                      108 T.C. No. 20



                  UNITED STATES TAX COURT


ESTATE OF ALGERINE ALLEN SMITH, DECEASED, JAMES ALLEN SMITH,
 EXECUTOR, Petitioner v. COMMISSIONER OF INTERNAL REVENUE,
                         Respondent



  Docket Nos. 19200-94, 3976-95.            Filed June 4, 1997.



       During 1975 through 1980, decedent received
  royalties from Exxon, which she reported as income. In
  1983, Exxon was ordered to make restitution for
  overcharging its customers. Exxon made restitution and
  in 1988 filed suit in District Court against decedent
  and other royalty interest owners for reimbursement of
  the portion of the royalties attributable to Exxon's
  overcharges. Decedent contested Exxon's claim.

       Decedent died on Nov. 16, 1990. On Feb. 15, 1991,
  the District Court determined that the royalty interest
  owners were liable to Exxon for restitution of the
  portion of royalties based on Exxon's overcharges. The
  District Court referred the calculation of the amount
  of this liability to a special master. In April 1991,
  Exxon claimed that P owed a total of $2,482,719. On
  its Federal estate tax return, filed July 12, 1991, P
  claimed a deduction for $2,482,719 pursuant to sec.
  2053(a)(3), I.R.C. On Feb. 10, 1992, P and Exxon
                               - 2 -

     entered into a settlement agreement, which resolved
     Exxon's claim for a total amount of $681,839. R
     determined that P's sec. 2053(a)(3), I.R.C., deduction
     was limited to $681,839.

          As a result of paying Exxon an amount that
     decedent had previously reported as income, P is
     entitled to tax relief pursuant to the provisions of
     sec. 1341(a), I.R.C. R determined that the income tax
     benefit derived by P through application of sec.
     1341(a), I.R.C., was an asset includable in the gross
     estate.

          Held: Exxon's claim against decedent was
     uncertain and unenforceable as of the date of
     decedent's death. P's deduction pursuant to sec.
     2053(a)(3), I.R.C., is limited to the amount paid in
     settlement of the claim.

          Held, further: The income tax benefit derived by
     P as a result of the application of sec. 1341(a),
     I.R.C., is an asset includable in the gross estate.
     P's deduction pursuant to sec. 2053(a)(3), I.R.C., of
     its liability to Exxon and its sec. 1341(a), I.R.C.,
     relief based on payment of that liability are so
     inextricably linked that it would be inappropriate to
     consider one in the determination of the taxable estate
     while excluding the other.


     Michael C. Riddle and Harold A. Chamberlain, for petitioner.

     Carol Bingham McClure, for respondent.


                              OPINION


     RUWE, Judge:   In docket No. 19200-94, respondent determined

an estate tax deficiency of $663,785 and an accuracy-related

penalty under section 6662(a)1 in the amount of $132,785.2    In

     1
      Unless otherwise indicated, all section references are to
the Internal Revenue Code in effect as of the date of decedent's
death, and all Rule references are to the Tax Court Rules of
                                                   (continued...)
                                   - 3 -

docket No. 3976-95, respondent determined a deficiency of

$558,272 in petitioner's Federal income tax for 1992.       The

deficiency determined in docket No. 3976-95 represents an

alternative position taken by respondent to protect the

Government's interest in the event its position in docket No.

19200-94 is not sustained.

       After concessions, the issues remaining for decision are:

(1) Whether petitioner's section 2053(a)(3) deduction for a claim

against the estate is limited to the amount for which the claim

was settled following decedent's death; (2) if petitioner is

entitled to a section 2053(a)(3) deduction for the entire amount

claimed on the Federal estate tax return, whether petitioner

realized discharge of indebtedness income pursuant to section

61(a)(12) when it settled the claim in question for a lesser

amount; and (3) whether the income tax benefit derived by

petitioner as a result of the application of section 1341(a) is

an asset which increases the gross estate.


                                Background


       This case was submitted fully stipulated pursuant to Rule

122.       The stipulation of facts, supplemental stipulation of


       1
      (...continued)
Practice and Procedure.
       2
      Respondent has conceded the accuracy-related penalty under
sec. 6662(a).
                                 - 4 -

facts, and stipulation of settled issues are incorporated herein

by this reference.

     Algerine Allen Smith (decedent) died testate on November 16,

1990, in Texas.   James Allen Smith, decedent's son, is the

executor of the estate.   Mr. Smith resided in Larchmont, New

York, at the time he filed the petition in this case.

     On April 23, 1970, decedent, as lessor, entered into an Oil,

Gas and Mineral Lease with Humble Oil & Refining Co. (Humble).

Pursuant to this lease agreement, decedent retained a royalty

interest in oil and gas production obtained from an 80-acre tract

of land in Wood County, Texas.    On April 23, 1970, Jessamine and

Frankie Allen, decedent's aunts, also entered into oil and gas

leases with Humble, pursuant to which they retained royalty

interests from the oil and gas production obtained from certain

tracts of land in Wood County.    Humble was subsequently acquired

by Exxon Corporation (Exxon).

