                         T.C. Memo. 1998-309



                      UNITED STATES TAX COURT



 ESTATE OF ETHEL M. CUMBER WILSON, DECEASED, ETHEL C. KELLY AND
 DENNIS I. BELCHER, CO-EXECUTORS, Petitioner v. COMMISSIONER OF
                  INTERNAL REVENUE, Respondent



     Docket No. 15559-96.                     Filed August 24, 1998.


     Dennis I. Belcher, Michele A.W. McKinnon, and John F.

Kelly, for petitioner.

     William Henck, for respondent.


                         MEMORANDUM OPINION


     RUWE, Judge:   Respondent determined a deficiency of

$1,225,296 in petitioner's Federal estate tax plus an accuracy-

related penalty under section 66621 in the amount of $202,811.

     1
      Unless otherwise indicated, all section references are to
the Internal Revenue Code in effect as of the date of decedent's
                                                   (continued...)
                                 - 2 -


The parties have by way of settlement or concession disposed of

all but one of the issues raised in the notice of deficiency.

The issue remaining for decision is whether petitioner is

entitled to deduct claims against decedent's estate made by David

and Daniel Griffith in the amounts that were ultimately paid to

the claimants.   This case was submitted fully stipulated.


                            Background


     Ethel M. Cumber Wilson (decedent) died a resident of

Richmond, Virginia, on October 3, 1992.    Decedent was a widow and

was survived by her only child, Ethel C. Kelly (Mrs. Kelly).

Decedent's will dated July 20, 1989, was probated in the Circuit

Court of the City of Richmond.    Under her will, decedent made

specific cash bequests to certain individuals totaling $240,000,

including a cash bequest of $100,000 to Daniel Griffith.     She

gave the balance of her estate to Mrs. Kelly.    Decedent's will

named Mrs. Kelly as executor and granted Mrs. Kelly the power to

designate a coexecutor.   Dennis I. Belcher of Richmond, Virginia,

was named to serve as coexecutor.

     During decedent's lifetime, David Griffith and Daniel

Griffith assisted her in various personal and financial matters.

David and Daniel were brothers.    David assisted decedent from

     1
      (...continued)
death, and all Rule references are to the Tax Court Rules of
Practice and Procedure.
                                - 3 -


1976 to 1984, and Daniel assisted decedent from 1984 until her

death in 1992.    The Griffiths were not related by blood to

decedent but were distant cousins of decedent's deceased husband.

Decedent's husband died on June 22, 1943.

     The services performed by the Griffiths included

companionship, secretarial work, chauffeuring, reading to her,

reviewing and paying bills, and taking her to medical and dental

appointments.    The Griffiths were on call at all times to meet

decedent's demands, which were substantial because she was of

advanced age, in very poor health (she was blind and severe

diabetes required amputation of her leg in 1989), and unable to

take care of any of her affairs.    Both David and Daniel were

employed full time elsewhere during the periods they assisted

decedent.    David was employed by C&P Telephone Co. and worked a

significant amount of overtime.    Daniel worked for Phillip

Morris, but worked the 3 p.m. to 11 p.m. shift and worked for

decedent in the mornings before going to work.

     Decedent never had an investment adviser but had a stock

broker who handled trades for her.      Decedent also informally

sought the advice of her son-in-law, two stock brokers, and a

trust officer.    Decedent kept her stock certificates in her own

name and did not use a brokerage firm to hold her stock

certificates.    Decedent employed other persons in her personal

residence.
                               - 4 -


     On December 30, 1993, David filed a lawsuit against

decedent's estate claiming that in the fall of 1976 he and

decedent had entered into a binding oral contract under which

decedent agreed to provide in her will that David receive one-

third of her estate in return for his agreement to provide

personal and financial services to decedent until her death.

David provided such personal and financial services to decedent

from 1976 until 1984.   In 1980, decedent executed a will in which

decedent gave one-third of her estate to David.   However, because

of a dispute with David, decedent executed a new will in 1984

that eliminated David as a beneficiary.

     Decedent's executors disputed the validity of David's claim

and litigated the matter on behalf of decedent's estate.   The

litigation included extensive discovery and contested pretrial

matters.   Following 2 years of discovery and pretrial motions, a

2-day jury trial was held in the Circuit Court of the City of

Richmond on January 11 and 12, 1995.   The principal issues were

the validity and amount of David's claim.   Before submitting the

matter to the jury, the court granted the executors' statute of

frauds motion with respect to decedent's real property but not

with respect to her personal property.    Consequently, if the jury

believed that David and decedent had an oral agreement, David

would receive:   (a) One-third of decedent's personal property (or

one-third of approximately $4.5 million), and (b) an award based
                               - 5 -


on quantum meruit for the portion of his claim relating to

decedent's real estate.

