Estate of O'Neal v. United States (291 F. Supp. 2d 1253, 2003)

Citations

291 F. Supp. 2d 1253

Full opinion text

MEMORANDUM OPINION

PROBST, Senior District Judge.

This cause comes on to be heard upon cross-motions for partial summary judgment. Defendant United States of America (“the Government”) filed its motion on May 8, 2003 (Doc. 29). Plaintiffs filed their motions on May 9, 2003 (Docs. 32-34).

FACTS AND PROCEDURAL HISTORY

1. General Background

This case involves certain federal estate taxes on the estate of Kirkman O’Neal (“Mr. O’Neal”), deceased. Mr. O’Neal, founder of O’Neal Steel, Inc., died in Birmingham, Alabama on August 7, 1988. Prior to Mr. O’Neal’s death, he was married to Elizabeth Paramore O’Neal (“Mrs. O’Neal”). Mr. And Mrs. O’Neal had two children: Emmet O’Neal, II, and Elizabeth P. O’Neal White Shannon (“Elizabeth Shannon”). They also had seven grandchildren: Emmet O’Neal, III, Kirkman O’Neal, II, Henry Craft O’Neal, who are the children of Emmet O’Neal, II, and Elizabeth White Reed, Margaret White Head, Virginia White Page, and David H. White, Jr., who are the children of Elizabeth Shannon. See, e.g., Def. Ex. 1 at IRS Form 706. Mr. O’Neal was survived by his wife, his children, and his grandchildren. See Pl.Ex. 4 at 1, 5.

On August 10, 1988, Letters Testamentary were granted to Mrs. O’Neal, Elizabeth Shannon, Emmet O’Neal, II, and Emmet O’Neal, III by the Probate Court of Jefferson County, Alabama. See Def. Ex. 2. After Mrs. O’Neal died on July 23, 1994, the Probate Court ordered that the Letters Testamentary be amended and reissued to Elizabeth Shannon, Emmet O’Neal, II, and Emmet O’Neal III. Id. On or around May 3, 1989, the then representatives filed an estate tax return for Mr. O’Neal’s estate, reporting an estate tax liability of $1,632,128 and remitting payment in the same amount. See Def. Ex. 1, 3. On that tax return, Mr. O’Neal’s estate chose to use the alternate valuation date. See Def. Ex. 1 at IRS From 706, page 2, Part 3, line 1.

In or around July 1990, Internal Revenue Service (“IRS”) examiner Suzanne Paulson was assigned to examine Mr. O’Neal’s estate tax return. See Def. Ex. 4. On April 28, 1992, the IRS issued a Statutory Notice of Estate Tax Deficiency to Mr. O’Neal’s estate, proposing an estate-tax deficiency in the amount of $951,587, plus interest. See Def. Ex. 5. On May 7, 1992, Mr. O’Neal’s estate contested the Statutory Notice of Estate Tax Deficiency, paid the $951,587 plus $357,232 in interest, and filed a refund claim. See Def. Ex. 3, 6. In the refund claim, Mr. O’Neal’s estate sought a refund of $2,941,487.38, plus interest and costs. See Def. Ex. 6. On October 20, 1992, the IRS issued a Notice of Disallowance, denying the refund sought by Mr. O’Neal’s estate. See Def. Ex. 7. On October 14, 1994, plaintiffs filed this refund action, seeking the full refund plus interest and costs.

In its motion, the Government has identified four issues which it argues govern the outcome of this ease: (1) Whether Mr. O’Neal’s estate is entitled to claim a deduction for any alleged restitution claims that his donees might have been able to assert against his estate; (2) Whether the adjusted taxable gifts and corresponding gift tax payable amounts reported on Mr. O’Neal’s estate tax return must be revalued for federal estate tax purposes; (3) Whether Mr. O’Neal’s estate must be increased by $700,000 in order to reflect that Mr. O’Neal’s funds were used to pay a portion of the gift taxes due on gifts made by Mrs. O’Neal in 1987; and (4) Whether the deduction for the 1988 Alabama income tax liability claimed by Mr. O’Neal’s estate must be reduced to properly reflect the correct amount of Mr. O’Neal’s share of such liability. Plaintiffs have filed three separate motions for partial summary judgment. The First and Third Motions appear to relate to issues raised by the defendants. The Second Motion involves whether the estate can deduct unpaid gift taxes that plaintiffs argue are still due. The pertinent facts will be discussed in connection with the issue addressed.

II. Facts Pertaining to Deductions for Certain Donees’ Claims (Defendant’s Issue 1 and Plaintiffs’ First Motion)

Before November 3, 1987, Mr. O’Neal was a minority shareholder in O’Neal Steel, a closely held, corporation that engaged in the steel service/distribution business. O’Neal Steel had two classes of common stock.- The first class was Class A nonvoting common stock, of which 171,-859 of the 200,000 shares were outstanding as of June 30, 1987. The second class was Class B voting common stock, of which 223 of the 1,500 authorized shares were outstanding as of June 30, 1987. As of the close of business on November 2,1987, Mr. O’Neal owned 42,262 shares of Class A stock and 35 shares of Class B stock.

On November 3, 1987, Mr. O’Neal made gifts of Class A and Class B stock to his two children and seven grandchildren (“the donees”). See Def. Ex. 8; PLEx. 4 at 1-4, Exs. 7-8. Specifically, Mr. O’Neal made the following gifts to the donees:

Donee Gift

Emmet O’Neal, II

Elizabeth Shannon

Emmet O’Neal, III

Kii'kman O’Neal, II

Henry Craft O’Neal

Virginia White Page

Elizabeth White Reed

Margaret White Head

David H. White, Jr.

1 share of Class A stock

18 shares of Class B stock

17 shares of Class B stock

7,043 shares of Class A stock

5,283shares of Class A stock

Before the gifts of stock were completed, three agreements had been entered into: (a) an agreement dated November 3, 1987 (“Consent Agreement”) in which all shareholders consented to the transfer of the stock pursuant to a June 28, 1951 buy-sell agreement, see Def. Ex. 10; PI.Ex. 9; (b) the Supplemental Stock Purchase Agreement dated November 3, 1987 which was entered into by the grandchildren only, see Def. Ex. 11; and (c) the Escrow Agreement dated November 3, 1987 which was entered into by Mr. and Mrs. O’Neal, as donors, and Emmet O’Neal, II, as escrow agent. See Def. Ex. 12. Pursuant to the Escrow Agreement, Mr. and Mrs. O’Neal, as donors, delivered to Emmet O’Neal, as escrow agent, the shares of stock for safekeeping until all the donees signed the Consent Agreement and the Supplemental Stock Purchase Agreement. See Def. Ex. 12. The Consent Agreement provided, inter alia, that the stock be transferred under a buy-sell agreement (see below). See Def. Ex. 10. The Supplemental Stock Purchase Agreement provided, inter alia, that the grandchildren do-nees would contribute, on a pro rata basis, toward the payment of any transferee gift tax liability imposed upon any one of them. See Def. Ex. 11 at § 7. Upon completion of the conditions for the gifts, the donees received stock certificates conveying ownership in the numbers of shares set forth above.

