Estate of Gertrude H. Saunders, William W. Saunders, Jr., and Richard B. Riegels, Co-Executors v. Commissioner

ESTATE OF GERTRUDE H. SAUNDERS, DECEASED, WILLIAM W.
SAUNDERS, JR., AND RICHARD B. RIEGELS, CO-EXECUTORS,
PETITIONER v. COMMISSIONER OF INTERNAL
REVENUE, RESPONDENT
Docket No. 10957–09. Filed April 28, 2011.
Decedent’s estate claimed a deduction of $30 million in rela-
tion to litigation pending against the estate at the date of
death. The case was submitted on stipulated facts and an
offer of proof for a preliminary determination as to whether
the amount of the claim was ascertainable with reasonable
certainty and deductible as of the date of death, in accordance
with sec. 20.2053–1(b)(3), Estate Tax Regs. Held: Different
standards apply to including a claim in favor of an estate in
the gross estate and deducting a claim against an estate for
estate tax purposes. Held, further, as demonstrated by the
expert reports submitted on behalf of the estate, the value of
the claim was too uncertain to be deducted based on estimates
as of the date of death and must be deducted based on the
ultimate outcome, in accordance with the regulation.
Thomas F. Carlucci, for petitioner.
Andrew R. Moore and Shannon Edelstone, for respondent.
OPINION
COHEN, Judge: Respondent determined a deficiency of
$14,400,000 in estate tax due from the Estate of Gertrude H.
Saunders (decedent). Respondent also determined a penalty
under section 6662(h) of $5,760,000, but that penalty has
406
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(406) ESTATE OF SAUNDERS v. COMMISSIONER 407
now been conceded. The case is before the Court for a
preliminary determination of whether a claim against the
estate satisfies the requirements of section 20.2053–1(b)(3),
Estate Tax Regs., as in effect for the date of the decedent’s
death that a claim may be deducted ‘‘though its exact
amount is not then known, provided it is ascertainable with
reasonable certainty, and will be paid.’’ (Respondent concedes
that final regulations at section 20.2053–1(b)(3), Estate Tax
Regs., effective for estates of decedents dying on or after
October 20, 2009, are not applicable although they are con-
sistent with respondent’s litigating position in this case and
in prior cases discussed below.) Unless otherwise indicated,
section references are to the Internal Revenue Code in effect
for the date of decedent’s death, and Rule references are to
the Tax Court Rules of Practice and Procedure.
Before a scheduled trial date in San Francisco, California,
the parties submitted expert reports in accordance with Rule
143(g) and pretrial memoranda as required by the Court’s
standing pretrial order. The parties then requested a con-
ference call to discuss a date and time certain for trial to
accommodate numerous witnesses who would be expected to
travel from Hawaii and other places. During those conversa-
tions, the Court suggested that review of the tendered expert
reports and the legal authorities cited in respondent’s pre-
trial memorandum raised a question that could be decided
preliminarily and possibly avoid an expensive trial. In the
Court’s stated view, the differences between the experts as to
the correct value to be placed on a claim against the estate
were an indication that the value of the claim could not be
ascertained with reasonable certainty. By agreement of the
parties, that issue has been briefed and submitted on stipu-
lated facts and the estate’s offer of proof.
If the preliminary issue is decided in favor of the estate,
the issue of the correct value to be placed on the claim
remains for trial. If the preliminary issue is decided in favor
of respondent, the claim ultimately paid may be treated as
a deduction in the final computation of the estate tax
liability.
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408 136 UNITED STATES TAX COURT REPORTS (406)
Background
Decedent, a resident of Hawaii, died on November 27,
2004. She was predeceased by her husband, William W.
Saunders, Sr. (Saunders), who died on November 3, 2003.
Prior to his death, Saunders was a practicing lawyer and at
one time represented Harry S. Stonehill (Stonehill).
William W. Saunders, Jr. (Saunders, Jr.), and Richard B.
Riegels are coexecutors of the estate and resided in Hawaii
at the time the petition was filed. Between approximately
June 1988 and March 2004, Saunders, Jr. was a partner in
the law firm formerly known as Bickerton Saunders & Dang
and later known as Bickerton Lee Dang & Sullivan.
The Stonehill Litigation
Robert Heggestad (Heggestad), a partner in a Washington,
D.C., law firm, beginning in 1990 was lead counsel in exten-
sive tax litigation involving Stonehill. See United States v.