     Jessamine and Frankie Allen died in 1979 and 1989,

respectively, and decedent served as the independent executrix of

both estates.   Upon Jessamine's death, decedent inherited a

portion of Jessamine's interest in the leased property.   Upon

Frankie's death, decedent inherited all Frankie's interest in the

leased property, as well as the remaining portion of Jessamine's

interest which Frankie had previously inherited.

     Decedent's, Frankie's, and Jessamine's interests in the Wood

County property were part of a unit formation known as the
                               - 5 -

Hawkins Field Unit (HFU).   The Texas Railroad Commission, which

regulates oil and gas operations in Texas, approved the HFU for

unitization on November 26, 1974.   In a unit agreement, effective

January 2, 1975, interest owners in the area utilized oil and gas

rights pertaining to the unitized formation.    The unit agreement

embraces interests of approximately 2,200 royalty interest

owners3 and 300 working interest owners.   Exxon is the sole unit

operator of the HFU and possesses the exclusive right to conduct

HFU operations pursuant to a unit operating agreement between

Exxon and the other working interest owners.4

     During the early operation of the HFU, the Federal

Government, acting initially through the Federal Energy

Administration and later through the Department of Energy (DOE),

regulated the price of domestic crude oil through the application

of two-tier price regulations under 10 C.F.R. secs. 212.73 and

212.74 (1975).   Producers were required to sell "old" crude oil

at the lower tier price and were allowed to sell "new" crude oil

at a higher price.

     In June 1978, the DOE filed suit against Exxon as operator

of the HFU.   The DOE contended that Exxon had misclassified crude

oil produced from the HFU, which resulted in overcharges in

violation of the DOE's petroleum price regulations.   Exxon

     3
      Decedent, Jessamine, and Frankie were royalty interest
owners.
     4
      Exxon was the HFU's largest working interest owner.
                                - 6 -

vigorously defended against the DOE's allegations.     Nevertheless,

on October 9, 1980, Exxon announced to the HFU interest owners

that it would begin to withhold amounts owed to the interest

owners under Exxon's posted prices for the oil produced.     In

justification for tendering less than the amount due under

Exxon's classification of the oil, Exxon stated that it desired

to create a fund for payment of any liability it might eventually

have to the DOE.   The amounts withheld represented the difference

between the higher price charged by Exxon and the lower price the

DOE contended was the maximum lawful selling price.     Exxon

withheld these amounts from October 1, 1980, to January 28, 1981,

the date on which oil prices in the United States were

decontrolled.

     In response, certain HFU royalty interest owners filed suit

against Exxon in October 1980 in the U.S. District Court for the

District of Texas (Tyler Division), arguing that Exxon was

required to pay them the full amount of their royalty.     Jarvis

Christian College v. Exxon Corp., docket No. TY-80-432-CA (the

Jarvis Christian litigation).   On February 6, 1981, decedent,

individually and as executrix for the estate of Jessamine Allen,

along with Frankie and other members of the Allen family (the

Allen parties), filed a motion to intervene as party plaintiffs

in the Jarvis Christian litigation.     On February 24, 1981, the

District Court filed an order granting leave to intervene.
                               - 7 -

     On March 25, 1983, the U.S. District Court for the District

of Columbia ruled that Exxon had violated the two-tier pricing

regulations.   United States v. Exxon Corp., 561 F. Supp. 816

(D.D.C. 1983) (Exxon I).   The District Court entered judgment in

favor of the DOE and ordered Exxon to make restitution to the

U.S. Treasury (Treasury) of the full amount of HFU overcharges

plus interest arising from sales of HFU crude oil for the period

January 1, 1975, through January 27, 1981.    The total amount of

the judgment exceeded $895 million.    On July 1, 1985, the

Temporary Emergency Court of Appeals affirmed the District Court.

United States v. Exxon Corp., 773 F.2d 1240 (Temp. Emer. Ct. App.

1985).

     On February 27, 1986, Exxon paid the judgment, which

amounted to just under $2.1 billion with interest.    The amount

paid consisted of $895,501,164 in overcharges, $771,997,881 in

prejudgment interest, and $428,273,813 in postjudgment interest.

     On January 26, 1988, Exxon filed suit in the U.S. District

Court for the Eastern District of Texas (Tyler Division) against

the owners of royalty and mineral interests in the HFU.       Exxon v.

Arnold, docket No. TY-88-110-CA (E.D. Tex., Jan. 26, 1988).

Exxon's suit was consolidated with the Jarvis Christian

litigation at docket No. TY-80-432-CA (Consolidated Action).5

Exxon sought reimbursement from the interest owners of the

     5
      Hereinafter, we shall refer to this consolidated action as
the Jarvis Christian litigation.
                              - 8 -

amounts which it had paid to the Treasury as a result of the DOE

litigation.

     Decedent, individually and as the executrix of the estate of

Jessamine Allen, and Frankie were parties to the suit.    The

Jarvis Christian defendants vigorously contested Exxon's claims.

On July 22, 1988, the Jarvis Christian defendants filed a motion

for judgment for lack of Federal statutory or common law claims,

asserting that neither Federal statutory law nor common law

authorized any of Exxon's claims against them.

