Ninth Circuit Finds Palimony Claim is an Effective Estate Tax Deduction

For twenty-two years, Bernard Shapiro and Cora Jane Chenchark lived in the same home. The two individuals never married, but Chenchark took care of the couple’s home while Shapiro paid the expenses. Shapiro also paid Chenchark a weekly allowance.

In 1999, Chenchark filed a palimony suit in Nevada for $5 million against Shapiro after she discovered he was with another woman. In the palimony suit, Chenchark alleged that Shapiro promised to support her for the rest of her life. The suit was brought for breach of fiduciary duty and breach of contract. Two years after Chenchark filed the suit, Shapiro passed away. Despite the fact that Shapiro’s will included provisions for Chenchark, she decided to challenge the will. Shapiro’s estate filed for summary judgment, a jury found in favor of the estate, and summary judgment was granted. Both parties settled for $1,012,641 following the granting of summary judgment.

As a result of Chenchark’s claim, Shapiro’s estate sought to reduce the taxable estate. In June 2003, Shapiro’s estate attempted to amend its earlier tax return under which it had paid $10,602,238 in generation-skipping and estate taxes. After the IRS disallowed the reduction, the estate filed suit in federal district court, claiming a $4,863,480 refund was owed. The government’s motion for summary judgment was granted based on the court’s finding that Chenchark produced no evidence proving she contributed more than just love, support, and management of Shapiro’s household.

On appeal, the Court of Appeals for the Ninth Circuit found error in the district court’s ruling. The Ninth Circuit disagreed with the lower court’s finding that Chenchark’s contributions were valueless, instead stating that the contributions could have value as a matter of both fact and law. The Ninth Circuit also noted that both California and Arizona courts have found homemaking services to be sufficient consideration to form a binding 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.

See Gary Rider, J.D. and Darlene Pulliam, CPA, PH.D, Palimony Claim is a Valid Estate Tax Deduction, Journal of Accountancy, June 2011.

Special thanks to Jim Hillhouse (WealthCounsel) for bringing this article to my attention.