Stonehill, 83 F.3d 1156 (9th Cir. 1996); United
States v. Stonehill, 959 F.2d 243 (9th Cir. 1992); United
States v. Stonehill, 702 F.2d 1288 (9th Cir. 1983); Stonehill
v. United States, 405 F.2d 738 (9th Cir. 1968). After 10 years
of litigation, including litigation relating to Freedom of
Information Act (FOIA) production, Heggestad obtained
numerous previously classified documents from the Internal
Revenue Service (IRS), Federal Bureau of Investigation, State
Department, and Department of Justice. Among the docu-
ments Heggestad received during the FOIA litigation was an
April 27, 1960, memorandum by IRS agent James H. Griffin
(the Griffin memo). The Griffin memo suggested that Saun-
ders had acted as a secret IRS informer against the interest
of his client, Stonehill.
Heggestad engaged co-counsel, John Edmunds (Edmunds),
a plaintiffs’ counsel in Honolulu, Hawaii, in relation to poten-
tial claims against Saunders by the Estate of Harry S.
Stonehill (the Stonehill estate). (Stonehill died in 2002.)
Heggestad recognized legal impediments or hurdles involved
in pursuing the claims but believed that he and Edmunds
could overcome them. Heggestad and Edmunds had sufficient
confidence in the case to take it on a contingency fee basis,
understanding that if they did not prevail they would not get
paid, unless the matter otherwise settled. Heggestad and
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Edmunds prepared a demand letter on behalf of the Stonehill
estate alleging that Saunders had committed legal mal-
practice, breach of confidence, breach of duty of loyalty, and
fraudulent concealment against Stonehill.
The demand on the Estate of William Saunders, Sr. (the
Saunders estate) by the Stonehill estate was based on the
claim that Saunders, while Stonehill’s attorney, had
informed the IRS that Stonehill maintained a Swiss bank
account. Allegedly as a result of this disclosure, the IRS
investigated Stonehill for tax fraud, leading to jeopardy
assessments for 1958–62 and a 1975 suit to reduce the
assessment to judgment and to foreclose liens. The claimed
consequence of these actions was loss of business interests
and property from the collection of taxes.
The demand letter was received by Saunders, Jr. on Sep-
tember 15, 2004, 73 days before decedent’s death. Saunders,
Jr. consulted James J. Bickerton (Bickerton), a former
partner of Saunders, Jr., and retained Bickerton to represent
the Saunders estate with respect to the claim by the
Stonehill estate.
On September 24, 2004, 64 days before decedent’s death,
the Stonehill estate filed formal complaints against the Saun-
ders estate in the U.S. District Court for the District of
Hawaii (Hawaii Federal District Court) and in a Hawaii
State court. The complaints were prepared by Heggestad and
Edmunds and alleged four causes of action for legal mal-
practice, breach of confidence, breach of duty of loyalty, and
fraudulent concealment. The complaints requested over $90
million in compensatory damages, plus additional punitive
damages.
From September through November 2004, Saunders, Jr.
and Bickerton were unsuccessful in finding any relevant or
material evidence that would benefit the defense of the
Stonehill claims. Saunders, Jr. believes that the difficulty
was due to the significant passage of time from the date of
the alleged misconduct and the date the claims were made.
However, they did learn that relevant documents might be in
Oregon. Elizabeth Anne Saunders, Saunders, Jr.’s sister, is
an attorney residing in Oregon. Beginning on October 14,
2004, and on several occasions thereafter, she went to the
U.S. District Court for the District of Oregon in Portland to
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410 136 UNITED STATES TAX COURT REPORTS (406)
search for documents from earlier tax litigation involving
Stonehill.
Bickerton entered an appearance and answered the Hawaii
Federal District Court complaint on October 7, 2004. In mid-
December 2004, Saunders, Jr. retained John Francis Perkin
(Perkin), a member of the Hawaii firm Perkin & Faria, as
litigation counsel. Although Perkin became lead counsel,
Bickerton remained involved in the Stonehill litigation until
its final resolution.
Perkin entered his appearance in the State case on Feb-
ruary 2, 2005, by filing a motion to dismiss. He answered the
State complaint on March 28, 2005. On July 18, 2005, Saun-
ders, Jr., Perkin, and Brandee Faria of Perkin & Faria trav-
eled to Portland, Oregon, to examine documents potentially
related to the Stonehill litigation.
Trial preparation, discovery, depositions, and motions pro-
ceeded over the course of the next year and a half. From
approximately May 2006 through July 2007, the parties dis-
cussed settlement prior to and during trial, but no settlement
was reached.
