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ESTATE AND GIFT TAX CONSIDERATIONSThe charitable organizations were concerned that their annuity amountswould be substantially reduced if the residuary estate were determined by subtractingthe huge administrative expenses. They filed a lawsuit claiming that theadministrative expenses should be paid out of the postmortem income. In thisand other suits, the parties argued extensively about whether the administrativeexpenses should be charged to the residuary corpus or to postmortem income.The settlement that was ultimately reached included an agreement to pay alladministrative expenses out of postmortem income and not the residuary corpus.Because of the nature of allocations of income to the estate, however, thecourt modified the settlement so that 72.5 percent of the expenses would be allocatedto postmortem income and 27.5 percent of the expenses would be chargedto the corpus. The final settlement also set a minimum annuity payment to thecharities of $1.47 million.The IRS then determined an estate tax deficiency and the matter went to theU.S. Tax Court. The IRS argued that, in computing the “initial net fair marketvalue of the assets constituting the trust,” the base amount for the annuitiesshould be reduced by all of the administrative expenses. The estate maintainedthat the reduction should be by only the 27.5 percent pursuant to the probatecourt’s judgment. The Tax Court agreed with the IRS, relying on state law ratherthan the probate court’s determination. This decision reduced the minimumannuity amount to $878,000 and reduced the estate tax charitable contributiondeduction from $16.9 million to $10 million. The estate appealed.The court of appeals had to decide whether to give effect to the ruling of theprobate court. It wrote that, in the estate tax charitable deduction area, “controllingeffect has frequently been given to bona fide settlements of adversarial litigationnot instituted for tax purposes.” 206 It added that “what the charity receivesit receives as a result and by virtue of the provision made for it in the decedent’swill, whether or not it receives precisely what it would be entitled to if no settlementhad been made.” 207The IRS challenged the bona fides of this settlement. The appellate courtcharacterized the government’s position as being that the settlement, “at least asfar as it dealt with the allocation of administrative expenses, was collusive anddesigned simply to avoid payment of taxes, and that the IRS should not now beforced to abide by a settlement in which it had no voice.” 208 But the courtrejected this view, holding that “[i]t is indisputably clear that the litigation, andits settlement, were to resolve adversarial, nontax, bona fide disputes between theparties.” 209 It also observed that the terms of the will provide “independent verificationof the adversarial interests involved in the probate contest,” in that, “tothe extent the charitable annuities are reduced, the children and grandchildrenbenefit.” 210 (Over the 20-year period, the swing amount between the charities206 Id. at 781. There is authority for the view, however, that state court decisions are not controlling in this regardin the income tax charitable contribution deduction area. See, e.g., Commissioner v. Bosch Estate, 387 U.S.456 (1967).207 Id. at 782 (emphasis in original).208 Id. at 783.209 Id.210 Id. 258