     During jury deliberations, David and the executors reached

an agreement, called a structured settlement, the terms of which

depended in part on the jury verdict.

     The jury determined that David and decedent had entered into

a binding contract under which decedent agreed to give David one-

third of her estate and in return David agreed to provide

personal and financial services to decedent.   The jury also

determined the value of David's services performed under the

contract to be worth $75,000 (without interest).

     The jury found sufficient consideration to support the oral

contract at the time of the alleged oral agreement.   The jury's

finding that the value of David's services was $75,000 did not

limit David's recovery with respect to decedent's personal

property, but would have been used as a basis to determine

David's ultimate recovery with respect to the real estate.     As a

result of the jury's verdict in favor of David, he would have,

but for the settlement agreement, received approximately $1.5

million plus $3,750 (the quantum meruit portion relating to

decedent's real estate).   Because the jury returned a verdict in

favor of David, the structured settlement provided that David was

entitled to receive $400,000 in full satisfaction of his claim

against decedent's estate for services provided to decedent
                               - 6 -


during her life.   Pursuant to the settlement agreement, David

recognized that the settlement payment he received was for

services rendered and agreed to treat the settlement payment

received as compensation.   As required by law for a payor of

miscellaneous income, the executors furnished a Form 1099 to

David.

     On July 22, 1993, Daniel filed a lawsuit against decedent's

estate claiming that in 1984 he and decedent had entered into a

binding oral contract under which decedent agreed to provide by

her will that Daniel receive one-third of her estate and that in

return Daniel agreed to provide personal and financial services

to decedent until her death.   Daniel provided such personal and

financial services to decedent from 1984 until decedent's death

in 1992.

     The executors disputed the validity of Daniel's claim and

litigated the matter on behalf of decedent's estate.   The

litigation continued for more than 2 years and included extensive

discovery and contested pretrial matters.   After 2 years of

discovery and other litigation matters, the executors and Daniel

agreed to submit Daniel's claim to mediation.   Retired Chief

Judge Robert R. Harris, Sr., of the Circuit Court of the City of

Richmond, acted as mediator between the parties.   As a result of

the mediation, the executors agreed to pay Daniel $550,000 (in

addition to the $100,000 specific bequest provided to Daniel in
                               - 7 -


decedent's will) in full satisfaction of his claim against

decedent's estate.   Pursuant to the settlement agreement, Daniel

recognized that the settlement payment he received was for

services rendered and agreed to treat the settlement payment

received as compensation.   As required by law for a payor of

miscellaneous income, the executors furnished a Form 1099 to

Daniel.

     The estate's respective payments of $400,000 to David and

$550,000 to Daniel were triggered solely by the results of the

judicial and mediation proceedings described above and for no

other reason.


                            Discussion


     The issue for decision is whether decedent's estate may

deduct the claims of David and Daniel Griffith in the amounts

paid to them pursuant to the settlement of their claims.2

     Section 2053 allows an estate tax deduction for claims

against the estate that are allowable by the laws of the

jurisdiction in which the estate is being administered.     Section

2053 seeks to distinguish between claims based upon obligations

     2
      Respondent does not appear to be contesting the
deductibility of $75,000 of each of the payments that was made to
David and Daniel. Respondent argues that the deductions are
limited to $75,000 of each payment, because that was the value
that the jury placed on the services that were actually rendered
by David. Respondent argues that Daniel's services should be
given a similar value.
                                - 8 -


of the decedent or of the estate, as compared to bequests and

legacies.    First Natl. Bank of Amarillo v. United States, 422

F.2d 1385, 1386 (10th Cir. 1970).    To be deductible, the claim

must represent a personal obligation of the decedent at the time

of death.    Section 2053(c)(1)(A) places a limitation on the type

of claims at issue in this case by providing:


            (A) Consideration for claims.--The deduction
       allowed by this section in the case of claims against
       the estate, * * * shall, when founded on a promise or
       agreement, be limited to the extent that they were
       contracted bona fide and for an adequate and full
       consideration in money or money's worth; * * *


Section 2053(c)(1)(A) is mirrored by the provisions of section

20.2053-4, Estate Tax Regs.

       The purpose of the "adequate and full consideration"

requirement is to prevent the depletion of the estate by the use

of agreements which would ultimately serve to avoid the estate

tax.    Bank of New York v. United States, 526 F.2d 1012, 1016 (3d

Cir. 1975); see Estate of Hartshorne v. Commissioner, 402 F.2d

592, 594 n.2 (2d Cir. 1968); Latty v. Commissioner, 62 F.2d 952,

953-954 (6th Cir. 1933).    Thus, claims based upon promises or

agreements must be "contracted for a consideration which at the

time either augmented the estate of the decedent, granted to him

some right or privilege he did not possess before, or operated to

discharge a then existing claim".       Latty v. Commissioner, supra

at 954. Furthermore, under the statute, some consideration is not
                                - 9 -


enough; it must be "adequate and full".    Sec. 2053(c)(1)(A).    Our

task is to determine whether the underlying claims that resulted

in the settlement payments were based on bona fide agreements

between decedent and David and Daniel Griffith for adequate and

full consideration in money's worth.