On April 17, 2007, the Saunders estate, as defendant,
moved for summary judgment in the Hawaii State court as
to damages on the ground that the Stonehill estate could not
prove any damages. On August 24, 2007, the State court
granted the motion to the extent that that court would not
allow relitigation of the underlying Stonehill tax judgment
but denied the motion as to the remainder of the relief
sought.
Before and during trial of the State court action, settle-
ment demands and offers were exchanged. The Stonehill
estate’s demands ranged from a high of $7.5 million before
May 1, 2006, to a low of $2.5 million in July 2007. The Saun-
ders estate’s offers ranged from a low of $250,000 in May
2006 to a high of $2.6 million in June 2007.
On May 28, 2007, a jury trial commenced in the Hawaii
State court. The trial lasted approximately 6 weeks. The jury
found that Saunders had breached his fiduciary duty of con-
fidentiality and his duty of undivided loyalty to Stonehill but
also found that neither breach was a legal cause of injury or
damage to Stonehill or to his estate. Judgment was entered
by the State court on October 23, 2007. Costs of $289,000
were awarded to the Saunders estate in the final judgment.
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The Stonehill estate appealed the judgment, but the litiga-
tion was ultimately resolved by a settlement agreement and
mutual release. The Saunders estate paid $250,000 in attor-
ney’s fees to the Stonehill estate’s attorney and waived its
right to the $289,000 costs awarded in the State court judg-
ment.
Estate Tax Returns
A return for the Saunders estate was filed February 2,
2005. A deduction of $30 million was claimed on the return
in relation to the Stonehill estate malpractice claim. The
estate tax return was examined. On December 31, 2009, a
closing document was issued stating that the value of the
malpractice claim would be resolved in the estate of the sur-
viving spouse, decedent here.
A return for the estate of decedent was filed February 23,
2006. A deduction of $30 million was claimed on the return
in relation to the Stonehill estate malpractice claim. Because
of the ongoing nature of the Stonehill litigation at the time
this return was filed, a statement attached to the return
referred to an appraisal letter prepared by Perkin dated
August 30, 2005.
In the notice of deficiency sent February 10, 2009, the
amount of $1 was allowed as a deduction for the malpractice
claim in lieu of the $30 million claimed by the estate.
Expert Reports
In the Perkin letter dated August 30, 2005, Perkin opined:
From the information available in November 2003, it would appear that
Mr. Saunders may have revealed such information to the United States
attorney for the District of Hawaii at the very least, and government docu-
ments did state that he did. Potential defenses to liability exist and could
be recognized as of November 2003, including the likelihood that Mr.
Saunders would have revealed the information as a business partner or
participant with Mr. Stonehill, rather than as Mr. Stonehill’s attorney.
Moreover, it could be argued that the information concerning Swiss banks
was not privileged or confidential. However, as of November 2003, the
viability of such defenses would have been very difficult to evaluate. How-
ever, should a jury determine that Mr. Saunders was assisting the govern-
ment against a client for his own gain as alleged, and allowed Mr.
Stonehill to testify denying Swiss bank accounts after revealing his use
thereof to the government, or revealed other confidential or privileged
information, an unfavorable verdict on liability would appear a near cer-
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412 136 UNITED STATES TAX COURT REPORTS (406)
tainty. As of November 2003, insufficient information was available to dis-
count such an outcome.
Under the heading ‘‘Damages’’, Perkin stated:
The determination of damages will largely depend on the results of the
Estate of Mr. Stonehill’s current attack on the federal tax judgments ren-
dered against Mr. Stonehill. If this attack succeeds and liability is found,
a ninety million dollar ($90,000,000) judgment would be within the reason-
able verdict range for a jury, as would any lesser amount. With the scarce
information available as to this as of November 2003, the likelihood of this
occurring would have been uncertain but seem to range between twenty-
five to fifty percent.
* * * * * * *
Failing the overturn of the federal tax judgments, the damages assessed
could range from nominal ($1) to a substantial portion of the Estate if
punitive damage [sic] are assessed. Jury instructions add to the signifi-
cance of fiduciary duties and an attorney’s duties are certain to be power-
ful, and are likely to provoke a verdict on the high end of the probable
range between one dollar ($1) and ninety million dollars ($90,000,000.00).
Perkin concluded with a valuation of $30 million, stating:
‘‘While a higher figure can easily be justified, a substantial
discount should be applied because of settlement possibility
and the wide range of unknowns as of November 2003.’’