Both the Class A and Class B stock certificates contained a legend on their face indicating that they were “transferable on the books of the Company by the holder hereof in person or by duly authorized attorney, on surrender of this certificate, properly endorsed, subject, however, to the restrictions referred to on the reverse hereof....” See Def. Ex. 13. The backs of the stock certificates stated: “The shares of stock evidence by this certificate are held and may be transferred only subject to the terms, provisions and options contained in an agreement dated June 28, 1951, as amended, and as recorded in Section 17 of the By-Laws of the Corporation, as amended.” Id. The 1951 agreement was a restrictive buy-sell agreement. See Def. Exs. 14-15; PI.Ex. 9. Specifically, the buy-sell agreement restricted the transferability of the O’Neal Steel stock during the lifetime and upon the death of the shareholder and provided a procedure by which O’Neal family members could purchase the stock at fixed prices only. Id. When the gifts were made in 1987, the fixed option prices for Class A and Class B stock were $54 and $61, respectively. See Def. Exs. 19-20; Pl. Exs. 17-18. Plaintiffs assert that previous valuations of the stock had been computed by Management Planning, Inc. (“MPI”), but this particular valuation was computed by the directors of O’Neal Steel, not MPI. See Pl. Exs. 19-25.

In addition to the fixed option price restriction, the buy-sell agreement further restricted transfers of O’Neal Steel stock by limiting the shareholders who were entitled to exercise the options being offered under the agreement. Specifically, only shareholders “who were designated as shareholders that were entitled to benefit under the agreement” were allowed to exercise the option to purchase the stock of another shareholder. See Def. Exs. 14-15, 20. Only shareholders who are members of the O’Neal family have been granted entitlement to the rights and benefits arising under the agreement. Id.

On or around April 15, 1988, Mr. and Mrs. O’Neal filed separate Forms 709, the gift tax return form, with the IRS. See Def. Exs. 8-9; Pl. Exs. 7-8. On these returns, Mr. and Mrs. O’Neal elected to split their gifts pursuant to IRS Code § 2518. They reported the gifts of stock made to the donees, at the value at which the stock could be sold under the buy-sell agreement, i.e., $54 for Class A stock and $61 for Class B stock. Attached to the tax returns were copies of the buy-sell agreement and copies of the financial statements of O’Neal Steel. Id. Mr. and Mrs. O’Neal owed $820,665 and $810,186 in gift taxes, respectively. Id. Plaintiffs note that Mr. O’Neal’s payment of his 1987 gift taxes were due on April 15, 1988, and that at 12:01 a.m. on April 16, 1988, IRS Code § 6324(b) imposed personal liability on the donees for the portion of the 1987 gift taxes that were due but not paid.

The Government notes that Revenue Ruling 59-60, 1959 WL 12594 provides some guidance on how to value closely-held stock for gift and estate tax purposes. See Def. Ex. 25. Specifically, special rules ai'e provided for valuing stock subject to an agreement restricting its sale or transfer. Id. at § 8. The Government also notes that as of the date of Mr. O’Neal’s death, no appraisal of the O’Neal Steel stock had been performed or was in existence. See Def. Ex. 24 at 54. At the time of Mr. O’Neal’s death, the IRS had not selected Mr. or Mrs. O’Neal’s 1987 gift tax returns for examination. Nor had the IRS proposed to assess any gift taxes, including additions to tax or interest, with respect to the gifts made on November 3, 1987. The Government also contends that as of the date of Mr. O’Neal’s death, neither Mr. O’Neal nor Mrs. O’Neal had made any efforts to amend their 1987 gift tax returns, and the donees had neither made any payments toward gift taxes nor made any claims against Mr. O’Neal seeking restitution or reimbursement of gift taxes.

As of the date of Mr. O’Neal’s death, his assets totaled approximately $4.8 million, while his probate assets totaled approximately $4.0 million. See Def. Ex. 1 at Form 706, page 3, Part 5, Schedules A-G. See also Def. Br. at 16-17 (breakdown of assets). Excluding the claims made by the donees, the debts due and owing by Mr. O’Neal totaled approximately $1.1 million. See Def. Ex. 1 at Form 706, page 3, Part 5, Schedule K. See also Def. Br. at 17-18 (breakdown of debts). A bequest was also due to be paid to Mrs. O’Neal, as surviving spouse, in the amount of $11,068. See Def. Ex. 1 at Form 706, page 3, Part 5, Schedule M.

Plaintiffs point to additional events that occurred after Mr. O’Neal died. The IRS selected Mr. O’Neal’s estate tax return for an audit. See Pl.Ex. 5 at 2. As part of the estate tax audit, the IRS identified the gift tax returns as items that needed to be examined. See Pl.Ex. 26. The IRS also received a copy of the buy-sell agreement and other papers related to O’Neal Steel’s business. See PLEx. 5 at 2; Ex. 27. According to plaintiffs, this information was received well before April 15, 1991, which was the last day on which the IRS could assessed additional gift tax with respect to the 1987 gifts against Mr. O’Neal’s estate. See Pl.Ex. 5 at 2-3; 26 U.S.C. § 6501(a). Plaintiffs contend that it was the IRS’s position that while the buy-sell agreement could determine stock value for estate tax purposes, it could not determine the stock value for gift tax purposes. See Pl.Ex. 30, Exhibit A at 14, 21-25.

On September 19, 1991, the attorney auditing Mr. O’Neal’s estate requested additional information concerning O’Neal Steel. See PLEx. 31. On November 25, 1991, the IRS confirmed that it had engaged an outside appraiser to value the donees’ stock. See Pl.Ex. 32. The next day, the estate’s attorneys wrote the IRS insisting that the stock had been properly valued on the 1987 gift tax returns, questioning the timeliness of any attempt by the IRS to assess additional gift taxes, and asserting that if such liability was asserted against the donees these claims would be deductible against Mr. O’Neal’s estate. See Pl.Ex. 33. On February 6, 1992, the outside appraiser issued a report indicating that the values of the stock were significantly higher than reported. See Pl. Ex. 34. As noted above, on April 13, 1992, the IRS issued a Statutory Notice of Estate Tax Deficiency to each donee. See Pl. Exs. 36M4. Each Notice stated that it was for “the transfer tax liability (gift tax and generation-skipping transfer tax) of Kirkman O’Neal ....” Id. As will be discussed more fully below, the deficiency was eventually settled. See Pl. First Br. at 10-13 (discussion of history of settlement). The donees filed claims on June 24, 1992 against the estate of Mr. O’Neal. See Pl. Exs. 122-130. The representatives of Mr. O’Neal’s estate eventually paid the donees for them claims against the estate. See Pl. First Br. at 14-15.

