I’ve seen that tactic used (and used it for clients) to get control of a property; be careful of champerty and maintenance, but that’s not the problem for Mike and Catherine, co-exr’s of Dad’s estate. Their problem is that, by buying the mortgages, they paid off the mortgage debts they bought while Dad was still among us, thus invalidating them as claims against his estate in reduction of estate tax. Worse, another mortgage they bought at a discount landed each of them with $960K in gift tax.

I’ve recently lamented the delay in adopting ex-Ch J Maurice B (“Mighty Mo”) Foley’s amendments to the Rules. But if Ch J Kathleen (“TBS = The Big Shillelagh”) Kerrigan has to spend time unscrambling frittatas like Estate of Bernard J. MacElhenny, Jr., Deceased, Donor, Michael P. MacElhenny and Catherine MacElhenny Dann, Co-Executors, T. C. Memo. 2033-33, filed 3/15/23, I can see why she has no time for rulemaking.

Briefly, the late Bernie Mac was mentally impaired toward the end, and co-ex’rs had POA. Bernie Mac’s affairs were a mess. Mike had real estate experience, and tried to straighten things out. Bernie Mac had a couple mortgages (hi, Judge Holmes) in default. Mike thought he could refinance the mortgaged properties out from under, and buy the mortgages. He haggled the lenders into taking haircuts for ready cash, and got assignments of the mortgages, although the lenders warranted nothing.

After Bernie Mac passed, Mike claimed these were debts of Bernie Mac’s estate.

No, says Ch J TBS.

“There is no evidence to support petitioners’ contention that the assignments were negotiated at arm’s length.Mr. MacElhenny was on both sides of the transactions. He agreed on decedent’s behalf to have the judgments entered against decedent and in his and Ms. Dann’s favor. There is no record of consent by decedent for maintenance of the liabilities after payment. True, Mr. MacElhenny held decedent’s power of attorney and so had the authority to make these decisions on decedent’s behalf. It is also true that Mr. MacElhenny employed multiple attorneys to represent the competing interests involved. But we do not see any evidence that these individuals actually negotiated amongst themselves.

“We note that the consent judgments entered against decedent did not resolve a dispute between decedent and his children. Mr. MacElhenny contends that he did not want to take over his father’s debts. At the time of the assignments for both claims, agreement had been reached regarding settling the debts with the banks.” T. C. Memo. 2033-33, at p. 12.

In fact, the debts were extinguished as against Bernie Mac during his life. There was another property where there was a live claim, but that was extinguished within one month. These were clearly all donative deals, to pass the mortgaged properties to the ex’rs (heirs) at a discount.

It gets worse.

Mike and Catherine acquired the mortgaged property for an alleged $4.75 million while there was a valid claim against Bernie Mac. But they really only paid off two mortgages, and reduced the balance of one of them. So they paid less than the worth of the property, and as it came from Bernie Mac, it’s a bargain sale, hence a gift.

I find it hard to reconcile the arithmetic, but maybe one of my CPA readers can give me a clue.