Perkin also prepared a letter appraisal dated October 26,
2009, which began:
Now that the case has been settled and the appeal dismissed, I will, at
your request supplement my evaluation of the claims in the above-cap-
tioned case rendered in August, 2005. At that time, because I was told my
opinion letter would be given to the IRS, I anticipated that it could wind
up in the hands of the Plaintiff’s attorneys, who would not have hesitated
to try to use the contents as ‘‘admissions’’ by the Saunders Estate, on the
basis of a waiver of attorney-client privilege. * * *
After discussing the litigation in greater detail than he had
in his 2005 letter, Perkin stated:
Finally, of course, some discount was warranted based on the general
principle that there are a few certainties in litigation, particularly where
a jury will be involved.
In summary, the Stonehill Estate had to be anticipated to be able to
prove damages in the claimed amount of $90 million at least, making a
two-thirds discount for a valuation of $30 million perhaps lower than was
warranted. While I am uncomfortable with ‘‘decision tree’’ analysis as
applied by non-lawyer ‘‘experts’’ to complex litigation, I have spent over
thirty years evaluating and trying litigation claims in Hawaii, including
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advising insurance companies concerning the setting of reserves and settle-
ment in over a hundred cases. I have handled a number of legal mal-
practice cases, two to verdict. I am listed in ‘‘Best Lawyers in Hawaii’’ and
‘‘Best Lawyers in America’’, and have a Martindale Hubbell AV rating.
While the Saunders Estate was lucky enough to duck this particular
bullet, I continue to believe that the valuation I rendered in August 2005
of $30 million was reasonable on the low side and as low as the known
facts allowed. However, taking a somewhat different approach as to what
someone might have paid for the claim in 2003–2004, an additional dis-
count of $5 million to reach a revised total of $25 million would have been
prudent in light of the time and expense necessary to pursue the claim,
and the approximate value of the Estate itself as between $30–$40 million.
On February 6, 2008, Philip M. Schwab (Schwab), senior
vice president with FMV Valuation & Financial Advisory
Services, prepared a report valuing ‘‘a contingent liability’’
associated with the Stonehill litigation as of November 27,
2004. Schwab expressed his understanding that postdeath
events could not be considered. The report explained:
The scope of our investigation included discussions with representatives
of the Estate regarding the history and nature of the Contingent Liability.
In the course of our analyses, among other things, we have relied upon cer-
tain verbal and written representations of the Estate’s representatives. We
have also relied on various documents related to the Contingent Liability,
as further discussed below, which were provided to us by representatives
of the Estate (collectively, ‘‘Documents’’). In addition, we have relied on
certain facts and assumptions regarding the status and possible course of
the existing litigation as provided by John Francis Perkin, Esq., of Perkin
& Faria, an attorney currently retained by the Estate to mediate and/or
litigate matters related to the Contingent Liability. The information pro-
vided to us by representatives of the Estate has been accepted, without
additional verification, as correctly reflecting the nature and condition of
the Contingent Liability as of the Valuation Date.
Schwab applied what he described as a ‘‘decision tree anal-
ysis’’, that ‘‘follows through various possible course of action
identified with the help of Mr. Perkin that could occur in the
course of investigating, negotiating, and/or litigating the
Lawsuit including numerous opportunities to settle.’’ Other
matters considered were described as follows:
Monetary values were based on estimated settlement amounts and pos-
sible damages that could be collected from the Estate should the plaintiff
prevail at trial and on appeal. Since the Lawsuit was filed against the
Estate of William W. Saunders and the actual damages that could be col-
lected by the plaintiff would be limited to the available assets of the
Estate, we have considered, with the assistance of legal counsel for the
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414 136 UNITED STATES TAX COURT REPORTS (406)
Estate, the available assets of the Estate in our estimation of the collect-
ible damages amount and possible settlement amounts.
With reference to determination of an applicable discount
rate, Schwab’s report explained:
In selecting an appropriate discount rate, we looked primarily to high-
yield and defaulted corporate bonds (bonds rated BB to C, and bonds that
are in default, respectively) because of the relatively similar uncertainty
about collectibility. These high-risk debt instruments have higher yields to
maturity than lower-risk debt instruments due to (a) their higher expected
volatility of returns and (b) their higher default or collectibility risk.
Because the probability that no liability will be incurred is already consid-
ered within our multi-scenario decision tree analyses, we selected a dis-
count rate based only on the return attributable to higher expected vola-
tility associated with high-yield debt compared to lower-risk debt
instruments. This rate is the expected rate of return on the high-yield debt
instrument after removing the yield factor attributable to the default risk.
With respect to an adjustment for lack of assignability,
Schwab’s report stated:
The decision tree employed above only quantifies the economic impact
associated with costs, time and uncertainties of defending the Lawsuit.
