The U.S. Court of Appeals for the Ninth Circuit reversed the U.S. District Court for the District of Nevada, saying a palimony claim could be a valid deduction from a taxable estate and that the district court had misconstrued Nevada law regarding contracts between cohabitating individuals.
Bernard Shapiro and Cora Jane Chenchark lived together for 22 years and never married. Chenchark provided homemaking services and Shapiro paid the living expenses, including a weekly allowance to Chenchark. Chenchark brought no assets to the relationship and did not work outside the home. Allegedly, Shapiro promised to take care of her for the rest of her life.
In 1999, after learning that Shapiro was involved with another woman, Chenchark filed a palimony suit in Nevada state court against Shapiro for approximately $5 million, alleging breach of contract and breach of fiduciary duty. Shapiro died in 2001 during the palimony suit. Shapiro’s will made provisions for Chenchark, but she was dissatisfied with the provisions and challenged the will. A jury found in favor of Shapiro’s estate in the palimony action, and the court granted the estate’s motion for summary judgment in the will contest. The parties later settled both actions for a total value of $1,012,641.
Shapiro’s estate had earlier filed the estate tax return and paid $10,602,238 in estate and generation-skipping taxes. In June 2003, the estate filed an amended estate tax return seeking a reduction of the taxable estate based on Chenchark’s claim. The IRS disallowed the reduction. In August 2006, the estate filed a suit in federal district court seeking a refund of $4,863,480.
The district court ruled in favor of the government’s summary judgment motion, stating no evidence existed that Chenchark ever contributed anything other than love, support and management of Shapiro’s household. The court looked at Western States Construction Inc. v. Michoff, 840 P.2d 1220 (Nev. 1992). In that case, Max and Lois Michoff cohabited and ran a business together. Lois changed her last name to Michoff, and Max held her out as his wife. The Nevada Supreme Court held that unmarried couples who cohabit have the same right as married couples to contract with each other regarding their property.
In contrast to Lois Michoff, the district court said, Chenchark did not provide sufficient consideration to support a contractual agreement, and thus there was no contract between her and Shapiro. The money she sought was a gift, not an enforceable obligation and therefore did not qualify as a deduction under section 2053.
The Court of Appeals for the Ninth Circuit found the district court’s conclusion erroneous because, it said, the Nevada Supreme Court in Western States Construction Inc. did not consider the type or amount of consideration necessary to support a contractual agreement. The Ninth Circuit also did not agree that Chenchark’s contribution to the relationship had no value to support an agreement. Her services could, as a matter of law and fact, have a value, it said, noting that Arizona and California have recognized homemaking services as sufficient consideration for a property-sharing agreement between cohabitants.
The Ninth Circuit reversed and remanded the case, instructing the district court to determine the value of Chenchark’s claim at the date of Shapiro’s death and the corresponding allowable estate tax deduction.
Estate of Bernard Shapiro v. U.S. , docket no. 08-17491 (9th Cir. 2/22/2011)
By Gary Rider, J.D., clinical assistant professor of business law, and Darlene Pulliam, CPA, Ph.D., Regents Professor and McCray Professor of Business, both of the College of Business, West Texas A&M University, Canyon, Texas
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