Or, Of What Had You Made Certain, After You Had Made Certain You Had Made Certain Of Nothing?
Tax Court asks Sherlock Holmes’ acid question (“The Adventure of the Golden Pince-Nez”) of Gertrude Saunders’ estate, in denying a $30 million estate tax deduction. Estate of Gertrude Saunders, 136 T.C. 18, released 4/28/11.
The question was the value to be placed on a contingent liability of Gertrude’s late husband, William Jr. William Jr. was being sued at his death by the estate of a former client, Stonehill. Stonehill’s estate alleged that William, Jr., was a snitch for the IRS who railroaded his client into a $90 million deficiency, which stripped Stonehill of his business and cash.
Stonehill’s estate sued for the $90 million. To settle William Jr.’s estate, Gertrude’s estate agreed with IRS that Gertrude would carry the weight of any successful judgment or settlement. Gertrude’s estate claimed a $30 million deduction, and IRS allowed $1.00, with any further deduction to be allowed when Gertrude’s estate closed. 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.
In fact, the estate settled for around $600K, but that was years afterward.
The case comes up based on stipulated facts and experts’ reports, Tax Court stressing that it does not decide the case by way of summary judgment.
First, Tax Court distinguishes between valuation of a claim as at date of death with reasonable certainty for inclusion, as against exclusion. Is the valuation for inclusion in gross estate (taxable) or exclusion (deduction)? Or as the real estate operator’s first-grader answered when the teacher asked him “Johnny, how much is two plus two?”, “Teacher, am I buying or selling?”
Judge Cohen put it simply: “In other words, a value may be determined for asset inclusion purposes that 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 * * * [decedent’s] death.’” 136 T.C. 18, at pp. 20-21.
Liability deduction (exclusion) is another story. Here Tax Court examines a raft of cases and concludes, almost in despair, “‘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.” 136 T.C. 18, at p.23.
Finally, Gertrude’s estate’s platoon of experts, each with a different number and each with a different rationale for arriving thereat, ultimately win the case for IRS.
Cutting the Gordian knot of expert opinions, Judge Cohen makes it simple: “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.” 136 T.C. 18, at p. 24. The blind men and the elephant, perhaps?
After an exhaustive (and exhausting) dissection of the several experts’ reports and their proffered testimony brought forward by Gertrude’s estate, Judge Cohen concludes: “In summary, stating and supporting a value is not equivalent to ascertaining a value with reasonable certainty. Neither the estate’s experts nor their offer of proof satisfies the applicable legal standard.” 136 T.C. 18, at p. 26.
In fact, the more experts you have, and the more their conclusions vary, the more certain it is that you have made certain of nothing.