Estate of Gertrude Saunders v. Cir
745 F.3d 953
9th Cir.2014Background
- Decedent Gertrude Saunders died November 27, 2004; a lawsuit (the "Stonehill Claim") against the estate of her late husband William Saunders alleging malpractice and seeking at least $90 million was pending at that time.
- The Estate filed Form 706 and claimed a $30 million deduction on February 23, 2006 as the estimated date-of-death value of the Stonehill Claim, relying on expert appraisal letters and reports.
- The IRS Commissioner issued a Notice of Deficiency disallowing the $30 million deduction, asserting the value was not properly deductible; the Estate petitioned the Tax Court.
- The Stonehill Claim proceeded to jury trial (post-death), which found breach but no damages; on appeal the parties later settled, with William Saunders’ estate paying $250,000 for a release.
- The Tax Court disallowed the $30 million deduction but allowed a deduction equal to the settlement amount; the Estate appealed to the Ninth Circuit.
Issues
| Issue | Plaintiff's Argument (Estate) | Defendant's Argument (Commissioner) | Held |
|---|---|---|---|
| Whether a pending lawsuit at date of death that states a cognizable claim is "certain and enforceable" such that its date-of-death value is "ascertainable with reasonable certainty" | The Stonehill Claim was legally cognizable and thus its date-of-death value was ascertainable as a matter of law; post-death events irrelevant (relied on Shapiro) | The claim was disputed; where a claim is disputed its date-of-death value often is not reasonably ascertainable and post-death events are relevant | Court held claim was disputed, not certain/enforceable; Shapiro does not override Ninth Circuit precedent; post-death events may be considered |
| Whether Treasury Regulations permit deduction of an estimated claim amount when the value is not "ascertainable with reasonable certainty" | Estate: expert valuations and probabilities made a reasonable ascertainment of value possible (supported $19–30M valuations) | Commissioner: wide range of possible outcomes ($1 to $90M) made any date-of-death estimate too vague and not reasonably certain | Court held the date-of-death value was not ascertainable with reasonable certainty and disallowed the $30M deduction |
| Whether post-death settlement should control deduction amount when date-of-death value is not ascertainable | Estate: courts sometimes value pending claims for estate inclusion; settlement should not automatically limit deductible amount claimed earlier | Commissioner: when date-of-death value is not reasonably ascertainable, Treasury Regulations permit using post-death events (e.g., settlement) to determine deductible amount | Court allowed deduction equal to the post-death settlement ($250,000) because the claim’s value became certain only after settlement |
| Whether the Tax Court erred in methodology or violated procedure in its valuation and treatment of expert reports | Estate: Tax Court improperly discounted certain expert reports and should have assigned a date-of-death value | Commissioner: Tax Court correctly assessed expert divergence and applied governing Regulations and precedent | Court affirmed Tax Court: disparity among experts signaled lack of reasonable certainty; methodology and outcome upheld |
Key Cases Cited
- Marshall Naify Revocable Trust v. United States, 672 F.3d 620 (9th Cir. 2012) (distinguishes "certain and enforceable" claims from disputed/contingent claims and permits consideration of post-death events for disputed claims)
- Propstra v. United States, 680 F.2d 1248 (9th Cir. 1982) (post-death events irrelevant for claims that are certain and enforceable at death; relevant for disputed claims)
- Estate of Van Horne v. Comm’r, 720 F.2d 1114 (9th Cir. 1983) (declines to consider post-death events for undisputed obligations)
- Shapiro v. United States, 634 F.3d 1055 (9th Cir. 2011) (addressed cognizability of claim for valuation purposes but did not displace Ninth Circuit precedent on disputed claims)
- Ithaca Trust Co. v. United States, 279 U.S. 151 (U.S. 1929) (often-cited principle that an estate is settled as of the date of death, but not an absolute rule overriding statutory/regulatory framework)