DiPaoli v. C.I.R.
62 F.3d 1259 (1995)

  • 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.
      • Thanks Dad!