III. Facts Pertaining to Revaluation of “Adjusted Taxable Gifts” and “Gift Tax Payable” (Defendant’s Issue 2)

On Mr. O’Neal’s estate tax return, the estate reported that the adjusted taxable gifts totaled $2,373,724, thus making a gift tax payable in the amount of $820,665. See Def. Ex. 1 at Form 706, page 1, lines 4, 9. According to the Government, these amounts included amounts relating to the gifts of O’Neal Steel stock made to the donees in 1987. See Def. Exs. 1, 8. For purposes of computing federal estate tax, the Government also notes, the adjusted taxable gifts and gift tax payable must be adjusted to reflect any revaluation of the gifts of O’Neal Steel stock made in 1987. See Def. Ex. 4. In the Statutory Notice of Estate Tax Deficiency sent on April 28, 1992, the IRS proposed to increase: (a) the adjusted taxable gifts by an amount equal to $12,814,717, resulting in an adjusted taxable gifts total of $15,188,411, and (b) the gift tax payable by an amount equal to $7,040,223, making the gift tax payable total $7,860,888. See Def. Exs. 4-5. The adjusted stock prices were based on the appraisal performed by the IRS. Eventually, the IRS and the donees settled the transferee liability issue. See Def. Exs. 28-30. The settlement provided that the value of the Class A stock would be increased from $54 to $77 per share, and that the value of the Class B stock would be increased from $61 to $82 per share. Id. The Government contends that the gifts must be revalued for estate tax purposes, although the amount of revaluation would depend on whether the estate is allowed a deduction for the donees’ purported claims. See Def. Br. at 20, ¶¶ 59-60.

IV. Facts Pertaining to the Inclusion of Funds Used to Pay Mrs. O’Neal’s Gift Taxes (Defendant’s Issue 3 and Plaintiffs’ Third Motion)

In November 1987, Mr. and Mrs. O’Neal gave all of their O’Neal Steel stock to their children and grandchildren. Because of these gifts, Mr. and Mrs. O’Neal filed gift tax returns for the year 1987. See Def. Exs. 8-9. As noted above, on those returns the O’Neals elected gift splitting pursuant to IRS Code § 2513. Also as noted above, Mr. O’Neal reported gift taxes due in the amount of $820,665, while Mrs. O’Neal reported gift taxes due in the amount of $810,186. Id.

Prior to these gifts, in December 1986, the shareholders of O’Neal Steel elected “S Corporation” status for O’Neal Steel effective with the tax year beginning July 1, 1987. See Def. Exs. 31-32. Anticipating that this change would require O’Neal Steel to change its tax year to a calendar year, and that such a change would require the allocation of significant income to Mr. and Mrs. O’Neal on their 1987 income tax return, Mr. O’Neal made a payment of $1,437,000 to the IRS to cover estimated income tax. See Def. Exs. 32-34. According to the Government, this payment was made from Mr. O’Neal’s separate funds. However, plaintiffs note that roughly 46% of the $1,437,000 was directly attributable to income earned by Mrs. O’Neal. See PL Third Br. at 3. Accordingly, plaintiffs contend, $664,543 of the estimated tax payment was being paid to satisfy Mrs. O’Neal’s portion of the 1987 income tax liability. Id.

After the payment was made, legislation was enacted that allowed O’Neal Steel to retain the same tax year it had always used. See Def. Ex. 35. The estimated income tax payment thus became an overestimate. The IRS contends that it was directed to apply the payment to the outstanding gift taxes owed by Mr. and Mrs. O’Neal. Plaintiffs counter that Mr. and Mrs. O’Neal sought refunds of the payment, which were effected by crediting their gift tax “account.” See Pl.Ex. 4 at 16; Ex. 5 at 4; Ex. 173. Of the overpayment, $737,000 was applied to Mr. O’Neal’s unpaid gift tax, while $700,000 was applied to Mrs. O’Neal’s unpaid gift tax. See Def. Exs. 32, 36. At all relevant times, the Government contends, Mr. and Mrs. O’Neal had separate banking accounts, and none of Mrs. O’Neal’s accounts were included as part of Mr. O’Neal’s estate when he died. See Def. Exs. 1, 38-39. Estate Examiner Suzanne Paulson determined that Mr. O’Neal’s gross estate must be increased by $700,000 to include the amount from his account used to pay Mrs. O’Neal’s gift tax. See Def. Exs. 4-5.

V. Facts Pertaining to Reduction in Deduction for 1988 Alabama Income Tax Liability (Defendant’s Issue 4)

Mr. and Mrs. O’Neal filed joint federal and state income tax returns for 1987. See Def. Exs. 37. 40. On the federal return, Mr. and Mrs. O’Neal did not report the $1,437,000 estimated income tax payment that had been transferred to cover the O’Neals’ 1987 gift taxes. See Def. Ex. 37. On the state income tax return, the O’Neals deducted the federal tax payment of $1,437,000. See Def. Ex. 40. After Mr. O’Neal died, Mrs. O’Neal subsequently claimed that the couple had not received any state tax benefit from the deduction because their Alabama income was insufficient to absorb the deduction for that year. See Def. Ex. 32.

In April 1989, Mrs. O’Neal filed joint federal and state income tax returns for the 1988 tax year. On the state income tax form filed for 1988, no deduction was taken for any portion of the $1,437,000 applied to the gift taxes. See Def. Ex. 41. In August 1990, Mrs. O’Neal amended the 1988 state tax return, requesting a refund of Alabama income taxes on the grounds that the deduction for the gift taxes should be allowed in 1988. See Def. Ex. 42. See also Def. Exs. 32, 36. In December 1990, a refund check was issued to Mr. and Mrs. O’Neal jointly. See Def. Exs. 4, 32. On Mr. O’Neal’s estate tax return, the Government contends, the estate claimed a deduction for Mr. O’Neal’s share of the 1988 state income tax liability incurred by him and Mrs. O’Neal. See Def. Ex. 1 at Form 706, Schedule K. The deduction totaled $93,797. During the subsequent IRS examination, the IRS determined that the deduction should only have been $38,054, and thus it increased O’Neal’s gross estate by $55,743. See Def. Exs. 4-5.

VI. Facts Pertaining to Deduction for Unpaid Gift Taxes (Plaintiffs’ Second Motion)

Plaintiffs put forth two separate expert opinions as to the actual date-of-death value of the stock given to the donees that should have been reported for gift tax purposes. According to plaintiffs, the values were severely understated, and thus the estate is entitled to a deduction on the amount of unpaid taxes, penalties, and statutory interest. The first expert is Carey T. Frazier, a retired IRS Estate Tax Attorney. After discussing Frazier’s qualifications and methods, see PI. Second Br. at 4-6, plaintiffs note several of his conclusions. Frazier opined that the likelihood that Mr. O’Neal’s gift tax return would have been chosen for an audit was 90% to 100%. See Pl.Ex. 55 at 4, 6. Frazier also concluded that the fair market value of the stock would have been determined by the IRS to be $250 per share. Id. at 7. Plaintiffs note that this figure would have resulted in a total gift tax liability of $5,049,943. Id. As Mr. O’Neal only paid $820,665 in gift tax, there would have been an underpayment of gift tax in the amount of $4,229,278. Id. Frazier further opined that a 30% undervaluation penalty would have been imposed in the amount of $1,268,683 under 26 U.S.C. § 6660 as it was written at the time. Id. Frazier also concluded that $173,922 would be due in statutory interest. Id. In total, Frazier opined that the estate was liable for $5,671,983 in unpaid gift tax, penalties, and interest. Id.