However, as of the Valuation Date, the holder of the Contingent Liability
also lacks the ability to assign the liability for the Lawsuit due to the lack
of a market for assigning post-claim liabilities (such as the Contingent
Liability) and any available insurance products to cover against the poten-
tial damages. The Contingent Liability represents a liability with unique
facts, circumstances, and risks, and would therefore require a substantial
underwriting effort, in contrast with underwriting costs associated with
insurance covering medical and environmental liabilities, among other
things. We have done research into what market may exist and have found
no entities involved in the insurance or assignment of litigation claims.
Based on previous discussions with insurance professionals, it is our
understanding that insurance companies account for the existence of a sec-
ondary market in pricing insurance policies. Accordingly, the holder of the
Contingent Liability would likely have to pay a premium to a hypothetical
willing holder of the Contingent Liability to compensate for the lack of the
ability to assign the Contingent Liability. Such a premium would be war-
ranted for the Contingent Liability since the holder has no way to get out
of the liability or hedge against it. Further, should the holder of the
Contingent Liability be unable to assign it, the assets of the Estate would
likely need to be maintained, rather than consumed or distributed, until
the Lawsuit is resolved. Restricting the assets of the Estate further erodes
the value of the Estate and should be considered in valuing the Contingent
Liability. Accordingly, an adjustment for lack of assignability of 25 percent
has also been applied to the aggregate weighted average monetary value.
* * *
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Using his described methodology, Schwab valued the contin-
gent liability at $19,300,000.
On September 15, 2010, in preparation for trial of this
case, Bickerton prepared a report for the estate. On the basis
of his experience as a Hawaii contingency fee attorney,
Bickerton opined that ‘‘plaintiffs’ lawyers generally do not
take on contingency work unless they have a substantial
probability of prevailing on the merits, typically at least 75%,
regardless of the size of the potential damages award.’’
Bickerton concluded:
I am familiar with John Edmunds, having had cases adverse to him and
having discussed a number of cases with him, having been familiar with
many of his cases from news and personal accounts of others, and knowing
his reputation in the legal community. Based on that foundation, it is my
opinion that John Edmunds would have applied formulas similar to the
above analysis in his case screening and intake decisions on the Stonehill
case and would not have undertaken the case unless he genuinely believed,
after careful analysis and due diligence, that there was a 75% or better
chance of obtaining a jury verdict in excess of $30 million such that the
case had a risk-adjusted value of $22.5 million or more at the time he com-
menced it.
Respondent submitted the expert report of James E. King
(King), a California litigator who had handled a number of
legal malpractice cases. King reviewed the reported Stonehill
tax litigation as well as the record in the Stonehill case
against the Saunders estate and concluded ‘‘that the claim
had no merit (at most a 3% chance of recovery if pursued
fully), and that the information upon which that conclusion
is based was known or knowable at the date of death.’’
Respondent also submitted an expert report dated Sep-
tember 17, 2010, prepared by James E. McCann (McCann),
valuation specialist for the IRS. McCann relied on informa-
tion and estimates King provided and on conversations with
respondent’s counsel. He selected a ‘‘discounted cash flow
valuation method’’, considering the ‘‘estimated outcome sce-
nario, probability, timeline, and cash flow expense variables’’
King provided to him. In a table that was part of McCann’s
report, he illustrated:
[A]pportioned values for each of the nine outcome scenarios range from a
low of $25,449 (see Outcome scenario 1), to a high of $1,500,395 (see Out-
come scenario 5). Each of these nine apportioned values is added together,
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416 136 UNITED STATES TAX COURT REPORTS (406)
to yield a combined, probability-adjusted, net present value of $3,200,000
for the Contingent Liability. * * *
The Estate’s Offer of Proof
Although the parties were able to submit a substantial
stipulation as to the documents and the expert reports, they
did not stipulate as to the testimony that the estate would
offer at trial from the fact witnesses, including Heggestad,
Bickerton, and Saunders, Jr., about their views of possible
outcomes of the Stonehill claims against the Saunders estate.
The offer of proof also suggested that Perkin and Schwab
would bolster their reports during testimony to address the
‘‘ascertainable with reasonable certainty standard’’, but such
additional testimony on direct would not necessarily be
allowed under Rule 143(g) and the Court’s standing pretrial
order. Respondent does not object to the estate’s proffers for
the limited purpose of determining whether the value of the
Stonehill lawsuit was ascertainable with reasonable certainty
and will be paid within the meaning of section 20.2053–
1(b)(3), Estate Tax Regs., but reserves the right to raise
objections and cross-examine the witnesses if the Court con-
cludes that a trial is necessary.