     On November 7, 1989, the District Court issued an order

granting an oral motion for reverse bifurcation.    The District

Court ordered that the trial on the damages issue in the case

would precede trial on the liability issue.    By order dated

December 5, 1989, the District Court directed the parties to file

any motions for summary judgment with respect to the issue of

whether Exxon had suffered any damages.    Pursuant to this order,

on January 16, 1990, the royalty and working interest owners

filed a joint motion for summary judgment and memorandum in

support of their motion against Exxon.    In their accompanying

memorandum, the interest owners denied that any amounts were owed

to Exxon, regardless of whether any liability under law could

attach to them, because Exxon had not, in fact, suffered any loss

in paying the approximately $2.1 billion judgment.6

     6
      The Allen parties expressly adopted the joint motion for
                                                   (continued...)
                                - 9 -

     Decedent died on November 16, 1990.

     On February 15, 1991, the District Court issued an order

determining in part that the royalty interest owners were liable

to Exxon under Federal common law for restitution of overcharges

received by them on account of the misclassified oil.    Despite

its previous order bifurcating the issues, the District Court

rendered summary judgment on both the liability and damages

issues.    The District Court then referred the calculation of

damages to a special master.

     In April 1991, Michael Riddle, decedent's attorney for

estate tax purposes, and James Knowles, her attorney in the

Jarvis Christian litigation, attended a meeting with

representatives of Exxon in Houston, Texas, at which Exxon

presented its calculation of the amounts owed by the Allen

parties.    Exxon claimed a total of $2,482,719 from decedent's

estate, which included interest.7   Exxon had sought prejudgment

interest beginning in February 1975 and postjudgment interest

beginning in June 1983 with respect to the amounts it had paid to

the Treasury in Exxon I.    However, in its February 15, 1991,

order, the District Court in the Jarvis Christian litigation

determined that Exxon was only entitled to prejudgment interest

     6
      (...continued)
summary judgment filed on Jan. 16, 1990.
     7
      The amount claimed by Exxon included amounts sought from
Jessamine's and Frankie's interests, which the decedent had
inherited.
                               - 10 -

beginning on the date Exxon paid the judgment in Exxon I

(February 27, 1986) and continuing until the judgment date in the

Jarvis Christian litigation, and thereafter for postjudgment

interest.

     On July 12, 1991, the executor of decedent's estate filed a

United States Estate (and Generation-Skipping Transfer) Tax

Return (Form 706).    On the return, the entire $2,482,719 sought

by Exxon was deducted as a claim against the estate pursuant to

section 2053(a)(3).

     On September 10, 1991, the special master in the Jarvis

Christian litigation issued an order regarding the procedures to

be followed in determining the damages, if any, concerning each

defendant.   On September 23, 1991, the Allen parties filed a

response to the special master's order, wherein they objected to

Exxon's damage calculations.

     On February 10, 1992, petitioner and Exxon entered into a

settlement agreement with respect to the litigation.    Pursuant to

the settlement, petitioner paid Exxon $421,276.60 and surrendered

to Exxon for a period of 7 years Frankie Allen's royalty interest

in the HFU, which had a fair market value of approximately

$260,563.00 when assigned.    Petitioner thus resolved Exxon's

disputed claim for a total amount of $681,839.60.    On April 6,

1992, Exxon and the Allen parties filed a stipulation of

dismissal.   On April 29, 1992, the District Court ordered that
                               - 11 -

all claims presented by the parties with respect to the

litigation were dismissed.


                             Discussion



     The first issue we must decide is whether petitioner is

entitled to a deduction pursuant to section 2053(a)(3) in the

amount reported on the estate tax return ($2,482,719.00) or in

the amount ultimately paid to Exxon in settlement of the relevant

claim ($681,839.60).   To do so, we must determine whether events

subsequent to the date of decedent's death are to be taken into

account in establishing the amount of the deduction to which

petitioner is entitled.

     The Internal Revenue Code imposes a Federal estate tax on

the transfer of the taxable estate of a decedent who is a citizen

or resident of the United States.   Secs. 2001 and 2002.    Section

2053(a)(3) allows a deduction from the gross estate for claims

against the estate that are allowable by the laws of the

jurisdiction under which the estate is administered.     Section

20.2053-4, Estate Tax Regs., provides that "The amounts that may

be deducted as claims against a decedent's estate are such only

as represent personal obligations of the decedent existing at the

time of his death * * * Only claims enforceable against the

decedent's estate may be deducted."     Section 20.2053-1(b)(3),
                                - 12 -

Estate Tax Regs., disallows a deduction that is "taken upon the

basis of a vague or uncertain estimate."

      Petitioner argues that it is entitled to a deduction

pursuant to section 2053(a)(3) for the entire amount reported on

the estate tax return.   Petitioner relies upon Ithaca Trust Co.

v. United States, 279 U.S. 151, 155 (1929), in which the Supreme

Court ruled that for purposes of determining the value of the

deduction for a charitable remainder, a life tenant's premature

death could not be substituted for the actuarial computation of

the life tenant's life expectancy as of the date of the

decedent's death.   The Supreme Court stated that "The estate so

far as may be is settled as of the date of the testator's death."

