Tax Court in Brief | Estate of Spizzirri v. Commissioner | Gifts, Bequests, Deductible Expenses, and Estate Tax

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The Tax Court in Brief – March 6th – March 10th, 2023

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Tax Litigation:  The Week of March 6th, 2023, through March 10th, 2023

Estate of Spizzirri v. Comm’r, T.C. Memo 2023-25 | February 28, 2023 | Urda, J. | Dkt. No. 19124-19 


Short Summary. Decedent was a wealthy lawyer and investor. During the last few years of his life, decedent paid significant sums to one of his daughters, one of his stepdaughters, and multiple women with whom he was either socially or romantically connected.

At the time of his death, decedent was married to his fourth wife. Decedent and wife had entered into a prenuptial agreement, which was subsequently amended over the course of several years. As amended, the prenuptial agreement provided that wife would receive at decedent’s death the right to reside at one of decedent’s properties for five years free of charge and that decedent’s will would include a bequest of $1,000,000 to each of wife’s daughters. This provision of the prenuptial agreement acted as a “waiver and release . . . of all rights in and to each other’s estate under any rule or law . . . entitling a surviving spouse to all or any part of the estate or property of a deceased spouse or to any interest therein.”

Decedent passed away in 2015. Decedent’s will did not include the payments reflected in the prenuptial agreement. Wife and her daughters brought claims against decedent’s estate. Eventually, the estate entered into a binding settlement with wife and paid each of wife’s daughters $1,000,000. The estate reported these payments to the Internal Revenue Service on Forms 1099-MISC.

The estate’s Form 706, United States Estate (and Generation Skipping Transfer) Tax Return, was due on February 10, 2016. On February 19, 2016, the estate requested a six-month extension to file the return, which was granted, extending the deadline to August 12, 2016. In July 2016 the estate’s tax return preparer requested a second extension of the filing deadline because of the ongoing probate litigation with wife. The IRS informed the estate that a second extension could not be granted as a matter of law.

On November 29, 2016, shortly after the conclusion of the probate litigation, the estate filed its federal estate tax return. The estate reported zero dollars in adjusted taxable gifts. It deducted as claims against the estate both the $3 million in payments to wife’s daughters and the appraised value of wife’s right to reside in one of decedent’s properties for five years. The estate further claimed administration expense deductions, including deck repairs for one of decedent’s properties.

The IRS issued a notice of deficiency determining a deficiency in estate tax of $2,251,189 as well as an addition to tax under section 6651(a)(1) of $450,238 for failure to timely file. The notice increased decedent’s lifetime adjusted taxable gifts from zero to $193,441. The notice disallowed the deductions claimed for the payments to wife’s children and wife’s right to reside in one of decedent’s properties. It likewise disallowed the administration expense deductions for the deck repairs for one of decedent’s properties.

Key Issues

Primary Holdings

Key Points of Law

Insights: Among the insights that can be gleaned from this case, perhaps the most fundamental are 1) a taxpayer should always maintain documentation supporting their claims (in this case, that certain payments were not taxable gifts or that certain repairs were necessary preserving the estate’s property); 2) legal agreements (such as prenuptial agreements) can have an affect on characterization of payments for tax purposes; and 3) if a taxpayer files a tax return late, they are likely going to get hit with penalties unless they can show reasonable cause.