The opinion
147 T.C. No. 11
UNITED STATES TAX COURT
ESTATE OF JAMES HELLER, DECEASED, BARBARA H. FREITAG,
HARRY H. FALK, AND STEVEN P. HELLER, CO-EXECUTORS, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 11390-12. Filed September 26, 2016.
E held a 99% interest in L, which held an account with MS as
its only asset. L distributed to E a portion of the funds from the MS
account, and E used those funds to pay estate taxes and administrative
expenses. Before E could distribute its remaining assets to D’s
beneficiaries, MS’ chairman was arrested on, and pleaded guilty to,
charges relating to a Ponzi scheme. As a result of the Ponzi scheme,
the MS account became worthless, and E, on its Federal estate tax
return, deducted a theft loss relating to its interest in L.
In a notice of deficiency issued to E, R determined that E was
not entitled to an I.R.C. sec. 2054 theft loss deduction. E challenged
the determination and moved for summary judgment. R objected,
contended that L owned the MS account, and moved for partial
summary judgment.
Held: E, pursuant to I.R.C. sec. 2054, is entitled to a deduction
relating to its interest in L.
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Christopher W. Campbell, Ryan M. Austin, and Theresa R. Clardy, for
petitioners.
Peter N. Scharff, for respondent.
OPINION
FOLEY, Judge: This matter is before the Court pursuant to Rule 121 on the
estate’s motion for summary judgment and respondent’s motion for partial
summary judgment.1 After concessions, the sole issue for decision is whether the
estate is entitled to a section 2054 deduction.
Background
James Heller, a resident of New York, New York, died on January 31,
2008.2 At that time he owned a 99% interest in James Heller Family, LLC (JHF).
James Heller’s daughter, Barbara H. Freitag, and his son, Steven P. Heller, each
held a 0.5% interest in JHF. Harry H. Falk managed JHF, the only asset of which
1
Unless otherwise indicated, all section references are to the Internal
Revenue Code relating to the date of decedent’s death, and all Rule references are
to the Tax Court Rules of Practice and Procedure.
2
James Heller’s will was probated in New York. The estate and coexecutors
had a mailing address in New York when the petition was filed. The record does
not disclose where the coexecutors resided when the petition was filed.
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was an account (JHF Madoff account) with Bernard L. Madoff Investment
Securities, LLC (Madoff Securities). On or around March 5, 2008, Ms. Freitag,
Mr. Falk, and Steven P. Heller were appointed coexecutors of the Estate of James
Heller (estate). Between March 4 and November 28, 2008, Mr. Falk withdrew
$11,500,000 from the JHF Madoff account and distributed it according to JHF’s
ownership interests. The estate’s share, $11,385,000, was used to pay its taxes and
administrative expenses.
On December 11, 2008, Bernard Madoff, the chairman of Madoff
Securities, was arrested, and the Securities and Exchange Commission issued a
press release to alert the public that it had charged him with securities fraud
relating to a multibillion-dollar Ponzi scheme. In perpetuating the scheme Mr.
Madoff and his associates fabricated monthly and quarterly statements (i.e.,
financial records that purportedly showed the value of accounts, trading activity,
gains, and other financial information) and sent them to Madoff Securities’ clients.
The Securities Investor Protection Corporation (SIPC), on December 15, 2008,
filed an application for a protective decree with the U.S. District Court for the
Southern District of New York, in which it, pursuant to the Securities Investor
Protection Act of 1970, sought liquidation of Madoff Securities. On that day the
court approved the application and appointed a trustee for Madoff Securities. Mr.
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Madoff, on March 12, 2009, admitted that he had perpetrated a Ponzi scheme
through Madoff Securities and pleaded guilty to various Federal crimes, including
securities fraud, investment adviser fraud, money laundering, and perjury. As a
result of the Ponzi scheme, JHF’s interest in the JHF Madoff account and the
estate’s interest in JHF became worthless.3
The estate on April 1, 2009, timely filed Form 706, United States Estate
(and Generation-Skipping Transfer) Tax Return, on which the estate reported a
$26,296,807 gross estate, including the value of James Heller’s 99% interest in
JHF (i.e., $16,560,990). The estate also claimed a $5,175,990 theft loss deduction
relating to the Ponzi scheme, the amount of which reflects the difference between
the value of the estate’s interest in JHF reported on the estate tax return and the
estate’s share of the amounts withdrawn from the JHF Madoff account.4
Respondent on February 9, 2012, issued the estate a notice of deficiency in which
3
From 1990 through 2007 James Heller contributed $6,052,000 to, and
withdrew $12,429,781 from, an account he held directly with Madoff Securities.