Id.   Petitioner contends that the Supreme Court's rationale in

Ithaca Trust supports petitioner's position in the instant case.

      In Estate of Van Horne v. Commissioner, 78 T.C. 728, 733-738

(1982), affd. 720 F.2d 1114 (9th Cir. 1983), we reviewed the case

law in this area and determined that the principle articulated in

Ithaca Trust is generally applicable in cases involving the

valuation of a claim that is valid and fully enforceable on the

date of the decedent's death.    See Estate of Kyle v.

Commissioner, 94 T.C. 829, 848-851 (1990).8   On the other hand,

      8
      In Estate of Kyle v. Commissioner, 94 T.C. 829, 849 (1990),
and Estate of Van Horne v. Commissioner, 78 T.C. 728, 736-737
(1982), affd. 720 F.2d 1114 (9th Cir. 1983), we reviewed the case
law in this area and noted that all the cases dealing with
postdeath events are not "easily reconciled". We see no need to
                                                   (continued...)
                               - 13 -

postdeath events warrant consideration where the decedent's

creditor has only a potential, unmatured, contingent, or

contested claim which requires further action before it becomes a

fixed obligation of the estate.    Estate of Van Horne v.

Commissioner, supra at 735.    Where a claim is disputed,

contingent, or uncertain as of the date of the decedent's death,

the estate is not entitled to a deduction until the claim is

resolved and it is determined what amount, if any, will be paid.

It is this latter amount that is allowed as a deduction.    See,

e.g., Propstra v. United States, 680 F.2d 1248, 1253 (9th Cir.

1982); Estate of Taylor v. Commissioner, 39 T.C. 371, 375 (1962),

affd. sub nom. Gowetz v. Commissioner, 320 F.2d 874 (1st Cir.

1963); Estate of Cafaro v. Commissioner, T.C. Memo. 1989-348.

     In Estate of Cafaro v. Commissioner, supra, for instance,

the taxpayer claimed several deductions pursuant to section

2053(a)(3) which exceeded the amounts for which the estate

ultimately settled the claims in issue, and the Commissioner

disallowed these deductions to the extent they exceeded the

amounts of the settlements.9   This Court found that the

settlement of the claims "indicates that, rather than being a

     8
      (...continued)
review all these prior cases in order to resolve the instant
case.
     9
      One claim was settled before the taxpayer filed its Federal
estate tax return, while the other was settled after the return
had been filed. Estate of Cafaro v. Commissioner, T.C. Memo.
1989-348.
                               - 14 -

claim for a sum certain legally enforceable at the date of the

decedent's death, the claim was potential, unmatured, contested,

or contingent at the date of the decedent's death."   Id.    As a

result, we concluded that postdeath events--i.e., the future

settlements of the claims--had to be taken into account in

determining the proper amounts of the deductions to which the

estate was entitled.

     In Estate of Taylor v. Commissioner, 39 T.C. at 372, a

husband and wife had entered into a separation agreement

requiring the husband to pay $500 a month to his wife for her

life or until she remarried.   Upon the husband's death, the wife

made a demand upon the executors for continuation of the monthly

payments.   The estate refused the wife's claim on the ground that

it was the intention of the parties to the separation agreement

that the payments would cease with the death of the husband.

While the matter was in litigation, the estate took a deduction

of $95,982 on its Federal estate tax return, which represented

the present value of the wife's right to receive $500 monthly

until she died or remarried.   The following year the wife

remarried, and approximately 2 years thereafter, the Supreme

Judicial Court of Massachusetts ruled that the estate was liable

for payments for the period up to the wife's remarriage.

Pursuant to this decree, the estate paid to the wife $12,500 in

satisfaction of her claim.
                               - 15 -

     We upheld the Commissioner's determination that the estate

was only entitled to a deduction of $12,500; i.e., the amount it

actually paid.   We stated that


     because of the uncertainty as to whether the estate
     would ever pay any amount to Alice [the decedent's
     wife] on her disputed claim, the estate's liability was
     contingent, and the outcome of such dispute must be
     looked to before the estate would be entitled to a
     deduction.

          Clearly the contesting of Alice's claim was not a
     frivolous or capricious act, but was based upon legal
     arguments which the estate deemed of sufficient
     importance to merit the attention of the highest court
     of Massachusetts.

          The value   of the claim for deduction purposes was
     not reasonably   ascertainable until the litigation ended
     and the estate   finally recognized its liability to
     Alice. * * *     [Id. at 375; citations omitted.]


     On brief, petitioner argues that Exxon's claim was certain

and enforceable on the date of decedent's death, thereby

entitling petitioner to deduct the entire amount of the claim in

determining the value of decedent's taxable estate.    Petitioner

posits several arguments in support of its position.    We shall

address each one in turn.