Discussion
Preliminarily we discuss a difference between the parties
as to the procedural posture of this case. Despite the agree-
ment of the parties that the issue before the Court would be
submitted on the basis of the stipulated facts and the estate’s
offer of proof, the estate argues that respondent’s position is
akin to a motion to dismiss for failure to state a claim or a
motion for summary judgment and that the estate is entitled
to a trial on the issue of ascertainability. We reject that
characterization and demand. The Court expressly disavowed
during the initial discussion any suggestion that the issue
could be decided on summary judgment. The suggestion of
bifurcation of the issues for a preliminary determination
based on stipulated facts and exhibits was made by the
Court after reviewing the expert reports that had been sub-
mitted approximately 30 days prior to the trial. Those
reports would constitute the direct testimony of the witnesses
as to valuation of the Stonehill claim. See Rule 143(g). Our
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decision will be based on applying the law to the stipulated
facts and documents, not as a matter of pleading or summary
judgment. See Rules 122, 149(b). But see Marshall Naify
Revocable Trust v. United States, 106 AFTR 2d 2010–6236,
2010–2 USTC par. 60,603 (N.D. Cal. 2010), on appeal (9th
Cir., Oct. 19, 2010), where judgment on the pleadings was
rendered in favor of the Government on this issue.
The estate’s counsel agreed to the bifurcation procedure as
an accommodation to the logistics and anticipated expenses
of trial where the valuation issues would be presented. On
the record when the case was called in San Francisco for
receipt of the stipulation, the estate’s counsel recognized that
the matter would be decided by applying the law to the
stipulated facts and the estate’s offer of proof and not by
summary judgment. In a subsequent conference call, the
possibility of abandoning the procedure was discussed but
discarded. The estate’s current position would render point-
less the whole exercise of stipulating and briefing the
‘‘ascertainability of the claim’’ issue and our consideration of
it in this Opinion. The estate agreed to the procedure, is not
unfairly prejudiced by it, and is bound to it.
Statute and Regulations
Section 2001(a), as of the relevant dates of death in this
case, imposes an estate tax on the taxable estate of a
decedent, determined, in accordance with section 2051, after
deductions provided for in sections 2053 through 2058. Sec-
tion 2053(a) allows a deduction for claims against the estate
that are allowable by the laws of the jurisdiction under
which the estate is administered.
Section 20.2053–1(b)(3), Estate Tax Regs., as in effect for
the respective dates of death of decedent in 2004 and Saun-
ders in 2003 provided:
An item may be entered on the return for 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. If the amount of a liability was not
ascertainable at the time of final audit of the return by the district director
and, as a consequence, it was not allowed as a deduction in the audit, and
subsequently the amount of the liability is ascertained, relief may be
sought by a petition to the Tax Court or a claim for refund as provided
by sections 6213(a) and 6511, respectively.
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418 136 UNITED STATES TAX COURT REPORTS (406)
Section 20.2053–4, Estate Tax Regs., provided:
The 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 interest accrued at the date
of the decedent’s death is allowable even though the executor elects the
alternate valuation method under section 2032. Only claims enforceable
against the decedent’s estate may be deducted. Except as otherwise pro-
vided in § 20.2053–5 with respect to pledges or subscriptions, Section
2053(c)(1)(A) provides that the allowance of a deduction for a claim
founded upon a promise or agreement is limited to the extent that the
liability was contracted bona fide and for an adequate and full consider-
ation in money or money’s worth. See § 20.2043–1. Liabilities imposed by
law or arising out of torts are deductible.
For our purposes, the parties have assumed that the valu-
ation date is the date of decedent’s death, rather than the
date of Saunders’ death, because of the agreement closing the
Saunders estate.
Lawsuits as Assets or as Contingent Liabilities
The limitations on deduction of liabilities set forth in the
regulations quoted above do not apply to the inclusion in a
decedent’s gross estate of claims in favor of the estate under
section 2031. Thus there are many cases in which the value
of claims in favor of an estate is established, including those
the estate cited in the filed briefs. See United States v. Sim-
mons, 346 F.2d 213 (5th Cir. 1965); Bank of Cal., Natl.
Association v. Commissioner, 133 F.2d 428 (9th Cir. 1943),
affg. in part and revg. in part Estate of Barneson v. Commis-
sioner, a Memorandum Opinion of the Board of Tax Appeals
dated May 27, 1941; Estate of Curry v. Commissioner, 74
T.C. 540 (1980); Estate of Aldrich v. Commissioner, T.C.
Memo. 1983–543; Rubenstein v. United States, 826 F. Supp.