Plaintiffs’ other expert, William F. Bullock, presents similar opinions. As with Frazier, plaintiffs discuss Bullock’s qualifications and methods. See PI. Second Br. at 7-9. Bullock opined that there was a 95% probability that Mr. O’Neal’s estate tax return would be examined and a 95% probability that the 1987 gift tax return would be examined in conjunction with the estate tax return. See Pl.Ex. 54 at 12-13. Bullock also opined that the IRS would have asserted a value of $230 per share for the Class A stock, and $248 per share for the Class B stock. Id. at Tab B, pages 13-14. Using these figures, the correct gift tax owed was $4,617,724, resulting in an underpayment of $3,797,059. Id. at Tab B, pages 1, 32. Bullock also concluded that a 30% penalty would be assessed totaling $1,139,118. Id. at Tab B, pages 29. He also opined that there would be statutory interest in the amount of $156,147.32. Id. at Tab B, pages 2, 32. Thus, Bullock’s opinion is that the estate owes a total of $5,092,324 in unpaid gift tax, penalties, and interest.

SUMMARY JUDGMENT STANDARD

Summary judgment may be granted based upon facts developed through pleadings, discovery, and supplemental affidavits, etc., if together, they show that there is no genuine issue as to any material fact. Celotex Corp. v. Catrett, 477 U.S. 317, 322-323, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986). A dispute is genuine “if the evidence is such that a reasonable jury could return a verdict for the nonmoving party.” Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986). The party moving for summary judgment bears the initial burden of explaining the basis of his motion. Celotex, 477 U.S. at 323, 106 S.Ct. 2548. “It is never enough [for the movant] simply to state that the non-moving party could not meet their burden at trial.” Mullins v. Crowell, 228 F.3d 1305, 1313 (11th Cir.2000) (quotation omitted). The non-moving party then bears the burden of pointing to specific facts demonstrating that there is a genuine issue of fact for trial. Celotex, 477 U.S. at 324, 106 S.Ct. 2548. The non-moving party “must either point to evidence in the record or present additional evidence ‘sufficient to withstand a directed verdict motion at trial based on the alleged evidentiary deficiency.’ ” Hammer v. Slater, 20 F.3d 1137, 1141 (11th Cir.1994) (quotation omitted). Summary judgment is required where the non-moving party merely repeats its conclusory allegations, unsupported by evidence showing an issue for trial. Comer v. City of Palm Bay, 265 F.3d 1186, 1192 (11th Cir.2001) (citation omitted).

Summary judgment will not be granted until a reasonable time has been allowed for discovery. Comer, 265 F.3d at 1192. Moreover, “[w]hen deciding whether summary judgment is appropriate, all evidence and reasonable factual inferences drawn therefrom are reviewed in a light most favorable to the non-moving party.” Korman v. HBC Florida, Inc., 182 F.3d 1291, 1293 (11th Cir.1999). Finally, the trial court must resolve all reasonable doubts in favor of the non-moving party, although it need not resolve all doubts in a similar fashion. Earley v. Champion Int’l Corp., 907 F.2d 1077, 1080 (11th Cir.1990).

ARGUMENTS

I. Burden of Proof

Before addressing the merits of each issue, both sides present arguments as to the applicable burden of proof. The Government contends that the plaintiffs bear the burden of proof in this action. In general, it notes, a statutory notice of tax deficiency is presumed to be accurate. See Welch v. Helvering, 290 U.S. 111, 115, 54 S.Ct. 8, 78 L.Ed. 212 (1933)(Commissioner’s ruling “has the support of a presumption of correctness, and the petitioner has the burden of proving it to be wrong.”). See also 26 U.S.C. § 7422(e). The Government contends that this burden includes establishing the amount of the deduction claimed.

Plaintiffs counter by arguing that the language of § 7422(e) shows that it applies only to issues raised as counterclaims or through intervention, neither of which has happened here. Plaintiffs also contend that the presumption of correctness articulated in Welch was based upon a ruling by the Commissioner of Internal Revenue. Here, some of the arguments made by the Government are raised for the first time, i.e., there has been no ruling on these issues by the Commissioner. Also, plaintiffs contend, many of the arguments made by the Government involve including, not deducting, items from the estate. Thus, Smith v. Commissioner, T.C. Memo 2001-303, 2001 WL 1505917 (2001), which dealt with deductions, is also inapplicable. See Pl. Response at 3. Finally, with respect the Government’s 26 U.S.C. § 2035(b) argument, (see below), plaintiffs argue that the Government bears the burden to show a reasonable basis for the setoff. See Missouri Pac. R.R. Co. v. United States, 411 F.2d 327, 329 (8th Cir.1969). See also Pl. Response at 4.

II. Deductions for Certain Donees’ Claims (Defendant’s Issue 1 and Plaintiffs’ First Motion)

A. Defendant’s Position

The Government argues that the estate is not entitled to a deduction for the do-nees’ claims under 26 U.S.C. § 2053(a)(3). Section 2053(a)(3) provides that, in determining the taxable estate, a deduction is allowed “for claims against the estate ... as are allowable by the laws of the jurisdiction, whether within or without the United States, under which the estate is being administered.” However, the Government contends, state law alone is not determinative. Rather, other requirements found in the Treasury regulations must also be satisfied. See, e.g., Estate of Chagra v. Comm’r, T.C. Memo 1990-352, 1990 WL 94717 (“The phrase ‘as are allowable by the ... jurisdiction ... under which the estate is being administered’... establishes a threshold and not an exclusive condition; the requirements of respondent’s regulations must also be satisfied.”), aff'd, 935 F.2d 1291 (5th Cir.1991).

First, the Government argues, “[t]he amounts that may be deducted as claims against a decedent’s estate are such only as represent personal obligations of the decedent existing at the time of his death, whether or not then matured, and interest thereon which had accrued at the time of death.... Only claims enforceable against the decedent’s estate may be deducted.... Liabilities imposed by law or arising out of torts are deductible.” 26 C.F.R. § 20.2053-3. Second, an item may be claimed as a deduction “though its exact amount is not then known, provided it is ascertainable with reasonable certainty, and will be paid. No deduction may be taken upon the basis of a vague or uncertain estimate.” 26 C.F.R. § 20.2053-1(b)(3).

With respect to whether these particular donee claims are deductible, the Government contends that there is a two-pronged test. The first question is whether a deduction is available. See Estate of Smith v. Comm’r, 198 F.3d 515, 521 (5th Cir.1999). The second prong is a determination of the “correct amount,” or value, of the deduction. Smith, 198 F.3d at 521.

The Government contends that the Eleventh Circuit has addressed the issue of how to value claims sought to be deducted under § 2053(a)(3). Adopting the principles announced in Ithaca Trust Co. v. United States, 279 U.S. 151, 49 S.Ct. 291, 73 L.Ed. 647 (1929), the court stated that the deduction “must be valued as of the date of the decedent’s death. Events occurring after the decedent’s death that alter the value must be disregarded.” Estate of Elizabeth P. O’Neal v. United States, 258 F.3d 1265, 1266 (11th Cir.2001) (citation omitted). The court also gave the following guidance:

On remand, the district court is instructed neither to admit nor consider evidence of post-death occurrences when determining the date of death value of the Section 2053(a)(3) deduction. It will be incumbent on each party to supply the district court with relevant evidence of pre-death facts and occurrences supporting the date of death value of the deduction as advocated by that party. The district court will then, by using informed judgment, reasonableness and common sense, weighing all relevant facts and evaluating their aggregate significance, determine a sound valuation.