     First, petitioner contends that the HFU interest owners'

liability for the overcharges was the actual basis for the

litigation in Exxon I, which was decided in 1983.    Petitioner

asserts that Exxon was required to make restitution only because

it was deemed necessary for the effective enforcement of the oil

pricing regulations.    Thus, petitioner maintains that Exxon's
                              - 16 -

claim was enforceable at the time of decedent's death.    We

disagree.

     The record clearly indicates that the issue in Exxon I was

whether Exxon had overcharged its crude oil purchasers for oil

produced in the HFU.   Contrary to petitioner's argument, Exxon I

did not consider whether Exxon had overpaid its royalty and

working interest owners in the HFU.    While Exxon attempted to

join the Jarvis Christian plaintiffs as indispensable parties,

its efforts were unsuccessful.   Rather, the Jarvis Christian

plaintiffs were invited to intervene in Exxon I if they "desired

'an earlier determination' of their claims" that Exxon should

continue paying them royalties based on the higher price under

the two-tier system.   United States v. Exxon Corp., 773 F.2d at

1271 n.32.   In affirming the decision of the District Court in

Exxon I, the Temporary Emergency Court of Appeals stated that the

decision in no way affected any rights or responsibilities of

other interest owners in the HFU.   See id. at 1271.   In addition,

the January 16, 1990, joint motion for summary judgment filed by

the defendants in the Jarvis Christian litigation (and adopted by

the Allen parties) recognized as much in stating that "the courts

[in Exxon I] explicitly said that Exxon's liability was

predicated solely upon its own misconduct and not upon any notion

of vicarious liability arising out of obligations owed by other

interest owners to the government."
                                - 17 -

     Petitioner argues that "There is no doubt here about the

legal enforceability of Exxon's contractual claims for

reimbursement of the overpayment of its oil royalties under the

provisions of the leases during the price regulation under Texas

law."   Petitioner's argument represents a dramatic shift from the

position taken by the Allen parties in the Jarvis Christian

litigation.    In count II of its complaint in that litigation,

Exxon alleged that the HFU interest owners had breached their

contractual obligations to Exxon by refusing to restore the

amounts of their overcharges.    However, the Allen parties denied

any contractual breach on the part of the interest owners and

contended that Exxon was not entitled to any recovery from them.

The Allen parties also adopted the January 16, 1990, motion for

summary judgment and accompanying memorandum filed by the

defendants in the Jarvis Christian litigation, which stated that

"Exxon mocks the fundamental equitable principles underlying this

proceeding by even asking for restitution" of the HFU

overcharges.

     When claims under a contract are contested, as were Exxon's

in the instant case, the claims are not enforceable within the

meaning of section 20.2053-4, Estate Tax Regs., until it is

eventually determined whether and to what extent the claims have

ripened into enforceable claims deductible pursuant to section

2053(a)(3).    See Estate of Van Horne v. Commissioner, 78 T.C. at

734; Estate of Taylor v. Commissioner, 39 T.C. at 374-375.    On
                               - 18 -

February 15, 1991, the District Court in the Jarvis Christian

litigation issued an order determining in part that the royalty

interest owners were liable to Exxon under Federal common law for

restitution of overcharges received by them with respect to the

misclassified oil.   The District Court then referred the

calculation of damages to a special master for determination.   On

February 10, 1992, Exxon and the Allen parties entered into a

settlement agreement pursuant to which petitioner agreed to pay

Exxon $681,839.60 in settlement of the litigation.

     Prior to the District Court's order on February 15, 1991, it

was uncertain whether the royalty interest owners had any

liability to Exxon.10   Prior to the settlement agreement on

February 10, 1992, the amount, if any, of petitioner's liability

pursuant to the District Court's order was also uncertain.11

Prior to the settlement, petitioner did not accept or acknowledge

any liability to Exxon under any of Exxon's theories, and

petitioner strenuously resisted Exxon's claims in maintaining

     10
      Even then, the District Court's determination was subject
to appeal.
     11
      Indeed, we note that a substantial portion of the amount
claimed by Exxon during its settlement conference with the
decedent's attorneys in April 1991 represented interest. Exxon
was seeking prejudgment interest beginning in February 1975 and
postjudgment interest beginning in June 1983 with respect to the
amounts it had paid to the Treasury in satisfaction of the
judgment in Exxon I. However, in its Feb. 15, 1991, order, the
District Court in the Jarvis Christian litigation had determined
that Exxon was only entitled to prejudgment interest beginning on
Feb. 27, 1986, and ending on the date of judgment in the Jarvis
Christian litigation, and thereafter for postjudgment interest.
                                - 19 -

that it owed Exxon nothing.12    Petitioner cannot now switch hats

and attempt to show how meritorious Exxon's claims actually were.

Instead, the settlement agreement of February 10, 1992, serves as

both Exxon's and petitioner's assessment of the value of the now

compromised claims.

     Petitioner further alleges that certain provisions of the

unit and unit operating agreements provided Exxon with an

enforceable lien against the Allen parties' interests in the HFU

and entitled Exxon to restitution of the overcharges.     Cf.

Propstra v. United States, 680 F.2d at 1253-1254.      We disagree.