448 (S.D. Fla. 1993). As demonstrated in the expert reports
of Schwab and McCann, there are recognized methods of val-
uing choses in action by assuming various outcomes,
assigning probabilities to those outcomes, and quantifying
the results. Respondent contends, however, that the same
standards of reliability of valuation techniques for asset pur-
poses do not apply to liabilities in view of the stricter provi-
sions of the regulations under section 2053. In other words,
a value may be determined for asset inclusion purposes that
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(406) ESTATE OF SAUNDERS v. COMMISSIONER 419
does not satisfy the ‘‘ascertainable with reasonable certainty’’
standard for deduction purposes. It is essentially undisputed
that postdeath events are not considered in valuing assets in
an estate because of the rule stated in Ithaca Trust Co. v.
United States, 279 U.S. 151, 155 (1929), that an estate ‘‘so
far as may be is settled as of the date of * * * [the
decedent’s] death.’’
Many cases can also be found involving attempts to value
claims against an estate. One matter on which courts appear
to differ is the extent to which events subsequent to the date
of death may be considered in determining the deductibility
of a claim. See Estate of O’Neal v. United States, 258 F.3d
1265 (11th Cir. 2001); Estate of McMorris v. Commissioner,
243 F.3d 1254 (10th Cir. 2001), revg. T.C. Memo. 1999–82;
Estate of Smith v. Commissioner, 198 F.3d 515 (5th Cir.
1999), revg. on this issue 108 T.C. 412 (1997); Estate of Sachs
v. Commissioner, 856 F.2d 1158, 1160–1163 (8th Cir. 1988),
affg. in part and revg. in part 88 T.C. 769 (1987); Commis-
sioner v. Estate of Shively, 276 F.2d 372, 373–375 (2d Cir.
1960), revg. T.C. Memo. 1958–196; Commissioner v. State St.
Trust Co., 128 F.2d 618 (1st Cir. 1942), remanding Estate of
Grinnell v. Commissioner, 44 B.T.A. 1286 (1941); Jacobs v.
Commissioner, 34 F.2d 233, 234–235 (8th Cir. 1929), affg. 9
B.T.A. 636 (1927); Estate of Kyle v. Commissioner, 94 T.C.
829, 848–851 (1990); Estate of Hagmann v. Commissioner, 60
T.C. 465, 466–469 (1973), affd. 492 F.2d 796 (5th Cir. 1974).
Our decision in this case is appealable to the Court of
Appeals for the Ninth Circuit, and thus respondent relies on
Propstra v. United States, 680 F.2d 1248, 1253 (9th Cir.
1982) (stating that ‘‘The law is clear that post-death events
are relevant when computing the deduction to be taken for
disputed or contingent claims’’ (citing section 20.2053–1(b)(3),
Estate Tax Regs.)), and Estate of Van Horne v. Commis-
sioner, 78 T.C. 728, 735 (1982) (in which we concluded that
we consider postdeath events in cases where the decedent’s
creditor has only a potential, unmatured, contingent, or con-
tested claim that requires further action before it becomes a
fixed obligation of the estate, but not where a claim is valid
and fully enforceable on the date of death), affd. 720 F.2d
1114 (9th Cir. 1983). See Golsen v. Commissioner, 54 T.C.
742 (1970), affd. 445 F.2d 985 (10th Cir. 1971); see also
Estate of Shapiro v. United States, 634 F.3d 1055 (9th Cir.
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420 136 UNITED STATES TAX COURT REPORTS (406)
2011); Marshall Naify Revocable Trust v. United States, 106
AFTR 2d 2010–6236, 2010–2 USTC par. 60,603 (N.D. Cal.
2010) (discussing the precedential weight of Propstra), on
appeal (9th Cir., Oct. 19, 2010). Respondent describes the
combined effect of those cases as holding ‘‘if the claims were
not certain and enforceable, but disputed or contingent, post-
death events would be considered.’’ The estate discounts the
Propstra rationale as dicta.
In the discussions with counsel leading to submission of
the preliminary issue discussed in this Opinion, the Court
expressed an interest in avoiding the necessity of deciding
whether subsequent events, particularly settlement of the
Stonehill claim for $250,000, could be considered, referring to
those cases cited above that reversed this Court and directed
that postdeath events either be considered, Estate of Sachs
v. Commissioner, supra, or not considered, Estate of
McMorris v. Commissioner, supra; Estate of Smith v.
