DiPaoli's father died. The
father had a will which left everything to DiPaoli. DiPaoli realized that
this would result in a large tax burden and so moved to have the probated
will set aside.
DiPaoli argued that his
father meant to change the will so
as to leave $600k to DiPaoli and the rest to his wife (DiPaoli's mother)
At the time, $600k was the greatest amount one could receive without tax liability.
DiPaoli's mother would have no tax liability since she was exempt from inheritance taxes as the
decedent's wife.
The Tax Commissioner denied
the entire deduction. DiPaoli appealed.
Based on his reading of the will, the entire estate passed to DiPaoli, and then DiPaoli made a
non-tax deductible gift to his mother.
They also fined DiPaoli for not filing a gift tax return.
The Tax Court affirmed.
DiPaoli appealed.
The Tax Court found that
since the money would not have gone to DiPaoli's mother without DiPaoli's
direction, the money passed through him and was therefore taxable as a
gift.
The Tax Court found that
money that has been disclaimed
passes as if the person making the disclaimer had died before the decedent.
Therefore, if DiPaoli had
children, the money would have gone to them, not his mother!
DiPaoli had two
illegitimate children. The Tax Court found that the money should have
gone to them if DiPaoli disclaimed
it.
When you disclaim, it is treated as if you have predeceased the decedent.
The Appellate Court reversed.
The Appellate Court found
that, for tax purposes, you can refuse to accept money left to you in a
will. That's called a disclaimer.
Money that is refused then becomes subject to intestate rules and in this case is passed to the
surviving spouse.
The money going to the
surviving spouse is assumed to be coming directly from the decedent, and
therefore qualifies for the marriage deduction.
The Appellate Court found
that illegitimate children do not always count as heirs under New Mexico
Probate law.
In order to count as an
heir, the parent of an illegitimate child must, "recognize the
child in writing...by an instrument signed by the parent...with the
intent of recognizing the child as an heir.
The IRS unsuccessfully
argued that DiPaoli claimed the kids as tax deductions he had recognized
them and should therefore be collaterally estopped from arguing the opposite.
But the Appellate Court
distinguished between recognizing a kid as child for tax purposes and
recognizing them as an "heir".
If DiPaoli had recognized the illegitimate kids, then any
money he disclaimed would
go to them, not to his mother.
