Tuesday, February 22, 2011

Estate of Bernard Shapiro v. U.S. (9th Cir. - Feb. 22, 2011)

I occasionally teach a class called "The Law of Love."  If I taught a class called "The Tax Law of Love," this would assuredly be a case I'd assign my students.

Thankfully, I don't.  Especially because even after thinking about it for quite a bit, I'm not sure what the right answer should be.

It's your basic palimony case, but with a twist.  Bernard Shapiro and Cora Jean Chenchark live together for 22 years but never married.  When Bernard steps out with another woman, they break up.  At which point Cora files a palimony suit.  Needless to say, Bernard's rich, and supported Cora during the relationship, and feels like Cora's already gotten her due (and more).  Whereas Cora feels like she cooked, cleaned up after the maid, and provided love and support under an express and implied contract that they'd pool their assets.

The case goes to trial.  The jury finds for Bernard.  Cora appeals.  While the appeal's pending, Cora settles for a million bucks.

You'd think that'd be the end of it.  But here's the twist:  Bernard died prior to the palimony trial.  And the settlement was to dismiss the palimony claim as well as Cora's challenge to Bernard's will.  Now, you might still think that none of this matters.  The lawsuit's over.  True enough.

But Bernard's estate paid estate tax.  Of over $10 million.  After the whole thing with Cora was concluded, the estate filed a federal tax refund claim for approximately $5 million.  Claiming that the estate was actually worth less because Cora had a claim against the estate -- her palimony suit -- that diminished the value of the estate.

The trial court granted summary judgment to the U.S. on multiple grounds, holding (1) Cora never had a valid claim since all she gave was love and support, and that's not adequate consideration; (2) that there was in fact no contract between the parties (consistent with the jury's verdict); and (3) that the estate was in any event judicially estopped from arguing otherwise since all of the above was exactly what they claimed in the underlying state court palimony trial.  Successfully.

The Ninth Circuit reverses.

Judge Silverman writes the majority opinion, holding that Cora's cooking etc. constitutes valid consideration under Nevada law and that there's a genuine issue of material fact about the value of Cora's claim, which may in fact entitle the estate to a refund.  Judge Tashima dissents, contending that regardless of state law, federal tax law doesn't allow deductions for palimony claims where the only contribution is (as here) the type of stuff one normally gives to one's companion.

I'm torn.  On the one hand, Judge Silverman seems right that we look towards Nevada law to see if Cora had a potentially valuable claim, which (at the time of Bernard's death) she did.  She might, after all, have won at trial.  If she had a claim, intrinsically, that diminishes the estate.  Hence the tax rightly due.

On the other hand, Judge Tashima seems right that federal tax law could easily take a different approach than state palimony law, and prefer (as it manifestly does) marriages.  It's one thing, Judge Tashima says, to say on the merits that palimony should be a valid cause of action.  That protects the companion, effectuates the intent of the parties, etc.  But it's another thing to provide a tax deduction for that sort of stuff.  Federal law might well not do so.  Perhaps for very good reasons, including the fact that allowing such claims would open up a vast area of potential tax-minimizing collusion.  You and I live together for 20 years, I find out I have a terminal illness, you file a palimony lawsuit (which I promptly settle), and boom, no estate tax.  Or do the same thing after I die.  Seems to me like creative and/or loving companions could find pretty good ways to avoid taxes if these sorts of things indeed create deductions.

Now maybe that's the inherent nature of taxes.  Rife for collusion.  But I'm not sure.

Given my uncertainty, I inherently struggle with trying to create a "solution" -- even if it's a nonjudicial one.  But can't come up with anything rock solid.  For example, one thought I had would be to create various presumptions.  Like "The rule is that you automaticaly split your assets (or income) after five years of living together unless you contract in writing otherwise."  Or perhaps have a "check-the-box" form that you have to file as part of your taxes (and disclose to the other side) if you claim to own someone else's assets/income as part of a palimony contract that you believe exists. 

There's part of me that wants to solve this problem in advance.  When the parties are actually together.  To force them to expressly confront -- and mutually disclose -- the difficult problem of "What happens if we split up?  What's our agreement?"  Because they should.  Even though it may be a difficult conversation.  If only because the alternative -- which is having that agreement after you split up, or (as here) catch your partner with another person -- is much worse (and much less accurate) than dealing with the issue in advance.

But is the candle worth the wick?  It's the rich person's fault if they don't get a signed contract, right?  Their bad.  At the same time, don't we want to protect the poorer partner if in fact there's an agreement, if only to make sure it's in writing and hence clearly going to be enforced?  Don't we also want to avoid unjustly enriching people (perhaps like Cora here) who didn't, in fact, have a contract, but who are able to get past summary judgment and/or persuade a jury and/or extort a settlement?  In short, aren't their public policy interests even beyond the private interests of the parties?  Don't we want to do what's right?

As I said in the beginning, and as one can surely see, I'm torn.  I'm not sure what the answer is.  Either in the present case or more generally.

Which makes it interesting.  Even if I'm not, in fact, teaching The Tax Laws of Love.