Commissioner, supra. In Estate of Van Horne v. Commis-
sioner, supra at 736–737, we observed that these cases ‘‘are
not easily reconciled with one another, and at times it is like
picking one’s way through a minefield in seeking to find a
completely consistent course of decision’’. Unfortunately, the
difficulty has not diminished, and we maintain our position
that reconciliation need not be undertaken here. We do not
consider the subsequent settlement in our discussion of the
question of whether the value of the Stonehill claim was
ascertainable with reasonable certainty as of November 2004.
We have addressed this dispute only to demonstrate that
there is a difference between valuing claims in favor of an
estate and allowing deductions for claims against an estate.
Claims Ascertainable With Reasonable Certainty
The estate cites Estate of Smith v. Commissioner, supra,
Estate of O’Neal v. United States, supra, and Estate of
McMorris v. Commissioner, supra, to argue that ‘‘disputed
lawsuits can be ascertained with reasonable certainty’’. We
agree with the comment of the District Court in Marshall
Naify Revocable Trust v. United States, supra at 2010–6240
to 2010–6241, 2010–2 USTC par. 60,603, at 86,285–86,286,
that
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(406) ESTATE OF SAUNDERS v. COMMISSIONER 421
it cannot be that simply because one can assign a probability to any event
and calculate a value accordingly, any and all claims are reasonably cer-
tain and susceptible to deduction. To so hold would read the regulatory
restriction [section 20.2053–1, Estate Tax Regs.] out of existence. * * *
The regulation * * * explicitly contemplates that some claims will be
simply too uncertain to be taken as a deduction, regardless of the fact that
it is always possible to come up with some estimate of a claim’s value. [Fn.
ref. omitted.]
Our review of the estate’s expert reports, standing alone,
convinces us the value of the Stonehill claim against the
Saunders estate is too uncertain to be deducted as of
November 2004.
Perkin vigorously and successfully resisted the Stonehill
claim on behalf of the Saunders estate. In his August 30,
2005, letter, he discussed ‘‘the wide range of unknowns as of
November 2003’’ (the date of Saunders’ death) to arrive at a
‘‘substantial discount’’ of the $90 million face amount of the
Stonehill complaints. He estimated the likelihood of
Stonehill’s attack on the Federal tax judgments as ‘‘uncertain
but seem to range between twenty-five to fifty percent.’’ He
acknowledged that the probable range of jury damages
awards would be from $1 to $90 million.
Perkin’s report prepared in October 2009 provided greater
detail about the Stonehill lawsuit and discussed the potential
exposure of the Saunders estate compared to its total value.
He assumed the worst in almost every instance. He reduced
his estimate of value from $30 million to $25 million. His
report is fraught with vague and uncertain guesstimates,
without any objectively reliable discussion of the strength of
the defense that he asserted in the Hawaii State court.
Schwab’s report used recognized methodology to quantify
the opinions that he was provided by the estate’s counsel.
His results, however, suffer from the deficiencies of the opin-
ions on which he relied. Even so, his valuation was over $10
million less than that asserted initially by Perkin and the
estate. He correctly described the liability as ‘‘contingent’’
and assumed the unresolved legal position that postdeath
events could not be considered.
Bickerton’s reports generalized about the probable analysis
undertaken by the Stonehill estate lawyers, concluding that
they would expect a 75-percent probability of prevailing
before commencing a contingency fee case. He thus guessed
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422 136 UNITED STATES TAX COURT REPORTS (406)
that the case would not be taken unless the plaintiff ’s law-
yers ‘‘judged that the case had a value of at least $22.5 mil-
lion after discounting by the risk of not prevailing.’’
Based on these reports presented by the estate for use at
trial, the suggested values are $30 million, $25 million, $19.3
million, and $22.5 million—prima facie indications of the
lack of reasonable certainty. None of the estate’s experts
opined, nor could they reasonably opine, that the $30 million
claimed on the estate tax return or any specific lesser
amount would be paid, as required by the applicable regula-
tion. The stark differences between their reports and those of
respondent’s experts merely reinforce the uncertainties
inherent in the process. The valuation methodologies are in
sharp contrast to applying actuarial tables to enforceable
claims, as approved in Estate of Van Horne v. Commissioner,
78 T.C. 728 (1982). In summary, stating and supporting a
value is not equivalent to ascertaining a value with reason-
able certainty. Neither the estate’s experts nor their offer of
proof satisfies the applicable legal standard.
For the foregoing reasons, we conclude that the Stonehill
claim was not deductible as of the date of death of decedent.
The amount actually paid during the administration of the
estate may be deducted in accordance with section 20.2053–
1(b)(3), Estate Tax Regs.
We have considered the other arguments of the parties.
They do not affect our result for the reasons stated above.
Decision will be entered under Rule 155.
f
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