On December 19, 2006, JHF contributed $150,000 to the JHF Madoff account,
and on January 3, 2007, James Heller transferred an additional $14,850,000 from
his account to the JHF Madoff account.
4
On May 31, 2011, the estate filed with respondent a protective refund claim
relating to the Madoff Securities trustee’s claims against the estate (i.e., to recover
amounts withdrawn from the JHF Madoff account before the Ponzi scheme
became public knowledge).
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respondent determined that the estate was not entitled to the $5,175,990 theft loss
deduction because the estate did not incur a theft loss during its settlement.
The estate timely filed a petition with the Court, and the Court subsequently
filed the estate’s motion for summary judgment and respondent’s motion for
partial summary judgment.
Discussion
The estate is entitled to deductions relating to “losses incurred during the
settlement of * * * [the estate] arising * * * from theft”. See sec. 2054. Whether
an estate is entitled to a section 2054 theft loss deduction relating to property held
by an LLC is an issue of first impression. Neither regulations nor legislative
history relating to section 2054 or its predecessors addresses this issue. Thus, our
analysis begins and ends with the statute.
The estate tax is imposed on the value of property transferred to
beneficiaries. See secs. 2001, 2031(a), 2051. In that context, a loss refers to a
reduction of the value of property held by an estate. See Black’s Law Dictionary
1087 (10th ed. 2014) (defining a loss as “the disappearance or diminution of
value”). While JHF lost its sole asset as a result of the Ponzi scheme, the estate,
during its settlement, also incurred a loss because the value of its interest in JHF
decreased from $5,175,990 to zero.
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Respondent concedes that Madoff Securities defrauded JHF but contends
that the estate is not entitled to a section 2054 deduction because JHF incurred the
loss. In support of this contention, respondent emphasizes that pursuant to New
York law, JHF, not the estate, was the theft victim. Section 2054, however, allows
for a broader nexus (i.e., between the theft and the incurred loss) than does
respondent’s narrow interpretation. “Arise” is generally defined as “to originate
from a source”. See Merriam-Webster’s Collegiate Dictionary 62 (10th ed. 2001).
Pursuant to the phrase “arising from” in section 2054, the estate is entitled to a
deduction if there is a sufficient nexus between the theft and the estate’s loss. See
White v. Commissioner, 48 T.C. 430, 435 (1967) (finding a similarity between
losses caused by direct and proximate damage of a section 165(c)(3) “other
casualty” and those arising from the specifically enumerated section 165(c)(3)
causes).5 It is sufficient indeed. The nexus between the theft and the value of the
estate’s JHF interest is direct and indisputable. The loss suffered by the estate
relates directly to its JHF interest, the worthlessness of which arose from the theft.
5
See also Roby v. Corp. of Lloyd’s, 996 F.2d 1353, 1361 (2d Cir.1993)
(finding no substantive difference among the phrases “relating to”, “in connection
with”, and “arising from”); United States v. Bradford, 433 F. Supp. 2d 1001, 1003
(N.D. Iowa 2006) (“In the federal common law of contracts, ‘arising from’ is a
broad contractual phrase that encompasses almost any causal connection or
relationship.”).
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Thus, the estate is entitled to a section 2054 deduction relating to its JHF interest.
We need not address whether a mere tangential or more circuitous relationship
would suffice.
Our construction is in accordance with, and buttressed by, the purpose of
the estate tax. See FDA v. Brown & Williamson Tobacco Corp., 529 U.S. 120,
133 (2000) (“It is a ‘fundamental canon of statutory construction that the words of
a statute must be read in their context and with a view to their place in the overall
statutory scheme.’” (quoting Davis v. Mich. Dep’t of Treasury, 489 U.S. 803, 809
(1989))). While the estate tax is imposed on the value of property transferred to
beneficiaries, estate tax deductions are designed to ensure “that the tax is imposed
on the net estate, which is really what of value passes from the dead to the living.”
See Jacobs v. Commissioner, 34 B.T.A. 594, 597 (1936). The theft extinguished
the value of the estate’s JHF interest, thereby diminishing the value of property
available to James Heller’s heirs. Thus, the estate’s entitlement to a section 2054
deduction is consistent with the overall statutory scheme of the estate tax.
The estate has established that no genuine dispute of material fact exists and
that it is entitled to judgment as a matter of law. See Sundstrand Corp. v.
Commissioner, 98 T.C. 518, 520 (1992), aff’d, 17 F.3d 965 (7th Cir. 1994).
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Accordingly, pursuant to Rule 121, summary judgment in favor of the estate is
appropriate.
Contentions we have not addressed are irrelevant, moot, or meritless.
To reflect the foregoing,
An appropriate order will be
issued, and decision will be entered
under Rule 155.