The relevant provisions petitioner refers to address the

relationship between Exxon, as operator of the HFU, and the other

working interest owners in the HFU.      Thus, neither provision is

applicable to the Allen parties who, in contrast, were royalty

interest owners in the HFU.     In addition, we note that no

provision of the unit operating agreement is applicable to

royalty interest owners, as the agreement only addresses the

relationship between Exxon and the other working interest owners

in the HFU.

     We also reject petitioner's attempt to find a lien within

the Allen parties' oil and gas leases.     The relevant provision in

the leases stated, in pertinent part:

     12
      For instance, shortly after filing its Federal estate tax
return in July 1991, petitioner filed a document with the special
master in the Jarvis Christian litigation objecting to Exxon's
damage calculations.
                              - 20 -


     Lessor hereby warrants and agrees to defend the title
     to said land and agrees that Lessee at its option may
     discharge any tax, mortgage or other lien upon said
     land, either in whole or in part, and if Lessee does
     so, it shall be subrogated to such lien with right to
     enforce same and apply rentals and royalties accruing
     hereunder toward satisfying same. * * *


This provision addresses a situation where the lessor would be

responsible for a third-party lien; e.g., where the lessor failed

to discharge a tax or mortgage obligation.    Under those

circumstances, Exxon, as lessee, would be entitled to satisfy the

third-party lien and become subrogated to the third-party's

rights against the lessor.   Thus, the provision does not

contemplate a situation such as the instant one.    Indeed, we note

that in the complaint filed against the interest owners in the

Jarvis Christian litigation, Exxon never claimed that the

provision was applicable to the litigation.

     Finally, petitioner contends that the opinion of the Court

of Appeals for the Ninth Circuit in Propstra v. United States,

supra, supports its position that it is entitled to a deduction

on its Federal estate tax return in the amount claimed.     In

Propstra, at the time of his death, the decedent's property had

been encumbered by liens of the Salt River Valley Water Users

Association (Association) for past due assessments and penalties.

The Association's bylaws denied it the power to adjust the

claims.   The estate's executrix deducted decedent's one-half

share of the liens on the Federal estate tax return.    Twenty-two
                                 - 21 -

months later, the Association's bylaws were amended to permit the

settlement of outstanding claims for less than the full amount

owed.     The estate ultimately settled the claim for less than the

amount originally sought (and reported by the estate on its

return).     Id. at 1250.

        The Court of Appeals for the Ninth Circuit found that the

Association's lien claims were certain and enforceable when the

decedent died.     The Court of Appeals noted that at the time of

the decedent's death, the Association lacked the authority to

settle claims for less than their full amount.      In addition, the

estate lacked even a colorable defense against the Association's

claims.     The Court of Appeals ruled that "when claims are for

sums certain and are legally enforceable as of the date of death,

post-death events are not relevant in computing the permissible

deduction."     Id. at 1254.   The estate was entitled, therefore, to

a deduction for the claim in the amount reported on its estate

tax return.

     Petitioner's reliance on Propstra is misplaced.       In

Propstra, the Court of Appeals explained that the threshold

determination to be made under section 2053(a)(3) is whether the

claim in question was certain and enforceable at the time of the

decedent's death.     See id. at 1253.    The Court of Appeals

precluded consideration of postdeath events only where a claim

was found to be certain and enforceable on the date of death.

Id. at 1254; see also Estate of Van Horne v. Commissioner, 720
                                - 22 -

F.2d at 1116-1117.    Moreover, the Court of Appeals acknowledged

that "The law is clear that post-death events are relevant when

computing the deduction to be taken for disputed or contingent

claims."     Propstra v. United States, supra at 1253.

     The validity and enforceability of Exxon's claim against

decedent in the instant case were uncertain as of the date of her

death.    As a result, we hold that petitioner's section 2053(a)(3)

deduction in connection therewith is limited to the amount

ultimately paid in settlement of that claim.    Thus, we sustain

respondent's determination.13

     The next issue for decision is whether the income tax

benefit derived by petitioner as a result of the application of

section 1341(a) is an asset includable in the gross estate.

Section 2031(a) provides that "The value of the gross estate of

the decedent shall be determined by including to the extent

provided for in this part, the value at the time of his death of

all property, real or personal, tangible or intangible, wherever

situated."    Section 2033 provides that "The value of the gross

estate shall include the value of all property to the extent of

the interest therein of the decedent at the time of his death."

In the instant case, the parties have stipulated that all HFU

royalties paid to decedent from Exxon for the calendar years 1975

     13
      Given our disposition of this issue, we need not consider
respondent's alternative argument that petitioner must recognize
discharge of indebtedness income pursuant to sec. 61(a)(12) in
connection with petitioner's settlement of Exxon's claim.
                                 - 23 -

through 1980 were reported as income on her Federal income tax

returns for those years and that petitioner is entitled to

section 1341(a) relief to the extent that these previously taxed

royalties were repaid to Exxon in 1992.

     Section 1341(a) provides relief to taxpayers who are forced

to repay an amount previously taken into income under a claim of

right.     The reduction in the taxpayer's tax liability

attributable to a repayment is the greater of the amounts

calculated under two approaches.     Pursuant to the first approach,

the taxpayer computes his tax liability for the year of repayment

after having deducted the amount of the repayment.14       Sec.