258 F.3d at 1275 (citations and footnote omitted). The court did note two exceptions, the Government contends, based upon the case Estate of Hagmann v. Commissioner, 60 T.C. 465, 1973 WL 2507 (1973), aff'd, 492 F.2d 796 (5th Cir.1974):(1) where the claim is classified as a “potential claim without an existing claimant,” or (2) where the claim is classified as having an “identifiable claimant without a cognizable claim” (“Hagmann exceptions”). See 258 F.3d at 1272 n. 24. However, the Government contends, the facts of this case do not fit within the Hagmann exceptions. See Armstrong ex rel. Armstrong v. United States, 132 F.Supp.2d 421 (W.D.Va. 2001)(“Not only was the possibility of an additional gift tax assessment purely conjectural, but, in the event that additional gift taxes were to be imposed, the amount of such an assessment was unpredictable [at the time of the gift].”), aff'd, 277 F.3d 490 (4th Cir.2002). See also Def. Ex. 26 at 11 (expert opinion that claims were too speculative).

Here, the Government argues, the value of any donee claims would be zero. Mr. O’Neal died on August 7, 1988. The Government argues that, at the time of his death, only the following events had occurred: Mr. O’Neal made gifts of O’Neal Steel stock in November, 1987. On or before April 15, 1988, Mr. O’Neal filed a gift tax return for the year 1987. In that return, Mr. O’Neal valued the Class A and Class B stock as $54 and $61, respectively. No appraisals of the O’Neal stock had been performed as of the date of the gifts. Mr. O’Neal never made any effort to amend his 1987 gift tax return. As of the date of his death, the IRS had not selected his gift tax return for review. None of the donees had made any assertions of any claims against Mr. O’Neal seeking reimbursement of any gift tax that might be payable by them. In sum, Government contends, the donees’ claims are not susceptible of valuation since the donees were not subject to any definite liability at the time of Mr. O’Neal’s death.

Alternatively, ’ the Government argues, even assuming that the claims were susceptible of valuation, “the value of their claim as of the date of Mr. O’Neal’s death would be zero, regardless of what amount of gift tax deficiency might have been asserted with respect to the gifts.” See Def. Ex. 26 at 15 (expert report of Larry J. White). This conclusion results because “[ejither (i) the estate’s probate assets would be exhausted by federal tax claims with priority over other claims, leaving no assets to pay a restitution claim; or [ (ii) ] the additional gift tax asserted on Mr. O’Neal’s 1987 gifts would be fully satisfied out of the estate’s probate assets, so that no transferee liability would be imposed on the donees ....” Id. at 16-26.

Also, the Government contends, even assuming that the donees’ claims had a value greater than zero, any tax benefit to Mr. O’Neal’s estate would be zero because the amount of such a deduction must be offset by a corresponding increase in Mr. O’Neal’s gross estate under 26 U.S.C. § 2035(b). Section 2035(b), provides:

The amount of the gross estate (determined without regard to this subsection)' shall be increased by the amount of any tax paid under chapter 12 by the decedent or his estate on any gift made by the decedent or his spouse during the 3-year period ending on the date of the decedent’s death.

The Government cites Estate of Sachs v. Commissioner, 88 T.C. 769, 1987 WL 49299 (1987), rev’d in part on other grounds, 856 F.2d 1158 (8th Cir.1988), which interpreted this provision. The court in Sachs held that a decedent’s gross estate must include the amount of any gift tax paid by donees on gifts made within three years of the decedent donor’s death. 88 T.C. at 769. The court went beyond the plain language of the statute, noting that “[a]n important purpose of the gift tax was to prevent or compensate for avoidance of the estate tax.” Id. at 774. The court also noted the Tax Reform Act of 1976, which was designed to “reduce the disparity of treatment between lifetime gifts and transfers at death.” Id. at 775. The court concluded that

Insistence on the literal language of section 2035(c) would distort the framework erected by the Tax Reform Act of 1976. The Act retained some of the prior law’s preferences for lifetime gifts; however, these preferences were not made available to deathbed gifts. Petitioners’ construction of section 2035(c) extends the benefit of one such preference to deathbed net gifts. Mechanical application of section 2035(c) would completely remove from the transfer tax base all funds used to pay gift tax on such gifts. This interpretation of the statute is wholly inconsistent with Congress’ goal of sharply distinguishing deathbed gifts from other gifts and eliminating the disparity of treatment between deathbed gifts and transfers at death.

Id. at 777. See also Def. Br. at 34-36 (discussion of Sachs). The same rationale applies here.

B. Plaintiffs’Position

Addressing the Government’s two-pronged approach, plaintiffs argue that the first question, the availability of the deduction, was thoroughly litigated and answered with respect to Mrs. O’Neal’s estate. The Probate Court of Jefferson County, Alabama determined that the do-nees’ claims against Mrs. O’Neal’s estate were valid and enforceable. See Pl.Ex. 3 at 9. The district court agreed, and the Eleventh Circuit affirmed. See Estate of Elizabeth P. O’Neal v. United States, 81 F.Supp.2d 1205, 1218 (M.D.Ala.1999), aff'd, 258 F.3d 1265 (11th Cir.2001).

As to the second prong, i.e., the value of the deduction, plaintiffs agree that the Eleventh Circuit adopted the “snapshot” rule announced by the Supreme Court in Ithaca Trust. See Estate of Elizabeth P. O’Neal, 258 F.3d at 1271. At trial, plaintiffs contend, they will present the “valuation snapshot” through four experts using the methodology announced by the Eleventh Circuit in O’Neal to determine (i) the facts as of the date-of-death; (ii) the foreseeable outcome of the donees’ liability for Mr. O’Neal’s gift taxes, penalties, and interest; and (iii) the foreseeable outcome of the assertion of the donees’ liability as a claim against the estate. See Pl. Exs. 54, 55, 162, 182. See also Estate of Elizabeth P. O’Neal v. U.S., 228 F.Supp.2d 1290, 1298-1302 (M.D.Ala.2002)(on remand from Eleventh Circuit’s O'Neal opinion). For the second issue, plaintiffs rely on the conclusions of two of these experts, Frazier and Bullock, which are recited above in the statement of facts.

For the third issue, plaintiffs rely on the opinions of two practitioners, Sam C. Pointer, Jr., and Ralph H. Yeilding. Plaintiffs contend that this type of methodology has been accepted by other courts. See, e.g., Estate of Smith, 82 T.C.M. 909, 916, 2001 WL 1505917 (2002); Pl. Response at 10 (other cases). Judge Pointer states that a claim is capable of valuation even if the “claim on the valuation date is contingent, uncertain, or subject to dispute ....” See Pl.Ex. 162 at 3. Here, four simple and undisputed facts are relevant. First, Mr. O’Neal failed to pay all of his 1987 gift taxes. Second, the donees became personally liable for the gift tax. Third, the donees’ liability created a duty on the part of Mr. O’Neal’s estate to make restitution for the amounts paid by the donees. Fourth, a duty to make restitution constitutes a deductible claim. See 26 U.S.C. § 2053.