     David filed a lawsuit against the estate claiming that in

1976 he and decedent had entered into an oral contract, whereby

decedent agreed to give him one-third of her estate in return for

his promise to provide personal and financial services to

decedent for her lifetime.    David provided such services from

1976 to 1984.   In 1980, decedent executed a will in which she

gave one-third of her estate to David.    Decedent subsequently had

a dispute with David, and in 1984 she executed a new will that

eliminated David as a beneficiary.

     David's claim that decedent had breached her contract was

litigated, and a jury returned a verdict that would have awarded

him more than $1.5 million.    However, during jury deliberations

David and the executors of decedent's estate entered into a

structured settlement agreement, the terms of which were, in

part, dependent on the jury's verdict.    Pursuant to the verdict

and the terms of the settlement agreement, the estate paid David

$400,000 in full satisfaction of his claim.

     Respondent would have us limit the deduction for David's

claim to $75,000 because that was the jury's determination of the
                               - 10 -


value of the services that David actually performed for decedent

from 1976 to 1984.    The problem with respondent's position is

that the consideration that David provided in return for

decedent's promise was not the years of services that he actually

provided; rather, it was his 1976 promise obligating him to

provide services to decedent for her lifetime.     The date on which

the contract (agreement) was made is the proper date on which to

value the consideration.    Estate of Fenton v. Commissioner, 70

T.C. 263, 275-276 (1978).    Thus, the value of the consideration

provided by David must be judged as of the time the contract was

made.   Likewise, the value of the consideration that decedent

provided (a promise to give one-third of her estate) must be

measured at the time the contract was entered into.

     There is no direct evidence of the 1976 value of David's

promise to provide lifetime services or of the 1976 value of

decedent's promise to give David one-third of her estate.      We

must therefore look to other factors to determine whether the

mutual promises of decedent and David constitute adequate and

full consideration in money's worth.     Generally, the best

indication of value is that which unrelated parties, dealing at

arm's length, agree to.    See Bank of New York v. United States,

supra at 1016-1017.

     David was not related to decedent.     He was not the natural

object of her bounty or affection.      At the time of the agreement,
                              - 11 -


neither party could have known the ultimate results that their

respective promises would produce, since both promises depended

upon unknown future events and conditions.   The nature and the

duration of the services that David was obligated to perform were

dependent upon decedent's condition and longevity.   The value of

one-third of decedent's estate was dependent upon whatever

expenditures were made to meet her needs and desires during her

life and fluctuations in the value of her assets.    See Estate of

Hartshorne v. Commissioner, supra at 596; Estate of Fenton v.

Commissioner, supra at 276-277.   Nevertheless, decedent and David

struck their bargain.   Based upon the facts presented, we find

that their mutual promises were based on adequate and full

consideration in money's worth and not intended as a substitute

for a testamentary disposition.   Our conclusion is supported by

the results of the adversarial litigation between David and the

estate and their arm's-length structured settlement.   See First

Natl. Bank of Amarillo v. United States, 422 F.2d at 1388.3

     3
      In Estate of Boyce v. Commissioner, T.C. Memo. 1972-204,
affd. in part, revd. in part and remanded sub nom. Wilder v.
Commissioner, 493 F.2d 608 (2d Cir. 1974), respondent disallowed
deductions for amounts paid to decedent's attorney for legal
services rendered during decedent's life. Respondent conceded
that the deduction claimed by decedent's estate was allowable
pursuant to sec. 2053, in the event we decided in a companion
case that the decedent's attorney was required to include the
distribution from decedent's estate in gross income. In the
companion case, we found such amounts to be includable in the
income of decedent's attorney and, therefore, held that
decedent's estate was entitled to a deduction in the same amount.
                                                   (continued...)
                               - 12 -


     Daniel's claim against the estate is for all practical

purposes the same as David's, and we believe that the same

considerations warrant our holding that the mutual, arm's-length

promises of decedent and Daniel constituted adequate and full

consideration in money's worth.   The fact that the amount of the

settlement disposing of Daniel's claim was somewhat greater than

David's settlement has no bearing on our finding.     Settlement

figures are generally arrived at after considering the

uncertainties of litigation.   However, our focus in analyzing the

adequate and full consideration issue falls on the point at which

decedent and Daniel decided to make their bargain.



                                         Decision will be entered

                                    under Rule 155.




     3
      (...continued)
Estate of Boyce v. Commissioner, supra. In the instant case,
both David and Daniel agreed to treat the settlement payments as
compensation received.