1341(a)(4).     Under the second approach, rather than a deduction

in the year of repayment, the taxpayer receives a reduction

(i.e., a credit) in his tax liability for the year of repayment

which is equal to the reduction in tax that would have occurred

for the prior year had the amount received under a claim of right

been excluded from income.     Sec. 1341(a)(5).   If the reduction in

tax under the second approach is greater than the taxpayer's

income tax liability for the year of repayment, the excess is

refundable or credited just as with any overpayment of tax.       Sec.

1341(b)(1).15

     14
      The amount of the deduction to which the taxpayer is
entitled as a result of a repayment must exceed $3,000. Sec.
1341(a)(3).
     15
          Petitioner concedes that the computation of its sec.
                                                       (continued...)
                               - 24 -

     On brief, petitioner contends that the gross estate is not

increased by the amount of its section 1341(a) relief, because

decedent's right to such relief did not exist at the time of her

death on November 16, 1990.   Petitioner maintains that it was not

entitled to any section 1341(a) relief until it repaid Exxon

pursuant to the terms of the February 10, 1992, settlement

agreement.   This agreement was not entered into until almost 15

months after decedent's death.   Respondent, on the other hand,

argues that petitioner's section 1341(a) relief necessarily

augments the gross estate.    Neither party has cited, nor have we

found, any case law squarely on point.

     In support of his position, respondent relies on the

decision of the District Court for the Eastern District of

Michigan in Estate of Good v. United States, 208 F. Supp. 521

(E.D. Mich. 1962).   In Estate of Good, the decedent had been

overpaid by his employer in salary and expense reimbursements.

These amounts were reported by decedent on his income tax returns

for the years received.   The employer notified the decedent that

he would be liable for repayment and filed a claim against the

decedent's estate when the decedent died prior to repayment.

     15
      (...continued)
1341(a) relief is limited to the amount paid to settle Exxon's
claim against decedent individually; petitioner is not entitled
to sec. 1341(a) relief for amounts paid in satisfaction of
Exxon's claims against Jessamine and Frankie. The parties also
appear to agree that a credit pursuant to sec. 1341(a)(5) would
provide petitioner a greater benefit than a deduction under sec.
1341(a)(4).
                                - 25 -

After the estate repaid the employer, it claimed a deduction on

its Federal estate tax return, as well as a credit pursuant to

section 1341(a)(5) on its fiduciary income tax return.   In the

Commissioner's view, because the decedent and his estate were

separate taxpayers, section 1341(a) relief was unavailable.    See

Rev. Rul. 67-355, 1967-2 C.B. 296, revoked by Rev. Rul. 77-322,

1977-2 C.B. 314.

     The District Court rejected the Commissioner's argument and

concluded that section 1341(a) relief was appropriate.   The

District Court analyzed the estate and income tax consequences

that would have resulted had the decedent repaid the amount in

issue prior to his death.    The District Court explained that the

gross estate would have been decreased by the amount repaid and

increased by the amount of the section 1341(a) credit to which

the estate was entitled.    Estate of Good v. United States, supra

at 522.   Since both parties acknowledged that the section 1341(a)

credit, if available, would increase the gross estate, the

District Court found that the Government would "not [be]

prejudiced in the collection of the estate tax by the estate's

claiming both an estate tax deduction and an income tax credit on

the same transaction."     Id. at 523.

     The District Court in Estate of Good reasoned that the

provisions of section 1341(a) should be available to an estate in

order to ensure the same income tax consequences regardless of

whether a taxpayer repays income prior to his death or the estate
                              - 26 -

makes the restoration after his death.16   Similarly, in the

instant case, the relevant estate tax consequences should not

vary where the estate, rather than decedent, makes the payment

upon which section 1341(a) relief is predicated.17   The right to

section 1341(a) relief clearly would have been includable in the

gross estate had Exxon's claim been settled and paid prior to

decedent's death.   We see no reason why decedent's "contingent"

right to section 1341(a) relief should not be included in her

gross estate.18

     16
      The District Court stated: "when Congress passed Section
1341 it did not intend to recognize a debt of the Government to
the taxpayer during his lifetime and deny the same obligation to
his personal representatives and to his estate." Estate of Good
v. United States, 208 F. Supp. 521, 523 (E.D. Mich. 1962); see
also Nalty v. United States, 35 AFTR 2d 75-1449, 75-1 USTC par.
9441 (1975); Estate of Stein v. Commissioner, 37 T.C. 945, 958
(1962).
     17
      While we recognize that the parties in Estate of Good v.
United States, supra at 523, agreed that the gross estate would
be increased by the amount of any sec. 1341(a) relief, we
nevertheless find the reasoning in the District Court's opinion
persuasive.
     18
      In United States v. Simmons, 346 F.2d 213, 214 (5th Cir.
1965), the decedent paid a deficiency in his Federal income
taxes, and the attorney for his estate filed a claim for refund
following his death. After the refund claim was disallowed, the
estate filed suit. The refund litigation was eventually settled,
and a refund was paid. In the interim, the estate had filed its
estate tax return listing the income tax claim as having no value
but requesting that the estate tax liability be held in abeyance
pending the outcome of the claim. The Commissioner determined
that the claim was includable in the decedent's estate and valued
the claim at the amount of the settlement. Although the estate
conceded that the claim was includable in the gross estate, it
contended that the claim had no value at the time of the
decedent's death.
                                                   (continued...)
                              - 27 -