Plaintiffs also note that nearly identical claims were given value with respect to Mrs. O’Neal’s claims. See Pl. First Br. at 18. Indeed, Treasury Regulation § 20.2053-4, cited by the Government, states that claims may be deducted “whether or not they matured.” Plaintiffs argue that Estate of Armstrong, cited by the Government, is inapplicable because it involved net gift taxes. Plaintiffs also note numerous factual differences between Armstrong and this case. See Pl. Response at 12-15. Plaintiffs cite the recent Tax Court case McCord v. Commissioner, 120 T.C. No. 13, 2003 WL 21089049 (May 14, 2003), in which the court explained the rationale underlying Armstrong:

Nevertheless, we agree with what we believe to be the basis of those two opinions, i.e., that, in advance of the death of a person, no recognized method exists for approximating the burden of the estate tax with a sufficient degree of certitude to be effective for Federal gift tax purposes.

Id. at 402, 2003 WL 21089049 (Part VII-B of the opinion). Plaintiffs contend that the McCord court applied this rationale to deny the taxpayers a reduction in the value of their gifts based on the claimed “ ‘mortality-adjusted present value’ ... of the [donees’] contingent obligation to pay additional estate tax that would be incurred ....” Id. at 399, 2003 WL 21089049 (Part VII-A of the opinion). The court further reasoned:

However, the dollar amount of a potential liability to pay the 2035 tax is by no means fixed; rather, such amount depends on factors that are subject to change, including estate tax rates and exemption amounts (not to mention the continued existence of the estate tax itself). For that reason alone, we conclude that petitioners are not entitled to treat the mortality-adjusted present values as sale proceeds (consideration received) for purposes of determining the amounts of their respective gifts at issue.

Id. at 402-03, 2003 WL 21089049 (footnotes omitted)(Part VII-B of the opinion). In Armstrong and McCord, plaintiffs contend, the taxpayers sought to reduce the date-of-gift value based on net gift principles because of a contingent obligation to pay additional estate tax in the future if the donor did not survive for three years. Here, plaintiffs merely seek to quantify the date-of-death value of the donees’ claims against Mr. O’Neal’s estate for their transferee gift tax, penalties, and interest that arose on April 16, 1988 — before Mr. O’Neal died. The claim was not contingent, but fixed. See PI. Response at 17-18.

Plaintiffs next address the Government’s argument that the deduction is not allowed because the claims are not susceptible to valuation. Plaintiffs cite Estate of Smith v. Commissioner, 198 F.3d 515 (5th Cir.1999), in which the court stated:

The actual value of Exxon’s claim prior to either settlement or entry of a judgment is inherently imprecise, yet “even a disputed claim may have a value, to which lawyers who settle cases every day may well testify, fully as measurable as the possible future amounts that may eventually accrue on an uncontested claim.”

In fact, when addressing situations that are the obverse of the one in the instant case, i.e., when the decedent-estate taxpayer is a plaintiff rather than a defendant in a pending lawsuit, the Commissioner has considered himself capable of determining the value of a pending lawsuit in exact dollars and cents, even when the claim has not been reduced to judgment. Furthermore, courts have consistently held that “inexactitude is often a byproduct in estimating claims or assets without an established market and provides no excuse for failing to value the claims ... in the light of the vicissitudes attending their recovery.”

Id. at 525-26 (footnotes and citations omitted). Thus, plaintiffs argue, there is well-established methodology for valuing these claims. See PI. Response at 19-20.

Plaintiffs also address the Government’s contention that any deduction would be offset by an increase in the estate under § 2035(b). First, plaintiffs contend that this defense was not raised in the IRS Notice of Deficiency or in the Government’s answer. See Pl. Response at 20, 24-25 (discussing Fed.R.Civ.P. 8(c)); PI. Ex. 182. Second, plaintiffs contend, Sachs (relied upon by the Government) relied on net gift tax principles and is thus inapplicable. Applying net principles to this case would result in the IRS taxing the donor for more than the amount that was actually transferred. See PI. Response at 20-21 (hypothetical example). Plaintiffs also note that in a net gift situation, the donee is simply acting as the agent of the donor, not as someone paying his or her own direct liability to the IRS. See Sachs, 88 T.C. at 778, 1987 WL 49299. Thus, in a net gift situation, it does not harm the statute to hold that the tax is paid by the donor or the donor’s estate. Here, the donees’ are only liable because Mr. O’Neal failed to timely pay his gift tax, not because they were contractually obligated to do so.

Plaintiffs also argue that the Government’s “offset” argument is not supported by the plain language of the statute. Section 2035(b) states that the gross estate shall be increased “by the amount of any tax paid under chapter 12 by the decedent or his estate.” (Emphasis added). Congress could have included the language “or paid by donees,” but it did not. Neither § 2035(b) or § 2053 speak of an offset. They are independent provisions. Even if the statute is ambiguous, plaintiffs note, revenue laws are construed against the taxing power and in favor of the taxpayer. See Tandy Leather Co. v. United States, 347 F.2d 693, 695 (5th Cir.1965). See also PI. Response at 22-24. Plaintiffs also contend that even if an offset was due because of amounts paid by the donees, the amount should be $489,360, not the $700,000 sought by the IRS in its Notice of Deficiency. See Pl. First Br. at 28-30.

Lastly, plaintiffs argue, the donees filed timely claims against Mr. O’Neal’s estate. Plaintiffs note that Alabama Code § 43-2-60 requires personal representatives to give notice of their appointment and to provide certain information. The notice must inform persons that their claims will be barred if not properly filed. Alabama Code § 43-2-350 sets out the appropriate time limits. However, as noted above, plaintiffs’ experts assert that the donees’ claims were “contingent, uncertain, or subject to dispute.” See Pl.Ex. 162 at 3. Plaintiffs contend that there is an exception to the general rule where a claim is contingent. Plaintiffs cite Farris v. Stoutz, 78 Ala. 130 (1884), where the court stated:

All claims which are absolute and unconditional, whether payable presently or in the future, must be presented within [six months] after the grant of letters testamentary, or of administration. “It is only contingent claims — claims which may never accrue — that fall within the provision postponing a presentment until eighteen months after the same have accrued.” A claim dependent upon a future contingency — on the happening of an event which may never happen — does not accrue until the event happens; until then it is not a claim.

Id. at 133 (citation omitted). This language, plaintiffs note, does not contain any “should have known” or “were well aware of’ language. In essence, the time prescribed in § 43-2-350 is tolled until the event happens. See also Edgehill Corp. v. Hutchens, 282 Ala. 492, 213 So.2d 225 (1968).

