedent’s testamentary plan as recognized under state law, not as a voluntary post-death gift by the son.

## Legal Principles

- For federal estate tax purposes, property interests passing at death are determined by state law; federal law then applies to the state-defined interests.
- A bona fide, non-collusive state court adjudication resolving an actual dispute over property rights may be given effect in determining whether a transfer is “by the decedent” or “from the estate” under I.R.C. § 2055.
- A court-approved settlement that implements an established testamentary plan and corrects an admitted scrivener’s error can support characterization of the charitable transfer as stemming from the decedent’s will, rather than from an heir’s independent transfer.
- Post-death settlements are less likely to be disregarded for tax purposes when they resolve genuine adversarial litigation and align with a demonstrated pre-death pattern of charitable intent, rather than retroactively creating or enlarging a charitable interest for tax reasons.

## Conclusion

The court allowed the Estate’s § 2055 charitable deduction because the state court’s approval of a settlement correcting a scrivener’s error defined the Trust’s entitlement to the residuary estate as part of the decedent’s testamentary scheme, making the transfer deductible as a charitable bequest from the decedent’s estate.


Palumbo v. United States, 788 F. Supp. 2d 384 (W.D. Pa. 2011)