     In Estate of Curry v. Commissioner, 74 T.C. 540, 544 (1980),

the decedent, who was an attorney, executed an agreement with

another attorney, which provided that the decedent would receive

a stated percentage of any attorney's fees that might be awarded

in a list of docketed cases pending before the Indian Claims

Commission (Commission).   Any award of attorney's fees in these

cases was contingent upon an ultimate recovery on behalf of the

plaintiffs and would be measured by the extent of the recovery.

At the time of the decedent's death, 13 of the cases remained in

various unresolved stages of litigation before the Commission.

Following the decedent's death, the estate received attorney's

fees in connection with this litigation.   The Commissioner

determined that the contractual right to share in future

attorney's fees was an interest in property includable in the

decedent's gross estate.

     In Estate of Curry v. Commissioner, supra at 545, the

taxpayer argued that the contingent legal fees were not


     18
      (...continued)
     After trial, the District Court submitted the issue of
valuation to the jury, which found that the claim had no value at
the time the decedent died. The Court of Appeals for the Fifth
Circuit reversed, holding that there was no rational basis for
the jury's finding. The Court of Appeals stated: "When * * *
[the decedent] died, his 'property' included the claim for refund
of federal income taxes." Id. at 215. The Court of Appeals
determined that postdeath facts and circumstances were to be
taken into account for purposes of valuing the estate's claim and
found the amount for which the claim was eventually settled to be
"highly indicative", but not determinative, of such value. Id.
at 218.
                                 - 28 -

includable in the gross estate, because the decedent was not

entitled to any fees at the time of his death; i.e., any fees

were contingent upon events that had not yet occurred as of the

date of death.   We explained:


     The fact that the legal fees we are concerned with were
     contingent upon future recovery * * * is a critical
     consideration in trying to determine what the contract
     right was worth as of the date of death. However, the
     contingent nature of the contract right must bear on
     the factual question of valuation. It cannot, as a
     matter of law, preclude the inclusion of the interest
     in the decedent's gross estate or command that the
     value be fixed at zero. Although uncertainty as to the
     value of a contract right may postpone the inclusion of
     the income until it is actually realized for income tax
     purposes, for estate tax purposes, the value of an
     asset must be determined in order to close the estate.
     * * * [Id. at 546-547.]


This analysis is equally applicable to a contingent statutory

right to relief under section 1341(a).    In the instant case, the

right to section 1341(a) relief was contingent at the date of

decedent's death.   The contingency centered on decedent's dispute

over Exxon's claim.    However, the fact that this right to relief

was contingent does not prevent its inclusion in the gross

estate.   See United States v. Simmons, 346 F.2d 213, 215 (5th

Cir. 1965); Estate of Curry v. Commissioner, supra at 545-547.

     The facts giving rise to petitioner's section 2053(a)(3)

deduction and its right to section 1341(a) relief are

inextricably linked.    At the time of decedent's death, Exxon was

claiming that decedent was obligated to repay royalties, which
                               - 29 -

decedent had previously reported as taxable income.   Therefore,

at the time of her death, decedent had statutory rights pursuant

to section 1341(a) to receive tax benefits based on whatever

amount she ultimately had to pay Exxon.   Petitioner is entitled

to an estate tax deduction in the amount paid to satisfy Exxon's

claim, as well as section 1341(a) relief for payment of the same

claim.   Exxon's claim decreases the estate's assets while the

right to section 1341(a) relief increases the estate's assets.

Under these circumstances, it would be inappropriate to consider

one in the determination of the taxable estate while excluding

the other.

     The amount for which a claim is ultimately settled is

evidence of its value.   See United States v. Simmons, supra at

218 (finding the amount for which a claim was eventually settled

to be "highly indicative" of the value of the claim).   In the

instant case, there was no evidence introduced to show that the

value of the contingent right to section 1341(a) relief at

decedent's death was less than the amount that will actually be

received.    On brief, petitioner confined its argument to whether

the contingent right to section 1341(a) relief was or was not an

asset includable in the gross estate.   Petitioner did not argue

that, in the event we find the right to section 1341(a) relief

includable in the gross estate, the value of this right for

estate tax purposes is anything less than the amount of the

benefit ultimately received.
                             - 30 -

     For the foregoing reasons, we hold that the taxable estate

must be increased by the amount of section 1341(a) relief that is

attributable to the amount petitioner paid to Exxon in settlement

of its claim.



                                        Decision will be entered

                                   under Rule 155 in docket No.

                                   19200-94.

                                        Decision will be entered

                                   for petitioner in docket No.

                                   3976-95.