While the donees’ liability arose at 12:01 a.m. on April 16, 1988, plaintiffs contend that the amount of liability, which must be known to make the claim “absolute and unconditional,” was not known until the transferee litigation. Again, plaintiffs argue, it is the happening of an event, not the awareness of the claimant, that starts the statute running. Farris, 78 Ala. at 133. Even if awareness was an issue, plaintiffs contend, the IRS first mentioned transferee liability in the April 1992 Notice of Deficiency. The donee’s claims were filed a little over two months after these notices were received.

Plaintiffs also assert that the donees’ claims were timely because, under Alabama law, they were entitled to actual notice by mail that their claims must be presented within a certain time limit. See Ala.Code § 43-2-61(1). Persons who are entitled to an actual notice have thirty days from the date of the notice to file their claims. See Ala.Code § 43-2-350. Plaintiffs assert that the donees never received this actual notice. See Pl.Ex. 4 at 5. Thus, the donees’ claims by definition were timely filed. See Clark v. Jefferson Fed. Savings & Loan, 571 So.2d 1032, 1034 (Ala.1990)(“The record supports the trial judge’s finding that Jefferson Federal was a known creditor, as well as his conclusion that the letter to Jefferson Federal from the attorney for the estate more than a year after the letters of administration were granted to Clark did not inform the bank of the need to file a claim.”). See also Pl. First Br. at 26-28 (discussing case).

C. Defendant’s Response

The Government disputes plaintiffs’ reliance on the litigation involving Mrs. O’Neal. The plaintiffs’ interpretation of these cases, the Government contends, fails to take into account the difference in dates on which the two died. Mr. O’Neal died on August 7, 1988, while Mrs. O’Neal died on July 23, 1994. Because of these differences in dates, the pre-death facts vary significantly. First, the Government argues, the statute of limitations for assessing and collecting any unpaid gift taxes from the donors had expired as of Mrs. O’Neal’s death, but not Mr. O’Neal’s. Second, the IRS had commenced an examination of Mrs. O’Neal’s gift tax return, but not Mr. O’Neal’s. Third, the IRS had proposed to assess transferee liability against the donees as of Mrs. O’Neal’s death, but not Mr. O’Neal’s. Fourth, appraisals of the stock existed at Mrs. O’Neal’s death, but not Mr. O’Neal’s. Fifth, the donees had begun litigation to contest the proposed transferee liability as of Mrs. O’Neal’s death, but not as of Mr. O’Neal’s. And finally, the donees had asserted their alleged reimbursement claims against Mr. O’Neal’s estate as of Mrs. O’Neal’s death, but they had not as of Mr. O’Neal’s death. See Def. First Response at 4-8 (discussion of prior litigation).

The Government also discusses the rulings of the various cases involved with Mrs. O’Neal’s estate. The Government contends that the district court did not hold that the donees’ claims against Mrs. O’Neal’s estate existed at the date of her death, but instead based its decision on post-death events. See Estate of Elizabeth P. O’Neal, 81 F.Supp.2d at 1205. The Eleventh Circuit did not address the issue, as the Government dismissed the issue on appeal. See Estate of Elizabeth P. O’Neal, 258 F.3d at 1271 n. 20. See also Def. First Response at 5-6. The Government also notes that the Probate Court dismissed the donees’ claims against Mrs. O’Neal’s estate as “premature.” See PI. First Response at 6-7, Attached Exs. A-B. This decision shows that the donees’ claims had not accrued as of the date of Mrs. O’Neal’s death.

The Government then addresses plaintiffs’ argument that Armstrong is inapplicable because it involves net gift taxes. The Government contends that Armstrong stands for the proposition that a possible assessment of additional gift tax is too conjectural and speculative to be susceptible to valuation. As noted above, as of August 7, 1988, the donees’ obligation and/or Mr. O’Neal’s obligation to pay additional gift taxes was unknown. See Def. Reply at 6-7.

Next, the Government addresses the “setoff’ argument under § 2035(b). The Government contends that this argument is not an affirmative defense or avoidance that needed to be specifically pled. The Government cites Lewis v. Reynolds, 284 U.S. 281, 52 S.Ct. 145, 76 L.Ed. 293 (1932), in which the court stated:

“[T]he ultimate question presented for decision, upon a claim for refund, is whether the taxpayer has overpaid his tax. This involves a redetermination of the entire tax liability. While no new assessment can be made, after the bar of the statute has fallen, the taxpayer, nevertheless, is not entitled to a refund unless he has overpaid his tax. The action to recover on a claim for refund is in the nature of an action for money had and received and it is incumbent upon the claimant to show that the United States has money which belongs to him.”

While the statutes authorizing refunds do not specifically empower the Commissioner to reaudit a return whenever repayment is claimed, authority therefor is necessarily implied. An overpayment must appear before refund is authorized. Although the statute of limitations may have barred the assessment and collection of any additional sum, it does not obliterate the right of the United States to retain payments already received when they do not exceed the amount which might have been properly assessed and demanded.

Id. at 283, 52 S.Ct. 145 (citation omitted). This defense of lack of overpayment applies in a refund suit where the taxpayer’s claim and the Government’s setoff involve “the same tax for the same year by the same taxpayer .... ” See Dysart v. United States, 169 Ct.Cl. 276, 340 F.2d 624, 627 (1965). In these cases, “the government’s right to raise such a defense is unconditional” and not subject to equitable considerations. Id. at 627. “[T]he government and the individual taxpayer have the legal right to raise a setoff without having to appeal to the court’s discretion or to its evaluation of the particular equities.” Id. at 628.

Thus, the Government contends, with respect to a “setoff’ defense, no special pleading is required. See, e.g., Sara Lee Corp. & Subsidiaries v. United States, 29 Fed. Cl. 330, 338 (Fed.C1.1993). Even if such a defense was an affirmative defense or avoidance, the Government notes, the offset defense was expressly included in the pretrial order in this case. See Def. Reply at 9. Thus, plaintiffs cannot now allege waiver. See Jackson v. Seaboard Coast Line R.R. Co., 678 F.2d 992, 1012 (11th Cir.1982)(“The failure to include an affirmative defense in the answer or have it included in the pre-trial order of the district court, ivhich supersedes the pleadings, will normally result in waiver of the defense.”)(emphasis added). Also, plaintiffs have not been prejudiced as they have had timely notice of the defense. See Pl. Exs. 1 at 3, 180 at 2-4. See also Def. Reply at 9.

The Government also address plaintiffs’ “plain meaning” argument with respect to § 2035(b). The Government notes that the Eleventh Circuit has held:

[Ujnless there is some ambiguity in the language of a statute, a court’s analysis must end with the statute’s plain language. When we examine the meaning of statutory words or phrases, however, we cannot examine statutory provisions in isolation. “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.”

Nyaga v. Ashcroft, 323 F.3d 906, 914 (11th Cir.2003) (citations omitted). However, in cases where the language is unclear, resorting to extrinsic material is appropriate. See Federal Reserve Bank of Atlanta v. Thomas, 220 F.3d 1235, 1239 (11th Cir.2000). If a statutory definition is nonexistent, courts look to “the common usage of words for their meaning.” CBS, Inc. v. PrimeTime 21 Joint Venture, 245 F.3d 1217, 1222 (11th Cir.2001). Dictionaries are often helpful. Id. at 1223. The Government has attached a dictionary definition of the term “paid.” See Def. Ex. 44.

Under the common meaning of the word “paid,” as used in § 2035(b), Mr. O’Neal’s gross estate must be increased in an amount equal to the amount of any deduction allowed for the alleged donees’ claims and/or Mr. O’Neal’s alleged claim for unpaid taxes. If extrinsic evidence is required, the Government points to Sachs as illustrative. Any other interpretation other than the one offered by the Government, it contends, would frustrate the Congressional intent to “eliminate the disparity of treatment between deathbed gifts and transfers at death.”

Lastly, the Government argues, plaintiffs are judicially estopped from claiming that the donees claims were timely filed. The Government concedes that under Alabama law claims can be deemed “contingent” and thus excepted from the applicable statutory time limits. See Def. First Response at 8. However, here and in Mrs. O’Neal’s litigation, the plaintiffs argued that, for purposes of claiming the deduction, the donees’ claims accrued at 12:01 a.m. on April 16,1988. See PI. First Br. at 7. Plaintiffs cannot now assert that the claims accrued on a different date for purposes of filing a claim with the estate. The Government also disputes the plaintiffs’ contention that the donees never received actual notice. The Government cites Alabama Code § 43-2-61, which states in relevant part that notice may be effected by mail or “any other mechanism reasonably calculated to provide actual notice.” Here, the Letters Testamentary were granted on August 10, 1988 to four persons: one of the donors and three of the donees. Also, as noted above, plaintiffs argue that the claims accrued at 12:01 a.m. on April 16, 1988. The evidence also shows, the Government contends, that the donees had notice sometime in the latter half of 1991. See Def. First Response at 10-11; PL Exs. 31, 33. Despite this knowledge, the donees did not file their claims until June 24,1992.

D. Plaintiffs’Response

Plaintiffs also begin by addressing the prior litigation involving Mrs. O’Neal. Plaintiffs contend that the actual holding of the Probate Court was that “[t]he claims filed by the Claimants against the Estate are valid and enforceable.” See PLEx. 3 at 9. The district court held: “Mrs. O’Neal’s estate is entitled to a deduction for the amount of restitution paid to the donees.” Estate of Elizabeth P. O’Neal, 81 F.Supp.2d at 1220. The Eleventh Circuit, plaintiffs contend, stated that “[h]ere there is no dispute that the estate is entitled to a deduction with respect to claims against the estate by the [donees] for reimbursement of their transferee gift tax liability ....” See 258 F.3d at 1271. See also PL First Reply at 2-3; 4-7 (further discussion of the relationship between Mrs. O’Neal’s litigation and this case). Among the issues resolved on remand, plaintiffs argue, was the district court’s holding that the deduction had to have a value greater than zero. Id. at 4-7.

Next, plaintiffs address the estoppel argument. They contend that they have never argued or taken the position that Mr. O’Neal’s estate was not entitled to a deduction for the donees’ claims or that the value of those claims was zero. See PL First Reply at 3-4. As to whether the claims were timely filed, plaintiffs note, they have never argued that the claims were not timely filed, and thus there can be no estoppel as that doctrine is normally used. Also, plaintiffs contend, the Government has misconstrued its position. Plaintiffs contend that the donees’ liability to pay Mr. O’Neal’s gift taxes existed at 12:01 a.m. and that this concurrently triggered the liability to make restitution. The “claims” did not accrue until later. Plaintiffs also again argue that they never received notice from the personal representatives. See Pl. First Reply at 10-12 (citing Clark v. Jefferson Fed. Savings & Loan).

III. Revaluation of “Adjusted Taxable Gifts,” “Gift Tax Payable” (Defendant’s Issue 2)

A. Defendant’s Position

The Government contends that any revaluation of the 1987 gifts requires an adjustment in the “adjusted taxable gifts” and “gift tax payable” to reflect such revaluation when calculating the federal estate tax. The Government notes that 26 U.S.C. § 2001(a) imposes a tax on the transfer of the taxable estate of every decedent who is a citizen or resident of the United States, while § 2001(b) describes how the estate tax is to be computed. Under this latter section, the estate tax, before the allowance of any credit, is computed by determining a tentative tax on the value of the taxable estate, plus adjusted taxable gifts, and subtracting from that amount the tax payable on gifts made after 1976.

The Government argues that in calculating the gift tax, the decedent’s prior taxable gifts must be adjusted in order to reflect the accurate value of such gifts on the date that they were given, despite the fact that the gift tax statute of limitation has run. See Estate of Elizabeth O’Neal, 81 F.Supp.2d at 1226. See also Def. Br. at 40 n. 22 (other cases). Thus, a revaluation of the O’Neal Steel stock triggers revaluation of the “adjusted taxable gifts” and “gift tax payable” amounts reported on Mr. O’Neal’s estate tax return. Assuming arguendo that a deduction is allowed for the donees’ claims (see discussion above), the revaluation must be determined based upon the per share values used in computing the deduction. Even if a deduction is not allowed, the Government argues, the stock must be revalued based upon the settlement agreement reached between the IRS and the donees. This revaluation would result in the “adjusted taxable gifts” and “gift tax payable” being $3,277,752 and $1,310,025, respectively.

B. Plaintiffs’Response

Plaintiffs also cite § 2001(b), which defines the term “adjustable taxable gifts” as follows:

For purposes of paragraph (1)(B), the term “adjusted taxable gifts” means the total amount of the taxable gifts (within the meaning of section 2503) made by the decedent after December 31, 1976, other than gifts which are includible in the gross estate of the decedent.

Plaintiffs agree that the adjusted taxable gifts should be $3,277,752 if the stock is valued based on the settlement amounts. See PI. Response at 26. However, they argue that the gift tax payable would be $1,313,670. See PI. Response at 28; Schedule A. They also contend that there is a difference between the determination of the adjusted taxable gifts and the determination of the date-of-death value of the estate’s liabilities. The latter is determined under the “snapshot” rule, while the former can be extended beyond death by various statutes of limitation. See, e.g., 26 U.S.C. § 6501(a).

C. Defendant’s Reply

In addition to its original arguments, the Government disputes plaintiffs’ figure of $1,313,670 for the gift tax payable. The Government contends that it is unable to respond in detail because plaintiffs have failed to provide it with the calculations underlying the figures in Schedule A. However, even a preliminary examination shows that the figures in Schedule A do not agree with information previously submitted to the IRS. For example, Schedule A indicates that the total taxable gifts for the pre-1977 period are $233,507.21, while Mr. O’Neal’s gift tax return shows that the total taxable gifts are $243,507.21. See Def. Reply Br. at 15-16 (other examples). If plaintiffs’ figures are correct, the Government notes, there would have to be a corresponding increase in adjusted taxable gifts, although plaintiffs have noted no such increase.

IV. Inclusion of Funds Used to Pay Mrs. O’Neal’s Gift Taxes (Defendant’s Issue 3 and Plaintiffs’ Third Motion)

A. Defendant’s Position

The Government con